Publication: Monitor Volume: 4 Issue: 76

Although the belief that a presidential dissolution of the Duma will have serious economic consequences seems widespread, such a view is not necessarily consistent either with current trends in the Russian economy or with the general patterns of economic recovery in the CIS and East European economies.

Many of the concerns about the economic consequences of the Duma’s dissolution focus on the reaction of investors, both foreign and domestic, to the heightened political uncertainty associated with such a development. But overall investment spending in Russia continues to be weak, even as the Russian economy appears to be bottoming out. The slow (0.4 percent) growth in GDP Goskomstat reported last year was driven by consumption: The volumes of retail trade and paid services increased by some 2 and 3 percent, respectively, after declining by some 4 and 6 percent in 1996. By contrast, investment spending fell last year by some 5 percent (TACIS’s Russian Economic Trends January 1998 Supplement). These trends seem to be continuing this year: Fixed investment during the first quarter was down 7.1 percent over the first quarter of 1997, despite retail trade growth of 3.7 percent and an essentially flat GDP during this time. (Interfax, April 16)

Moreover, while political uncertainty has not helped Russia’s finances, neither Yeltsin’s dismissal of the Chernomyrdin government last month nor the lasting effects of last year’s East Asian financial crisis have pushed Russia out of international capital markets. As Central Bank President Sergei Dubinin pointed out in Washington last week, Russia was able to sell 1.25 billion Deutsche marks in Eurobonds on March 24, immediately after Chernomyrdin’s dismissal. (Interfax-AFI, April 13) Likewise, serious reductions in IMF lending to Russia are not likely, for political reasons.

In any case, investment spending is generally a lagging indicator in economic recoveries, both in general and for transition economies in particular. Economic recoveries in other CIS and Eastern European countries have generally started thanks to growing consumption and (moderate) fiscal deficits, not to investment. Prospects for increased investment spending in Russia may therefore not have a great deal of short-term macroeconomic significance. The Russian economy may continue to disappoint, but the Duma’s dissolution need not make things worse.