Russia “has hit the buffers”, says Capital Economics. The economics ministry has downgraded its long-term growth forecast. It now reckons the economy will grow by 2.5% a year until 2030, from an estimate of 4.3% just six months ago. In short, Russia’s economic speed limit has fallen. While demand is healthy, the economy has run out of the ability to supply goods and services, which is crimping overall production and growth.
In the 2000s, says The Economist, the government funnelled oil and gas revenues into wages and pensions, triggering a consumer boom. Mothballed Soviet-era equipment was brought back on stream to meet demand, so companies did not have to boost investment in technology to grow production. But now oil prices are no longer soaring and spare capacity has all but run out. So stimulating demand further would now be more likely to stoke inflation than generate growth.
Investment in production facilities and infrastructure needs to rise rapidly to boost output. Russian fixed investment makes up 21% of GDP, against the emerging market average of 27%. China’s figure is over 50%. As the FT notes, “If China must shift from investment-driven to consumption-driven growth, Russia must go the other way”. That’s easier said than done.
Foreign and domestic investment in production and infrastructure have been undermined by state racketeering and weak property rights. President Putin has cut red tape but further reforms could loosen his grip on power, which Putin is loath to attempt. So it may be some time before the economy moves back up a gear.
That said, Russia looks cheap enough to discount potential problems – one way in is the Blackrock Emerging Europe Trust (LSE: BEEP).