Barclays Capital Chief Warns of Global Fallout

BloombergHans-Joerg Rudloff, pictured at the London forum last year, says Russia's economy will not emerge unscathed.
Russia will not emerge unscathed from a likely global slowdown, and will need to tackle high growth rates if it is to bring down inflation, Barclays Capital chairman Hans-Joerg Rudloff said.

"Fundamentally, the Russian growth story stays intact, but there will be a much more difficult sea to navigate," Rudloff, who sits on Rosneft's supervisory board, said in an interview.

Since last summer, some of the West's largest financial corporations have revealed massive write-downs in the wake of the U.S. subprime crisis, while equity markets have tumbled around the world. The U.S. economy is widely thought to be on the brink of a recession.

"No integrated economy will escape the consequences [of the crisis], and the Russians want to be integrated. You can't have it both ways," Rudloff said.

The International Monetary Fund issued a sobering report recently, where it cut its global growth forecasts for the second time since January, to 3.7 percent from 4.9 percent in 2007, on the back of the financial crisis, which has spread to core parts of the financial system and the housing sector in the West.

Russia, meanwhile, has proclaimed itself an "island of stability," arguing that its banks have little exposure to the subprime crisis, thus helping insulate its economy. Last year, Russia's economy expanded by an impressive 8.1 percent, up from 6.7 percent the year before, adding a ninth straight year of economic growth. But Russia's growth, Rudloff said, could be under threat. "Never has there been a country or a period where a country's growth [for] 10, 20, 30, 40 years [has been] without interruption or some hiccoughs," he said. "Strain in economic development will always occur — one should take that as an absolutely natural development.

"The present situation will clearly lead to a slowdown of economic growth, even in countries like Russia and China," he said.

Finance Minister Alexei Kudrin, the guardian of the country's purse strings, has suggested that the economy is overheating, fueling inflation, and that growth should be brought down to sustainable levels. But his view is at odds with Economic Development and Trade Minister Elvira Nabiullina, who called for a stop to "this talk of overheating," and has insisted that the country cannot afford to slow its economic growth.

Like many countries, Russia is battling high inflation. The first week of April saw food-price inflation hit its highest level since October, a sign that the government is failing to bring it under control and will miss its 2008 targets.

The government will need to aim for more moderate growth, as well as implement other policy measures such as higher interest rates, if it is to succeed in bringing down inflation and provide some relief to the poorer parts of the population, Rudloff said.

"In countries like Russia, high inflation rates are like a heavy taxation burden on the poor parts of the population, and rapidly eat into the popularity of governments," he said.

Inflation reached 11.9 percent in 2007, its highest level in several years, and the government introduced a range of initiatives to bring it down, including voluntary food-price freezes and higher import tariffs on some goods, as the country headed into State Duma and presidential elections. Economists have expressed skepticism that any of these measures will work, and have called on the government to tackle the issue head on with robust measures, such as allowing the ruble to appreciate, which would hurt domestic producers. "All measures taken against inflation are, by definition, unpopular," Rudloff said.

And it seems unlikely that the government is ready to stem growth, particularly at a time when global growth is so vulnerable. During President Vladimir Putin's two terms, growth has been a constant watchword. After eight years of planning, the government is finally moving into a new phase of huge state-led investment, targeted at overhauling the country's dilapidated infrastructure.

Private investors will be an integral part of this, Rudloff said. "The Russian economy suffers from a bottleneck in many areas, and the modernization of its industry as well as its infrastructure will demand a major financial effort," he said. "Therefore, foreign investment and lending will be crucial."

As Medvedev prepares to take up the presidential reins in May, investors are hoping the new "Western-friendly" president will make it easier for foreign investors. Bruised by the recent broadside against TNK-BP and claims of intimidation from Hermitage Capital, Russia has work to do if it is to dispel some of the lingering concerns about investing in the country.

"I would expect that Russia [under Medvedev] will show a much more friendly image to the world, without giving in on substance," Rudloff said.