NEWS ANALYSIS: 3% GDP Contraction Is Cause for Applause

Russia received a rare piece of good news about its economy this week: The nation's gross domestic product contracted by 3 percent in the first quarter of 1999, according to preliminary figures.

In many countries, that kind of news would topple governments, or at least launch a serious discussion of the nation's economic policies.

But for Russia f which had been expecting the news to be far worse f the latest figures from the State Statistics Committee are something of a relief. Many economists had been predicting a further contraction of 8 percent f the figure put forward by the International Monetary Fund in its World Economic Outlook f to 15 percent over the first three months of this year.

In 1998, Russia saw GDP decline by 5 percent f with a frighteningly large 7.8 percent contraction coming in just the fourth quarter of that year.

Analysts interviewed said the GDP contraction was mostly thanks to the positive effects of the devaluation, as the cheaper ruble has made Russian manufacturing and commodity production more competitive both here and abroad.

"Most economists underestimated the degree to which Russia has become a market economy, which then responded to devaluation in the way it should have responded," said Edwin Dolan, president of the American Institute of Business and Economics.

Increased competitiveness has stimulated industrial production and reversed much of the effect of the crash, he said.

News that industrial output for January to May this year was up 1.5 percent on the same period in 1998 underlined this recovery in industrial output.

However, the relative improvement was not only due to the devaluation, although the ruble has provided a bigger boost than expected, said Roland Nash, chief economist at MFK Renaissance.

"Many observers had also assumed that instability would breed further instability, especially inflation, leading to a devaluation-inflation spiral. Prime Minister Yevgeny Primakov was able to forestall this by cutting expenditure essentially at will, without causing the sort of major social upheaval that we had expected in response," Nash said.

Furthermore, the banking sector collapse has failed to have anywhere near as much impact on the real economy as had been expected, Nash said.

"Much of the expectations were based on the experience in Asia, where you did see GDP fall 15 percent and the banking sector was much more tightly tied to the real economy," he said.

Even after Russia had beaten earlier expectations, no one was optimistic that the recovery would continue.

"I think that GDP will shrink by 1 to 2 percent over the course of 1999," Nash said, adding that the first quarter figures represented a return to trend after the drop in the last quarter of 1998.

"I see GDP flattening out for rest of the year," Dolan said.

Even though the devaluation effects have helped stimulate some companies, there is still a large, unproductive sector living off unpaid bills that will remain a drag on any real recovery, he added.