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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Risk Factors in Russia’s Economy

Risk Factors in Russia’s Economy

LEE Jong-Kyu

Dec. 31, 2008

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Originally released on October 13, 2008

The Russian economy began to show troubling signs in the first half of 2008. Until then the economy had enjoyed rapid economic growth on the back of high oil prices. Russia now faces an economic slowdown, as reflected in declining macroeconomic indicators. Economic growth in the second quarter of 2008 fell to 7.5% from 9.5% in the fourth quarter of 2007 and projected growth for the year was lowered to 6% from nearly 7%. Moreover, given the deepening global financial turmoil, forecasts for 2009 growth have been slashed to 5%. Unemployment also reversed upward, while consumer inflation surged to 14.9% (the highest since 2002), and producer inflation soared up to 30%. The inflation spikes were largely attributed to high dependence on food imports and short energy supplies. Due to falling investment in the agricultural sector and heavy exports of energy resources, the Russian consumers have had to endure shortages of food and fuel.

With rising inflation and liquidity shortage, banks raised interest rates. State-run banks increased lending rates to 11-13% while rates at regional banks jumped above 20%. The rate increases impacted housing prices, which pulled down the real estate market. Housing prices in St. Petersburg, for example, fell by 24% while the volume of transactions also dropped by half. In many cities (excluding Moscow ) the housing market has already fallen into a recession. Even Moscow is, however, expected to see housing prices fall. Currently, there are many cases in Moscow where property developers have slashed prices, scaled down their business, or canceled their projects. Of course, an economic slowdown, rising inflation, and contracting liquidity are common anywhere during times of global financial instability. But the Russian stock market fell the hardest among emerging market economies. The Russian Trading System (RTS) - a stock price index - which was already on a downturn from June was hit hard by the US fin ancial turmoil and negative international publicity from Russia-Georgia clash. The RTS fell from 2,498.10 on May 19 to 759.40 on October 8, amid heightened global financial instability. During the period from May 19 to October 1, the Russian stock market fell 52.2%, the biggest drop among emerging markets. The list of Russia's financial woes continues. Due to a surge in Russia's Credit Default Swap premium, global major banks' lending conditions toward Russia have gotten tighter. Subsequently, Russian banks have had difficulty in borrowing from overseas and are thus suffering liquidity shortage. This has caused problems for Russian companies, which have already had to deal with plunging stock markets and rising interest rates, as they now have to tackle tighter lending conditions imposed on them.

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