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. Last Updated: 07/27/2016

We're Close to Hitting Bottom

Last week, the World Bank again lowered its expectations for Russia's economic performance in 2009. Its prognosis is that the country's gross domestic product will fall by 4.5 percent this year. Meanwhile, the Organization for Economic Cooperation and Development expects a 5.6 percent drop over the same period.

Nonetheless, there are still some bright spots in Russia's economy that might mitigate these negative forecasts by the end of 2009. For example, over the past two months, manufacturers have increased their expectations for an economic upswing. This stands in clear contrast to the mood of analysts, international organizations and investment banks.

According to monthly analytical surveys conducted by the Institute for the Economy in Transition, top managers of the country's leading companies are anticipating increased demand for their products. These surveys have been conducted since 1992 and have proven to be a reliable indicator of future trends. Thus, we can predict with a high degree of certainty that the fall in demand for manufactured goods will end in the next few months. In other words, the decline in Russia's manufacturing sector is coming close to hitting bottom.

But this by no means guarantees a resumption of economic growth. The economy's relatively poor performance in the first quarter might lead to a months-long recession. There are a few reasons to be hopeful, however, that with a little luck, moderate economic growth will resume by the year's end.

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First, there are excellent opportunities for growth as a result of ruble devaluation and import substitution. According to surveys from the Institute for the Economy in Transition, the number of Russian manufacturers claiming that imports had a negative impact on their growth was three times lower in January 2009 than in January 2008.

Second, there is a good chance that domestic demand will increase as a result of increased government spending. Until the end of February, leaders had been wary of implementing a broad fiscal policy to boost the economy. Instead, the government focused narrowly on supporting the banking system with the help of cash infusions from the Central Bank, but only a small portion of this liquidity reached the real sector. Now, however, the picture has improved for increasing government spending across broad sectors.

Third, the sharp declines in industrial output in late 2008 was a reflection not only of the objective worsening of external and internal market conditions but was also a result of an exaggerated panic, which tends to be short-term. The sharp fall in manufacturing was not in line with the overall healthy macroeconomic characteristics of Russia's economy -- above all, its large gold and foreign exchange reserves and solid trade balance. A low level of trust within the business community and the government's poorly defined anti-crisis plan helped cause the panic, but the situation has calmed down markedly since then.

The fourth reason is that the government's assumption of a mid-year price of $41 per barrel of oil is weighted on the low side. It is highly likely that the price of oil will increase above $45 per barrel in the third and fourth quarters, and this will have a positive impact on the Russian economy.

Other positive trends include a more stable situation in terms of bank liquidity. For example, the Central Bank's credit interest rate has stopped rising, and the ruble exchange rate has stabilized.

Moreover, the Russian government has changed the focus of its anti-crisis program in recent months. In the beginning of the crisis, the emphasis was placed on supporting large businesses and their owners. Now, the anti-crisis plan calls for increasing consumer demand, in part by increasing individual incomes. The government is ready to increase federal spending and to tolerate a budget deficit of 8 percent of GDP. To be sure, an increase in government spending could easily lead to a spike in inflation, but overall it is a major improvement over the government's previous efforts to combat the crisis. Now the question is how effectively the plan will be implemented.

The government's ability to spur demand will depend on how well it can handle two perpetual problems in Russia. The first is whether the government will release allocated funds on schedule. The second, of course, is whether corruption will prevent these funds from reaching its intended targets. To lower the risk of corruption, the government must improve the transparency of the entire allocation process.

Lev Freinkman is an analyst at the Institute for the Economy in Transition. This comment appeared in Vedomosti.