Finland Economy

Economy - overview

Finland has a highly industrialized, largely free-market economy with per capita output roughly that of Austria, Belgium, the Netherlands, and Sweden. Trade is important with exports accounting for over one third of GDP in recent years. Finland is strongly competitive in manufacturing - principally the wood, metals, engineering, telecommunications, and electronics industries. Finland excels in high-tech exports such as mobile phones. Except for timber and several minerals, Finland depends on imports of raw materials, energy, and some components for manufactured goods. Because of the climate, agricultural development is limited to maintaining self-sufficiency in basic products. Forestry, an important export earner, provides a secondary occupation for the rural population. Finland had been one of the best performing economies within the EU in recent years and its banks and financial markets avoided the worst of global financial crisis. However, the world slowdown hit exports and domestic demand hard in 2009, with Finland experiencing one of the deepest contractions in the euro zone. A recovery of exports, domestic trade, and household consumption stimulated economic growth in 2010. The recession left a deep mark on general government finances and the debt ratio, turning previously strong budget surpluses into deficits. Despite good growth prospects, general government finances will remain in deficit during the next few years. The great challenge of economic policy will be to implement a post-recession exit strategy in which measures supporting growth will be combined with general government adjustment measures. Longer-term, Finland must address a rapidly aging population and decreasing productivity that threaten competitiveness, fiscal sustainability, and economic growth.

GDP (purchasing power parity)

$186 billion (2010 est.)
$180.3 billion (2009 est.)
$196.5 billion (2008 est.)
note: data are in 2010 US dollars

GDP (official exchange rate)

$239.2 billion (2010 est.)

GDP - real growth rate

3.1% (2010 est.)
-8.2% (2009 est.)
0.9% (2008 est.)

GDP - per capita (PPP)

$35,400 (2010 est.)
$34,400 (2009 est.)
$37,500 (2008 est.)
note: data are in 2010 US dollars

GDP - composition by sector

agriculture: 2.9%
industry: 29%
services: 68.1% (2010 est.)

Population below poverty line

NA%

Labor force

2.672 million (2010 est.)

Labor force - by occupation

agriculture and forestry: 4.9%
industry: 16.7%
construction: 7.1%
commerce: 19.4%
finance, insurance, and business services: 12.8%
transport and communications: 6.3%
public services: 32.8% (2009)

Unemployment rate

8.4% (2010 est.)
8.2% (2009 est.)

Unemployment, youth ages 15-24

total: 20.5%
male: 22%
female: 18.8% (2009)

Household income or consumption by percentage share

lowest 10%: 3.6%
highest 10%: 24.7% (2007)

Distribution of family income - Gini index

26.8 (2008)
25.6 (1991)

Investment (gross fixed)

18.8% of GDP (2010 est.)

Budget

revenues: $125.2 billion
expenditures: $131.9 billion
note: Central Government Budget (2010 est.)

Taxes and other revenues

52.4% of GDP (2010 est.)

Budget surplus (+) or deficit (-)

-2.8% of GDP (2010 est.)

Public debt

48.4% of GDP (2010 est.)
43.8% of GDP (2009 est.)

Inflation rate (consumer prices)

1.7% (2010 est.)
1.6% (2009 est.)

Central bank discount rate

1.75% (31 December 2010)
1.75% (31 December 2009)
note: this is the European Central Bank's rate on the marginal lending facility, which offers overnight credit to banks in the euro area

Commercial bank prime lending rate

2.267% (31 December 2010 est.)
2.552% (31 December 2009 est.)

Stock of money

$NA
note: see entry for the European Union for money supply in the euro area; the European Central Bank (ECB) controls monetary policy for the 16 members of the Economic and Monetary Union (EMU); individual members of the EMU do not control the quantity of money and quasi money circulating within their own borders

Stock of narrow money

$113 billion (31 December 2010 est.)
$113.6 billion (31 December 2009 est.)
note: see entry for the European Union for money supply in the euro area; the European Central Bank (ECB) controls monetary policy for the 17 members of the Economic and Monetary Union (EMU); individual members of the EMU do not control the quantity of money circulating within their own borders

Stock of broad money

$172.9 billion (31 December 2010 est.)
$173.4 billion (31 December 2009 est.)

Stock of quasi money

$NA

Stock of domestic credit

$242.6 billion (31 December 2010 est.)
$242.2 billion (31 December 2009 est.)

Market value of publicly traded shares

$118.2 billion (31 December 2010)
$91.02 billion (31 December 2009)
$154.4 billion (31 December 2008)

Agriculture - products

barley, wheat, sugar beets, potatoes; dairy cattle; fish

Industries

metals and metal products, electronics, machinery and scientific instruments, shipbuilding, pulp and paper, foodstuffs, chemicals, textiles, clothing

Industrial production growth rate

5.1% (2010 est.)

Electricity - production

67.94 billion kWh (2009 est.)

Electricity - production by source

fossil fuel: 39%
hydro: 18.7%
nuclear: 30.4%
other: 11.8% (2001)

Electricity - consumption

83.09 billion kWh (2008 est.)

Electricity - exports

3.375 billion kWh (2009 est.)

Electricity - imports

12.09 billion kWh (2009 est.)

Oil - production

8,718 bbl/day (2010 est.)

Oil - consumption

217,400 bbl/day (2010 est.)

Oil - exports

133,600 bbl/day (2009 est.)

Oil - imports

318,100 bbl/day (2009 est.)

Oil - proved reserves

0 bbl (1 January 2011 est.)

Natural gas - production

0 cu m (2010 est.)

Natural gas - consumption

4.782 billion cu m (2010 est.)

Natural gas - exports

0 cu m (2010 est.)

Natural gas - imports

4.782 billion cu m (2010 est.)

Natural gas - proved reserves

0 cu m (1 January 2011 est.)

Current Account Balance

$7.561 billion (2010 est.)
$5.892 billion (2009)

Exports

$69.4 billion (2010 est.)
$62.91 billion (2009 est.)

Exports - commodities

electrical and optical equipment, machinery, transport equipment, paper and pulp, chemicals, basic metals; timber

Exports - partners

Sweden 11.6%, Germany 10.2%, Russia 8.5%, US 7%, Netherlands 6.9%, China 5%, UK 4.9% (2010)

Imports

$65 billion (2010 est.)
$58.12 billion (2009 est.)

Imports - commodities

foodstuffs, petroleum and petroleum products, chemicals, transport equipment, iron and steel, machinery, textile yarn and fabrics, grains

Imports - partners

Russia 17.4%, Germany 14.7%, Sweden 14.5%, Netherlands 8.2%, China 4.4% (2010)

Reserves of foreign exchange and gold

$9.555 billion (31 December 2010 est.)
$11.46 billion (31 December 2009 est.)

Debt - external

$518 billion (30 June 2011)
$370.8 billion (30 June 2010)

Stock of direct foreign investment - at home

$82.71 billion (31 December 2010 est.)
$84.44 billion (31 December 2009 est.)

Stock of direct foreign investment - abroad

$130.6 billion (31 December 2010 est.)
$126.8 billion (31 December 2009 est.)

Exchange rates

euros (EUR) per US dollar -
0.755 (2010)
0.7198 (2009)
0.6827 (2008)
0.7345 (2007)
0.7964 (2006)

Venezuela Economy

AN UPPER-MIDDLE INCOME, oil-producing country, Venezuela enjoyed the highest standard of living in Latin America. The country's gross domestic product ( GDP) in 1988 was approximately US$58 billion, or roughly US$3,100 per capita. Although the petroleum industry has dominated the Venezuelan economy since the 1920s, aluminum, steel, and petrochemicals diversified the economy's industrial base during the 1980s. Agriculture activity was relatively minor and shrinking, whereas services were expanding.
Venezuela possessed enormous natural resources. The country was the world's third largest exporter of oil, its ninth largest producer of oil, and accounted for more oil reserves than any other nation in the Western Hemisphere. The national petroleum company, Venezuelan Petroleum Corporation (Petróleos de Venezuela, S.A.--PDVSA), was also the third largest international oil conglomerate. Because of its immense mineral wealth, Venezuela in 1990 was also poised to become an international leader in the export of coal, iron, steel, and aluminum.
Despite bountiful natural resources and significant advances in some economic areas, Venezuela in 1990 continued to suffer from the debilitating effects of political patronage, corruption, and poor economic management. The country's political and economic structures often allowed a small elite to benefit at the expense of the masses. As a result, Venezuela's income distribution was uneven, and its social indicators were lower than the expected level for a country with Venezuela's level of per capita income. Many economic institutions were also weak relative to the country's international stature. The efforts of the administration of Carlos Andrés Pérez (president, 1974-79, 1989- ) to reform the economy, especially if coupled with political and institutional reforms, would likely determine whether the country would reach its extraordinary potential.


<>GROWTH AND STRUCTURE OF THE ECONOMY
<>ECONOMIC POLICY

Venezuela - GROWTH AND STRUCTURE OF THE ECONOMY

Spanish expeditionary arrived in what is present-day Venezuela in 1498, but generally neglected the area because of its apparent lack of mineral wealth. The Spaniards who remained pursued rumored deposits of precious metals in the wilderness, raised cattle, or worked the pearl beds on the islands off the western end of the Península de Paria. Colonial authorities organized the local Indian into an encomienda system to grow tobacco, cotton, indigo, and cocoa. The Spanish crown officially ended the encomienda system in 1687, and enslaved Africans replaced most Indian labor. As a result, Venezuela's colonial economic history, dominated by a plantation culture, often more closely resembled that of a Caribbean island than a South American territory.

Cocoa, coffee, and independence from Spain dominated the Venezuelan economy in the eighteenth and nineteenth centuries. Cocoa eclipsed tobacco as the most important crop in the 1700s; coffee surpassed cocoa in the 1800s. Although the war of independence devastated the economy in the early nineteenth century, a coffee boom in the 1830s made Venezuela the world's third largest exporter of coffee. Fluctuations in the international coffee market, however, created wide swings in the economy throughout the 1800s.

The first commercial drilling of oil in 1917 and the oil boom of the 1920s brought to a close the coffee era and eventually transformed the nation from a relatively poor agrarian society into Latin America's wealthiest state. By 1928 Venezuela was the world's leading exporter of oil and its second in total petroleum production. Venezuela remained the world's leading oil exporter until 1970, the year of its peak oil production. As early as the 1930s, oil represented over 90 percent of total exports, and national debate increasingly centered on better working conditions for oil workers and increased taxation of the scores of multinational oil companies on the shores of Lago de Maracaibo. In 1936 the government embarked on its now-famous policy of sembrar el petróleo, or "sowing the oil." This policy entailed using oil revenues to stimulate agriculture, and later, industry. After years of negotiations, in 1943 the government achieved a landmark 50 percent tax on the oil profits of the foreign oil companies. Although Venezuela reaped greater benefits from its generous oil endowment after 1943, widespread corruption and deceit by foreign companies and indifferent military dictators still flourished to the detriment of economic development. Nevertheless, despite unenlightened policies, economic growth in the 1950s was robust because of unprecedented world economic growth and a firm demand for oil. As a result, physical infrastructure, agriculture, and industry all expanded swiftly.

With the arrival of democracy in 1958, Venezuela's new leaders concentrated on the oil industry as the main source of financing for their reformist economic and social policies. Using oil revenues, the government intervened significantly in the economy. In 1958 the new government founded a new noncabinet ministry, the Central Office of Coordination and Planning (Oficina Central de Coordinación y Planificación--Cordiplan) in the Office of the President. Cordiplan issued multiyear plans with broad economic development objectives. The government in 1960 embarked on a land reform program in response to peasant land seizures. In 1960 policy makers also began to create regional development corporations to encourage more decentralized planning in industry. The first such regional organization was the Venezuelan Corporation of Guayana (Corporación Venezolana de Guayana--CVG), which eventually oversaw nearly all major mining ventures. The year 1960 also marked the country's entrance as a founding member into the Organization of Petroleum Exporting Countries (OPEC), which set the stage for the economy's rapid expansion in the 1970s. Throughout the 1960s, the government addressed general social reform by spending large sums of money on education, health, electricity, potable water, and other basic projects. Rapid economic growth accompanied these reformist policies, and from 1960 to 1973 the country's real per capita output increased by 25 percent.

The quadrupling of crude oil prices in 1973 spawned an oil euphoria and a spree of public and private consumption unprecedented in Venezuelan history. The government spent more money (in absolute terms) from 1974 to 1979 than in its entire independent history dating back to 1830. Increased public outlays manifested themselves most prominently in the expansion of the bureaucracy. During the 1970s, the government established hundreds of new state-owned enterprises and decentralized agencies as the public sector assumed the role of primary engine of economic growth. The Venezuelan Investment Fund (Fondo de Inversiones de Venezuela--FIV), responsible for allocating huge oil revenues to other government entities, served as the hub of these institutions. In addition to establishing new enterprises in such areas as mining, petrochemicals, and hydroelectricity, the government purchased previously private ones. In 1975 the government nationalized the steel industry; nationalization of the oil industry followed in 1976. Many private citizens also reaped great wealth from the oil bonanza, and weekend shopping trips to Miami typified upper-middle-class life in this period.

A growing acknowledgment of the unsustainable pace of public and private expansion became the focus of the 1978-79 electoral campaign. Because of renewed surges in the price of oil from 1978 to 1982, however, the government of Luis Herrera Campins (president, 1979-84) scrapped plans to downgrade government activities, and the spiral of government spending resumed. In 1983, however, the price of oil fell and soaring interest rates caused the national debt to multiply. Oil revenues could no longer support the array of government subsidies, price controls, exchange-rate losses, and the operations of more than 400 public institutions. Widespread corruption and political patronage only exacerbated the situation.

The government of Jaime Lusinchi (president, 1984-89) attempted to reverse the 1983 economic crisis through devaluations of the currency, a multi-tier exchange-rate system, greater import protection, increased attention to agriculture and food self-sufficiency, and generous use of producer and consumer subsidies. These 1983 reforms stimulated a recovery from the negative growth rates of 1980-81 and the stagnation of 1982 with sustained modest growth from 1985 to 1988. By 1989, however, the economy could no longer support the high rates of subsidies and the increasing foreign debt burden, particularly in light of the nearly 50 percent reduction of the price of oil during 1986.

In 1989 the second Pérez administration launched profound policy reforms with the support of structural adjustment loans from the International Monetary Fund ( IMF) and the World Bank. In February 1989, price increases directly related to these reforms sparked several days of rioting and looting that left hundreds dead in the country's worst violence since its return to democracy in 1958. Ironically, Pérez, who oversaw much of the government's expansion beginning in the 1970s, spearheaded the structural reforms of 1989 with the goal of reducing the role of government in the economy, orienting economic activities toward the free market, and stimulating foreign investment. The most fundamental of the 1989 adjustments, however, was the massive devaluation of the bolívar from its highly overvalued rate to a market rate. Other related policies sought to eliminate budget deficits by 1991 through the sale of scores of state-owned enterprises, to restructure the financial sector and restore positive real interest rates, to liberalize trade through tariff reduction and exchange-rate adjustment, and to abolish most subsidies and price controls. The government also aggressively pursued debt reduction schemes with its commercial creditors in an effort to lower its enervating foreign debt repayments.

Venezuela - ECONOMIC POLICY

Fiscal Policy

The government's fiscal accounts generally showed surpluses until the mid-1980s because of the immense oil income. In 1986, however, the drop in oil prices triggered a fiscal deficit of 4 percent; the deficit exceeded 6 percent in 1988.

The major actors in fiscal policy were Cordiplan, which was responsible for long-term economic planning, and the Budget Office of the Ministry of Finance, which oversaw expenditures and revenues for each fiscal year ( FY). Cordiplan also oversaw the fiscal status of the FIV, PDVSA, the social security system, regional and municipal governments, the foreign exchange authority, state-owned enterprises, and other autonomous agencies. But economic planning and budgeting suffered from a serious lack of inter agency cooperation, and five-year plans and annual public-sector investments often lacked cohesiveness.

Total government spending reached about 23 percent of GDP in 1988. Current expenditures accounted for 70 percent of overall outlays, compared with 30 percent for capital expenditures. Capital investments, after a decline in the mid-1980s, expanded slowly during the late 1980s. Interest payments, two-thirds of which serviced foreign debt, represented 11 percent of total expenditures in 1988, a typical figure for most of the decade.

The revenue structure in the late 1980s remained excessively dependent on oil income. In 1988 petroleum revenues, both income taxes and royalties, provided 55 percent of total revenue. Although oil's contribution to total revenue had declined in the 1980s, most economists felt that it had not declined sufficiently. Overall, taxes contributed 80 percent of total revenue in 1988, with the remaining 20 percent derived from such nontax sources as royalties and administrative fees. Tax exemptions, deductions, allowances, and outright evasion greatly reduced the effectiveness of fiscal policy. Officials planned to inaugurate a value-added tax in 1990 as another means to widen the revenue base.

Monetary and Exchange Rate Policies

The Central Bank of Venezuela (Banco Central de Venezuela-- BCV) performed all typical central bank functions, such as managing the money supply, issuing bank notes, and allocating credit. As part of the country's overall financial sector reform, the BCV embarked in 1989 on numerous revisions of monetary policy aimed at improving the bank's control over the money supply. The most important policy change was the government's decision to allow the interest rate to fluctuate with market rates. Despite its initial inflationary effect, the policy created incentives for savings and investment, thereby attracting and retaining capital. Deposits swelled noticeably during 1989. In 1990, however, the Venezuelan Supreme Court declared that the BCV was legally responsible for setting interest rates. The BCV hoped to rescind the law in the early 1990s.

Venezuela traditionally enjoyed general price stability; inflation averaged a mere 3 percent from 1930 to 1970. Annual price increases did not exceed 25 percent until the mid-1980s. During the 1970s, many economists credited the FIV with successfully managing and investing overseas the country's oil windfalls in a way that prevented inordinate price instability. By the 1980s, however, financial deterioration, weakening BCV authority, numerous devaluations, and fiscal deficits had combined to push consumer prices and inflation up dramatically in the late 1980s. The average consumer price index rose by an unprecedented 85 percent in 1989. Some price increases were associated with the 1989 structural adjustment program, and thus represented what some economists refer to as "correctionary inflation," the trade-off for eliminating previous distortions in prices. By 1990 only a handful of price controls remained in effect.

The bolívar was traditionally a very stable currency, pegged to the United States dollar at a value of B4.29=US$1 from 1976 to 1983. The bolívar experienced several devaluations from 1983 to 1988, when monetary authorities implemented a complicated fourtier exchange-rate system that provided special subsidized rates for certain priority activities. The multiple exchange-rate system, however, proved to be only a stopgap measure, eventually giving way to a 150 percent devaluation at the market rate in 1989. The 1989 devaluation unified all rates from the official B14=US$1 rate to the new B36=US$1 rate, which was a floating rate subject to the supply and demand of the market. By late 1990, the value of the bolívar had crept down to B43=US$1.

In a related matter, the Differential Exchange System Office (Régimen de Cambio de Dinero--Recadi), the organization that oversaw the various exchange rates, became the focus of one of the largest scandals in the decade. Between 1983 and 1988, businessmen bribed Recadi officials in return for access to halfpriced United States dollars to funnel an alleged US$8 billion overseas. When the scandal broke in 1989, law enforcement agents investigated as many as 2,800 businesses, and more than 100 executives from leading multinational enterprises fled the country in fear of prosecution.

France Economy

GDP
Actual: 0.0% • Previous: 0.2%	Next Release: N/A

French real GDP was unchanged on a quarter-ago basis in the three months to March, following a revised 0.1% increase in the previous stanza. The outcome was better than Moody’s Analytic and the Bloomberg market consensus had expected. Domestic demand contributed to GDP, while net foreign trade was a drag. On a year-ago basis, GDP growth slowed to 0.3% from a revised 1.2% in the fourth quarter. The economy will go into a mild recession in coming quarters as fiscal tightening in France and its key European trading partners, combined with uncertainty about the sovereign debt crisis weigh, on activity.

Employment Situation
Actual: 9.4% • Previous: 9.3%	Next Release: N/A

The seasonally adjusted unemployment rate for mainland France rose to 9.4%, the highest in nearly two years, in the fourth quarter from 9.3% in the previous stanza. Weak public and private sector hiring will put upward pressure on the unemployment rate in the coming quarters.

Industrial Production
Actual: -0.9% • Previous: 0.3%	Next Release: N/A

French industrial production fell 0.9% m/m in March, following a revised 0.9% rise in the previous month. On a year-ago basis, production contracted 0.9%, less than a 1.4% decline in February. Production will remain under pressure in the coming months because of fiscal tightening at home and in key European trading partners and uncertainty about the economic program of France’s new president weighing on the demand for local goods.

Trade balance
Actual: -€ 5.7 bil • Previous: -€ 6.4 bil	Next Release: N/A

France’s seasonally adjusted foreign trade deficit narrowed to €5.7 billion in March from a shortfall of €6.4 billion in the previous month. The trade balance will remain under pressure in the coming months because Moody’s Analytics believes that the euro zone has gone into a mild recession, which will weigh on demand for French exports.

Taiwan economy 2012

Despite various negative factors affecting the international economic situation in the first half of 2011, the continuation of the global economy is still revived, and the domestic economy to grow steadily with a 5.54% rate. But from the second half of the year, the European debt crisis suddenly become a major factor threatening the world economy. Major forecasting agencies recently revised down the growth of the global economy in 2011 and 2012. With regard to the domestic economy, leading indicators continue to decline, due to the slow growth of economic activities. We estimate that 2011 real GDP growth to be 4.38%. The deteriorating global economic environment will continue to keep Taiwan's economy grow 3.81% in 2012.



With regard to private consumption, the slow growth in the domestic economy affected consumer confidence. The negative impact of lower equity prices and reduce work hours, it is estimated that the domestic annual growth rate of real private consumption will be adjusted downward from 3.38% in 2011 to 2.72% in 2012. Because of the negative effects of the international economic situation, business investment is expected to decline, as private investment. But with government efforts to increase investment and private participation in public construction to stimulate investment is expected to increase. Therefore, it is estimated that the annual growth of private investment will continue to grow steadily, reaching 1.91% in 2012 of -2.36% in 2011.



With regard to foreign trade, the European debt crisis still a negative impact on the global requirements, and therefore exports to China, Japan, and Europe fell in November 2011. But with more than 90% zero products ECFA early harvest list starting next year, the export momentum is expected to be larger. It is estimated that the annual growth of Taiwan of real goods and services exports will be 5.15% in 2012. Regarding the imports, because of the negative effects of the recession on business investment, the annual growth of real goods and services imports are expected to fall to 2.2%.


Regarding the price, with the slow growth in the global economy, the prices of international crude oil and raw materials declined. Meanwhile, as the European countries still tight fiscal policy to control the deficit, global demand is expected to decline, the expected inflation remains within reasonable limits. The annual growth rate for Consumer Price Index of Taiwan in 2012 is expected to decrease slightly from 1.35% to 1.16%. Moreover, the annual growth of the Wholesale Price Index expected to decrease from 4.25% to 2.35%. As for money, with sufficient domestic equity funds is the annual growth rate of monetary expansion is expected to grow steadily in 2012 with 5.98% of narrow money supply (M1B) and 5.24% of broad money (M2).


In short, the European debt crisis had a significant influence on the dynamics of foreign claims on Taiwan. Fortunately, the U.S. economy is expected to continue growing, albeit slowly and with the leading Chinese emerging economies in Asia will likely continue to perform relatively well in 2012. Taiwan is estimated that GDP growth will remain at 3.81% next year. Looking ahead, the credit problems of issuers of government bonds in Europe, the possibility of a hard landing for the Chinese economy, the fragile economic recovery in the U.S. and the uncertain situation in Iran is worth noting that in the near future. Is the expected errors and uncertainties into account that 50% of GDP forecast is between 2.07% and 5.64%.

Russia's Economy Enters 2012

Economic growth in Russia should stay dynamic in the first half of this year, but we anticipate that the economy will lose some steam in the second part of the year. Following 4.2% growth in 2011, we think the slowdown will lead to GDP growth of about 3.5% for the full year. Initially, we expect that consumption will be boosted by the increase in military salaries and pensions. Inflation, too, should remain moderate in the first half of the year because the government has postponed regulated tariff hikes on electricity and gas prices to July, allowing inflation to stay below 5%. Consumer lending, which reached an expected double-digit rate last year, should also continue to underpin consumer demand in the first part of 2012.

Later in the year, though, we see growth moderating for several reasons. The Central Bank of Russia (CBR) is likely to curb credit growth in the second part of the year. This is because inflation will likely accelerate again on the back of the July electricity and gas tariff hikes, which in turn will slow growth in consumer demand. The fixed capital investment outlook is equally uncertain. Investment growth accelerated in the second part of 2011 on the back of a rise in corporate profits and bank lending. This trend will continue in the first part of 2012, but is likely to slow in the following 12 months as bank lending becomes tighter and somewhat more expensive.

• Russia's economic growth is likely to slow this year, to about 3.5% GDP on higher inflation and tighter bank lending. We expect GDP growth to average 4% in 2013.
• This follows stronger growth last year on the back of strong industrial production, lower unemployment, and buoyant consumer demand.
• Nevertheless, a recovery in investment spending last year was not enough to ease capacity constraints in the underdeveloped natural resources extraction sector, which makes up 25% of the economy.
• Furthermore, capital outflows have accelerated on perceived investment restraints, and political uncertainties about structural reforms. We expect that these uncertainties will continue after the March 4 presidential election.

Russia's external sector will remain highly dependent on the outlook for commodity prices. In our baseline scenario for the world economy, we anticipate that growth in developed markets will bounce back in the second part of 2012 on the back of a recovery in emerging markets, in particular China and Brazil. This would be supportive of Brent oil prices staying above $115 per barrel (/bbl) through the beginning of 2013. We note, however, that the so-called breakeven point for Ural oil prices (the price associated with a balanced budget) has risen every year and currently stands above $120/bbl.

Overall we anticipate that real GDP growth will stabilize at about 3.5% this year before experiencing some acceleration on the back of a more dynamic world economy in 2013 (see chart 1).

Chart 1

Momentum From Last Year Carries The Economy Forward

Russia's economy is entering 2012 on a good footing, after 2011 turned out to be a reasonably strong year on balance, with GDP and industrial production up and unemployment down. GDP reached 4.3%, the same as in 2010, on the back of strong credit growth and a rebound in incomes. The industrial production index (IPI) gained 3.3% in manufacturing and 1.8% in mining and quarrying in December 2011 on the same month of the previous year. Both these IPIs had shown upbeat movement during 2010 and 2011, reflecting the recovery from the slump in 2009. Meanwhile, the unemployment rate declined to 6.1% in December, its lowest level since mid-2008. The federal budget recorded a surplus equal to 0.8% of GDP (after minus 4.0% a year earlier), with an average oil price of $109 per barrel.

Buoyant consumer demand also helped drive strong GDP growth. Retail sales accelerated to a record high for the year, rising 9.5% in the 12 months to December. Meanwhile, retail lending rose by 36% over the 12 months to December. Consumption was underpinned by lower inflation. The Consumer Price Index (CPI) dropped to a record low of 6.1% in the 12 months to December, near the floor of the 6%–7% target band set by the Central Bank of Russia (CBR). Between 2004 and 2010, Russia had the highest inflation rate among the so-called BRIC countries (Brazil, Russia, India, China), but this was no longer the case in 2011, as Russia's inflation ran slightly below that of Brazil. This decrease is due in part to the shift in the CBR's monetary policy to a more flexible exchange rate. This has allowed the CBR to reduce its interventions on foreign exchange markets, which used to be an important driver of money supply growth prior to 2008. Money supply growth declined to about 20% in 2011 (chart 2).

Chart 2

A partial recovery in investment and construction also supported the economy overall in 2011, but in our view will not be sufficient to ease the capacity constraints in Russia's important natural-resource extraction sector. Capital spending in December 2011 was 9% up on the previous December, while construction was up 6.7%. Natural resource extraction currently represents 25% of the entire economy. Exports of fuels and metals typically account for three-quarters of total Russian exports, and the gas and oil sector is responsible for as much as 60% of federal budget receipts. Oil and gas faces significant capacity constraints because of an extended period of insufficient investment following the post-soviet economic transition. Moreover, capacity needed to replace depleted older deposits is typically associated with more difficult geological, logistical, and climatic conditions and hence is far more capital intensive to develop and exploit. Capital expenditures remain heavily concentrated: The total capital expenditures of OAO Gazprom, Russian Railways (JSC), OAO AK Transneft, as well as electric utilities reached 4.1% of GDP in 2011. Investment by those very large companies is also heavily dependent on growth in tariffs set by the government. Year on year, these tariffs can increase at a more or less rapid rate depending on the overall economic and political context: Electricity prices rose 13% in 2011, gas prices 15%, but further hikes in 2012 have been postponed to the second half of the year.

Russia's external sector benefitted from the rise in commodity prices during 2011. Merchandise exports grew at 32.2% year on year to reach $380.1 billion. Of this amount, 65.5% were exports of oil and gas, up from 63.5% in the same period of 2010. While merchandise imports grew at an even faster pace of 34.8% to reach $232.3 billion, this was from a much lower base than exports, so that the merchandise trade surplus widened compared with a year earlier to $147.7 billion, an increase of $32.4 billion. At the same time, the physical volume of energy exports from Russia was apparently little changed from a year earlier. According to data published by RosStat for the first 10 months of 2011, the physical volume of crude oil exports was actually down 4.0%, refined product exports were 1.9% lower, and natural gas exports were up 7.4%. But the received price for crude oil in October was 36.7% higher than in the same month a year earlier, and the price of natural gas was up 25.2%

Capital Outflows Have Intensified On Investment Constraints And Political Uncertainty

In spite of these economic achievements, CBR estimates suggest that the best part of Russia's current account surplus of $101 billion (5.8% of GDP) in 2011 was absorbed by $84 billion of capital outflows. This is the second-largest outflow in the history of modern Russia (chart 3).

Chart 3

This sharp rise in capital outflows is the result of a combination of factors, in our view. First, the global financial crisis and the decrease in risk appetite by international investors has made the refinancing of foreign debt and new borrowings abroad more difficult, putting a cap on capital inflows. Additionally, the increased flexibility of the ruble exchange rate has made portfolio inflows based on carry trade less attractive. Second, outbound investments by Russian banks have been a key contributor to capital outflows since the middle of 2010. According to balance-of-payment data, on a cumulative basis by the end of the second quarter of 2011 foreign banking assets had reached $201 billion (12% of GDP). Of these, about $78 billion were parked in the EU: 34% in the U.K., 18% in Germany, 13% in Austria, and 13% in Cyprus. But interestingly, a good part of the increase in banks' foreign assets corresponds to loans made to Russian corporate borrowers. This is because many large Russian companies (and almost all of the publicly listed ones) have part of their holding structures registered in foreign jurisdictions for legal reasons.

According to VTB Capital, a Russian bank, offshore loans by Russian banks stood at $60 billion as of November 2011. Yet, this observation leads, in turn, to another: that large corporate entities borrow through their foreign entities but decline to repatriate those funds. If they did, it would offset the outflows in the capital account. More generally, this also shows that funds generated by Russian exports are not fully reinvested at home, which seems to reflect a perceived lack of investment opportunities in the domestic economy. Institutional limitations can be seen by investors as disincentives, as the central government continues to influence significantly infrastructure developments via the large state-owned companies. In addition, political uncertainties have increased in the past year as the presidential elections, due in March, were approaching, while more anti-government protests were taking place in Moscow.

Looking forward, it is difficult in our opinion to see what would slow this rise in capital outflows in 2012. The continued increase in net foreign assets could be compensated by higher external borrowing on the back of higher lending rates in the domestic economy. However, we only anticipate a very gradual return to financing conditions more favorable to borrowers on international capital markets. This is because we believe that the sovereign crisis in Europe and the associated hike in bond yields will take time to resolve. Meanwhile, political uncertainties at home will not necessarily disappear immediately after the presidential elections. There will still be many questions relative to the pace at which the new government will be ready to undertake structural reforms.