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. Last Updated: 07/27/2016

Dependence on Oil Could Hurt Growth

News that the GDP grew a healthy 6.7 percent in 2006 met with as much anxiety as cheer among analysts, who said the economy got lucky last year with the oil price but is not diverse enough to stay ahead if that luck runs out next year.

Reaching $981 billion, gross domestic product climbed almost one-third of a percent faster in 2006 than it did the previous year, according to preliminary data released Wednesday by the State Statistics Service.

But Natalya Orlova, chief economist at Alfa Bank, said the sensitivity to oil prices was intensifying. "While the prices were high, it was not such a concern. But if they continue falling as they have been, it will affect every industry that depends on consumption," including everything from finance to food, she said.

Alfa Bank's oil price forecast for 2007 is $55 per barrel, about $12 per barrel less than last year's average. Brent crude was trading at $58.41 per barrel in London at Friday's close.

The construction industry saw the most resilience of all last year, growing 14 percent as the building boom continued. And at first glance, the financial and communication sectors, both with around 10 percent in yearly growth, seem to be signs of a diversifying economy. But Orlova said this was deceptive. Both of these markets rely heavily on the capital inflows from oil and gas, which accounted for 63 percent of the economy last year.

There were also disappointing numbers for household consumption, whose share in GDP use fell by about one percentage point. This was combined with a spike in imports, partly as better-paid Russians demand more goods produced abroad. But even though imports were 38 percent of GDP, the trade balance was still positive, with exports outpacing imports by 12.7 percent.

About 40 percent of these imports, however, were heavy machinery -- a good indication that Russians are investing in major industrial projects, not just flat-screen televisions, said Peter Westin, chief economist at MDM Bank.

Still, the role of investment in GDP use stayed at around 18 percent, which is "sufficient for moderate growth but too small to expect successful diversification away from fuels and metals in the near future," Renaissance Capital said in a research note.

The need for this diversification was underscored last week by The Economist's Big Mac index. The index assesses the value of various currencies on the basis of their purchasing power, and it found that the ruble was undervalued by 43 percent. If this is true, the ruble should soon strengthen, and the commodity exporters will take the biggest hit in their labor and production costs.

One hopeful development came last week from a change in the policies of the RTS exchange. On Friday, the RTS began posting the prices and volumes of all of its over-the-counter trading, which is the trading of small companies' stock through informal dealer networks.

The volume of over-the-counter deals at the RTS on Friday was nearly $1 billion, compared to $1.7 billion on the formal exchange that day.

Many analysts were astounded to learn that small companies were being traded so robustly in Russia, and said the news might inspire investors to take a closer look at these noncore markets.

But Westin said that in the short run, these markets would not do much to give the economy breadth. "I think it looks like we have another year of blue chips," he said.