UPDATE: Russian economy continues to strengthen in October

Russia’s economy continued to strengthen in October, with industrial output 5.8% higher than in September (the biggest rise since April) and inflation falling to an annual rate of 6.1% (below market expectations).  Inflation at the end of November will probably be below 6%.  Both manufacturing and services PMI were in positive territory 52.40 and 52.70 respectively).

Meanwhile Russia continues to be in line for a record grain harvest this year of around 106 million tonnes. 

This reflects an across the board strengthening of the Russia’s whole agriculture sector, which is growing at an annual rate of around 3%. 

The country in a few years has managed to become self-sufficient in pork and poultry where it was previously a big importer, and it should soon be self sufficient in beef as well, at which point it will have become entirely self-sufficient in all meat products.

The transformation in Russia’s agriculture sector has enabled the country to cut food imports by 10% this year from those of the previous year.  Russia this year for the first time in its history is set to overtake the US to become the world’s biggest exporter of wheat, and it has also become a net exporter of certain other food products such as chicken meat. 

The days when Russian consumers bought chicken legs imported from the US (known locally as “Bush’s legs”) are gone.  In the words of Russian Minister of Agriculture, Alexander Tkachev

“To compare, ten years ago food import exceeded export volumes four times, and now export volume is only 1.5 time lower than import volume. Export growth is due to the increased supply of wheat (by 32%) and sunflower oil (by 15%)”.

Tkachev has predicted that if government support for the agricultural sector remains at current levels, then by 2020 the value of the country’s food exports will equal that of its food imports. 

With Russian agri-businesses now investing heavily in increasing food and vegetable output (the main food products Russia is still importing), the country looks set in the 2020s to become a major food exporter, with Russian Prime Minister Medvedev predicting that food exports will soon become Russia’s second biggest foreign currency earner after energy exports.

Tkachev’s comment about the importance of government support being necessary to ensure the continued growth of Russia’s agricultural sector is undoubtedly what lies behind Putin’s gnomic comment of a few days ago that even if Western sanctions on Russia are lifted, Russia will drag its heels as long as it can before it lifts the retaliatory ban it imposed on food imports from the EU. 

RT reports Putin saying

“We really did it responsibly and, in fact, used the short-sighted decisions that had been applied in regard to our country by our so-called partners, who introduced the sanctions.”

(bold italics added)

In truth for Russia’s agricultural sector EU sanctions have been an unqualified boon, with the counter sanctions weaning the country off imports at a speed that seems to have surprised even the Russian government, whilst providing a major boost for domestic production.

Though the Russians doubtless will drag their heels on lifting the counter sanctions, my opinion is that the country’s agricultural sector has now gained sufficient critical mass that it will continue to grow rapidly even once sanctions are lifted.  Moreover by prohibiting the growth in Russia of GM foods the Russians authorities are helping this process along by successfully fostering the idea amongst many Russians that their own food is healthier and better than food imported from the West. 

With Russia now even successfully producing reasonable substitutes for expensive imported cheeses like Parmesan, the days when it was possible to write pieces about Russians lamenting the disappearance of imported cheese are all but gone.

It is conventional in the West to think of Russia as a land of boring food, of food queues and of food shortages, and this image of the country once contained much more than a grain of truth.  However when travelling to Russia today the impression on the contrary is of great variety in food and above all of abundance. 

As I have discussed many times previously, by far the single biggest constraint on growth is the Central Bank’s single minded focus on its counter inflation policy, which aims to bring the annual rate of inflation by the end of 2014 down to 4%.

What this has meant in practice is sky high real interest rates – the highest by far of any major economy – and falling real incomes, as short term growth is being sacrificed to bring down inflation. 

With the government now committed for the next three years to a policy of fiscal consolidation aimed at extinguishing the budget deficit by 2020, there is no countervailing fiscal stimulus to offset the Central Bank’s emphasis on inflation reduction, which is why growth is slow.  The result is that even as the country exits recession living standards continue to fall, a fact which however  – as I have discussed previously – is something which the Central Bank almost certainly privately welcomes because it increases the economy’s competitiveness and reduces inflation by depressing demand, even as it prevents the economy from growing.

At some point however interest rates will fall as inflation falls to the Central Bank’s target, and with Central Bank Chair Nabiullina predicting that the remaining foreign debt owed by Russian banks will have been paid off by the end of 2017 conditions in the economy for a return to higher sustained growth (around 4% per annum) in the 2020s are being put in place.  If oil prices recover more quickly, then of course growth might even come sooner though as a consequence of the deliberate policy of the government the importance of the oil price to the state of the economy is diminishing.

In the meantime the fall in investment is levelling off, the exchange rate of the rouble has stabilised, and foreign direct investment in the Russian economy in anticipation of its future expansion is growing again.

This is the state of the Russian economy today.  In some areas such as agriculture the results of government policy are already bearing fruit.  In others such as industry and manufacturing it remains very much a work in progress.  However talk of the economy being a basket case or in any sort of crisis is nonsense.