RUSSIA’S LATEST SURPRISE: AN INVESTMENT BOOM.

Sharp growth in investment spending is one of the more surprising aspects of Russia’s economic recovery. After dropping by more than 75 percent during 1992-1998, gross investment in fixed capital–spending by businesses and households on new dwellings, factories and equipment, as well as on replacing worn-out capital–registered a 4.5 percent increase over last year. And according to the most recent official data, investment was up a stunning 14 percent during January-May 2000, relative to the same period in 1999 (Goskomstat, Sotsialno-Ekonomicheskoye Polozhenie Rossii, January-April, May 2000).

Russia’s investment boom is puzzling in at least two respects. First, it flies in the face of the near universal conviction that Russia’s investment environment is bleak or worse. Investment growth is difficult to reconcile with the seemingly endless litanies of everchanging tax regulations, capricious bureaucrats and mob shake-downs. Second, investment in transition economies is typically a lagging indicator. That is, investment spending typically does not grow in the first year in which a transition economy reports economic growth. Increased spending on consumer goods is usually the driving force in the first year or two of recovery, though government budget deficits and (sometimes) growth in net exports can also provide additional spending. When investment begins to grow, it is often driven by residential construction, as households attempt to use their growing incomes to improve their housing situation. Companies generally do not commit to large investments until evidence of a stronger recovery becomes clear, and once excess production capacity created by the transition recession is used up.

Russia seems to represent an exception to this pattern. The 4.5 percent investment growth registered in 1999–Russia’s first year of economic recovery–exceeded the 3.2 percent increase in GDP, and the 14 percent increase recorded during the first five months of 2000 suggests that investment will almost certainly grow faster than GDP this year as well. The investment collapse of 1992-1998 left Russian enterprises with a great deal of excess capacity, which would seem to reduce the need for spending on new plant and equipment. Moreover, residential construction in Russia has apparently grown more slowly than investment spending. Growth in the cubic metrage of new housing constructed rose by 4.3 percent last year, and was up “only” 12 percent during the first five months of 2000. Residential construction counted for only 12 percent of total investment spending during the first quarter of 2000, down from 16 percent during the first quarter of 1999.

CAUSES: LESS CONSUMPTION, SMALLER DEFICITS–AND LOTS OF “USELESS” CAPACITY.