…BUT FOR HOW LONG?

While these figures look impressive, it is generally agreed that Russia’s rapid growth results largely from high export prices, statistical base effects, and the weak exchange rate that followed the August 1998 financial crisis. (The exchange rate fell from US$1=6.2 rubles as of mid-1998 to US$1=28.4 rubles during the first quarter of 2000.) Domestic producers have benefited from the weak ruble that has priced imports out of many Russian markets. Imports in the first quarter were only US$9.7 billion, compared to US$18.3 billion in the first quarter of 1998. The weak ruble has also made exports much more profitable: The US$23.4 billion in exports reported in the first quarter of 2000 were more than 50 percent above the level registered in the first quarter of 1999. Exports were also helped by higher world prices for key Russian commodities. Whereas a ton of oil sold for only US$61 during the first quarter of 1999, it averaged US$170 during the first quarter of 2000.

While oil and other commodity prices may remain high for some time, further dramatic improvements in Russia’s terms of trade are unlikely. Meanwhile, the ruble is now strengthening: as of July 21 it was trading at US$1=27.7 rubles. The competitiveness enjoyed by Russian domestic producers and exporters is also being eroded by inflation, which for producer prices is currently running at 45-50 percent annual rates. Given the depths of the ruble’s long slide after August 1998, the advantages afforded to Russian companies by the weak exchange rate are unlikely to vanish in the near future. Still, like the high price for oil and other Russian exports, the weak ruble is a serendipitous, rather than sustainable, source of economic growth.

Russia’s rapid first-quarter growth also results from the fact that it is calculated relative to a low base. Since GDP dropped by some 3 percent in the first quarter of 1999, some of the first quarter growth this year reflects this favorable point of comparison. Since, according to Goskomstat, Russia’s economic recovery began in the second quarter of last year, base effects will start to reduce reported GDP growth in the second quarter of this year and beyond. The Russian government seems to be aware of this: The Finance Ministry, for example, has estimated that GDP growth slowed to around 5 percent in the second quarter of this year.

MOSCOW PLAYING FOR–AND GAINING–TIME IN MOLDOVA.