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Russia kicks off economic forum, but its wealth is on shaky ground

Key Points
  • Russia kicked off its annual St Petersburg International Economic Forum (SPIEF) on Thursday, an event at which it will try to boost its appeal to international businesses and investors.
  • The country has been hit by five years of international sanctions on its economy.
  • The effects of the U.S.' trade war with China is also putting the brakes on growth.
Russian President Vladimir Putin arrives to deliver his annual state of the nation address in Moscow on February 20, 2019.
ALEXANDER NEMENOV | AFP | Getty Images

Russia began its annual St Petersburg International Economic Forum (SPIEF) on Thursday, an event at which it will try to boost its appeal to international businesses and investors.

Russia has been hit by five years of international sanctions on its economy following its annexation of Crimea and role in pro-Russian uprising in Ukraine. It is also not immune to the effects of the U.S.' trade war with China which is putting the brakes on global growth.

Frederic Oudea, president of the European Banking Federation and CEO of Societe Generale, told a Russian economy panel at SPIEF Thursday that while the country's finances were not faring too badly given the global environment, sanctions remained a hurdle.

"In this world of uncertainty … I think Russia has done pretty well in the last few quarters. Of course, the international sanctions remain an obstacle, a handicap to create more positive momentum and more structural confidence," he said.

A stalling in Russia's economy is borne out in the latest growth data that revealed the economy had slowed in the first quarter of 2019 to its weakest level since late 2017.

In May, Russia's Economy Ministry had already warned of lower growth in 2019, forecasting 1.3% this year. Meanwhile the Central Bank of Russia expects GDP to grow by 1.2 - 1.7% this year with both domestic and external factors hampering growth.

Finance Minister Alexei Kudrin, who also took part in SPIEF's inaugural panel was more pessimistic, predicting less than 1% growth in 2019. He also said Russia needed to improve the rule of law and that a lack of confidence in government was affecting investment.

"According to my forecasts, the growth potential is something close to 2% and I don't think we'll make 3% or above because we're not quite active enough in improving structural things … We have to implement a number of measures in order to increase confidence otherwise we cannot expect more investments."

Russian Finance Minister Anton Siluanov told the SPIEF panel Thursday that it was the aim of the government to boost economic and business activity and that lackluster growth in recent quarters had been expected due to tax changes. He conceded that Russia needed to boost structural reforms, however.

"We're just getting the national initiatives going to tackle the problems that we've never tackled (like) boosting exports, productivity, small and medium-sized business," he said.

"These are the spheres where our government is trying to resolve the problems we have. I'm sure this will give an additional impetus for growth but we're just at the beginning and it's not that simple," he said.

Wait-and-see mode

Russia's central bank has previously come under some pressure to cut rates in order to boost growth but it has had to tread a fine line to tackle previously rampant inflation stemming in recent years from the oil price collapse, sanctions, capital flight and a devalued ruble.

The central bank has resisted following other central banks in implementing looser policy to stimulate growth, nonetheless it remains cautious about Russia's near-term outlook.

It noted in a statement in April, when it kept its key interest rate at 7.75% (inflation stood at 5.2% in April), that a recent unpopular VAT hike from 18 to 20% had only "slightly constrained business activity" but said wider data showed that investment activity remained muted.

The bank had signaled earlier in the year that it could consider a rate cut later in 2019 but that decision would depend on Russia's spring economic performance. The central bank believes that its inflation target of 4% will be reached in the first half of 2020.

Speaking on the SPIEF panel Thursday, Bank Governor Elvira Nabiullina agreed that structural changes were needed rather than monetary policy changes.

"In our opinion, changing our policy at a time when the problems are in other things (areas) will change nothing but will only create additional risks and produce negative effect on stability. A low inflation rate is also one of the ways to ensure economic growth, so we make our input and I think we cannot copy things that other countries are doing."