Analysts: 'Healthy' Trade Surplus May Be Deceptive

NEWS ANALYSIS - The nation's $32.2 billion half-year foreign trade surplus reported by the Economic Development and Trade Ministry may be seen by some as a positive sign.

The ministry has projected the annual surplus may go as high as $57.2 billion.

However, hard-nosed skeptics will see the surplus as the fruit of skewed government policies operating since the mid-'90s.

And although the surplus seems huge, when taken as a per capita figure the size of the trade is minuscule.

Figures provided by the State Customs Committee for the first quarter of this year show the average Russian bought 56 cents worth of foreign goods and sold $1.74 of his own each day. His daily surplus was $1.18.

The slogan of the mid '90s was to boost industry through a stable ruble, yet the government's policies collapsed due to its inability to solve fiscal problems.

This tight foreign exchange policy led to an influx of imports and the trade deficit blew out to a record $3.5 billion for the first half of 1998, worsening investors' confidence and pushing borrowing costs up.

When in mid-1998 foreign loans suddenly stopped and the economy crashed, the value of the ruble plummeted and buying power dissolved.

Imports dried up because few people could afford them and they have been slow to return as import substitution filled the hole in the market.

Two years later the structure of exports and imports for the first three months of 2000 reveals that local production is still weak in many key areas. The nation produces most of what it needs only in some areas, but relies on imports for the rest.

Of $1.73 billion worth of imports last month from countries outside the former Soviet Union, $430 million (24.6 percent) went toward food products, $357 million (20.6 percent) to chemical products, textiles and shoes accounted for $69.8 million (4 percent) and machinery $621million (35.8 percent), according to the State Customs Committee.

In terms of foreign trade turnover, $12.5 billion in May 2000 is already 3.3 percent and 4.9 percent higher than in May of pre-crisis 1997 and 1998, with 35.3 percent and 47.3 percent rises in export and 35.3 and 39.3 percent falls in imports, respectively, according to the State Statistics Committee

A trade surplus can indicate a nation's relative economic health, but analysts agree that Russia's surplus is the result of high world oil prices, low demand from households and capital flight.

Anatoly Mikhailov, deputy head of forecasting department of the Economic Development and Trade Ministry, said in a telephone interview that the trade surplus will remain positive as long as there is no change in the pattern of trade - import of high-tech products and export of unprocessed commodities such as oil, metals and timber.

The Central Bank has amassed enough reserves to control inflation, but they should be channeled into importing more sophisticated equipment, which will inevitably lead to a smaller trade surplus, but more competitive high-tech Russian goods, a more preferable outcome in the long run than the deceptively rosy picture, he said.

Oleg Vyugin, executive vice president of Troika Dialog investment bank, agreed. In the near future the trade surplus may even increase if more arms - helicopters, planes and tanks - are sold, he said Wednesday in a telephone interview.

He said Russia can hardly expect to increase exports of other manufactured products.

But the real change will come only with an increase in import of machinery for manufacturing competitive goods, he added.