Boston, 12 July 1999 (RFE/RL) -- A sudden burst of optimism over the Russian economy has sent analysts scrambling for explanations as Moscow's stock market shakes off the effects of last year's August 17 crash.
Real recovery for Russia's economy may still be a long way off, but the stock market index has already regained its lost ground by more than doubling since the start of the year.
Investors have been cheered by a few glimmers of good economic news, as well as the chance to wring export profits from a ruble that is worth one-quarter of its value a year ago. Higher world oil prices have been the brightest spot of all.
Rising oil revenues and devalued domestic costs have combined to improve the outlook for 1999 in much the same way that low oil prices and the Asian currency crisis came together last year to spark the Russian collapse.
Those seeking more justification for the surge in stocks can point to a host of other reasons. Industrial output in May rose 6.1 percent from a year before, while monthly inflation has fallen. President Boris Yeltsin has returned to a semblance of health. Creditors are likely to ease the country's debt burden. And the International Monetary Fund has agreed to renew lending, even though no loans have been made. All in all, Russian stocks look cheap again, thanks to devaluation.
But the biggest reason for the sudden change may be that Russia's shrunken economy may now be more susceptible than ever to big changes in dollar-denominated exports like oil. While oil prices have nearly doubled since February, Russia's prospects may be affected more dramatically than in previous years because its economy is only about half as large as it was a decade ago.
In dollar terms, Russia's gross domestic product last year was only 84 percent larger than Poland's, although it has more than three times the population and 50 times more land. While Russia's economy fell 4.6 percent last year, the economy of Poland grew 4.8 percent. If those rates were to continue, the size of the Polish economy could surpass that of Russia by 2005.
Such comparisons have very limited value. Although the Polish economy has been growing for the past five years while the Russian economy has been shrinking, there is no assurance that the two opposite trends will continue for the next five years. The dollar value of GDP was also greatly affected by last year's devaluation. Russia's resources and its strategic importance to the West may give it an added potential for recovery, even after major crises like the one of August 17.
But the comparison may serve as reminder that Russia's economy is far smaller than in Soviet times. Perhaps for that reason, the Russian market is more easily influenced by swings in the price of oil. Last year, fuel and energy accounted for about 40 percent of Russia's exports, according to the Economist Intelligence Unit. Exports in turn accounted for 27 percent of GDP.
At last year's rates, an oil increase of $5 a barrel would earn Russia an additional $4 billion this year, or more than a 5 percent increase in exports. In fact, there are signs that Russia could gain much more from the current price rise. In May, the country boosted its oil exports by nearly 30 percent from a year earlier in hopes of capitalizing on higher prices, despite a pledge to OPEC that it would cut exports to help keep prices up.
But while the market is cheered by higher oil prices, it has ignored other factors that are far less positive. A 20-year low in world gold prices last week will damage revenues from another key export, while decreasing the value of Russian reserves that support the ruble. There may also be little to celebrate about the May increase in industrial production. The monthly output a year earlier declined 2.1 percent, starting the slide that led to the August crisis. Year-to-year comparisons may only give the appearance of health.
Retail trade and incomes remain dismal after 3 percent decline in GDP in the first quarter of the year. This year's harvest is also expected to be poor. In addition, creditors have apparently become less willing to consider a debt write-off. On Friday, envoy Alexander Livshits said that Russia is now only seeking a rescheduling of debt service for the next year or two, followed by restructuring.
The bright spot of oil prices may also turn dim. Officials say that more oil has been available for export because of weak domestic demand, hardly a good economic sign. OPEC may also have trouble holding the line on production cuts and prices if Russia continues to increase exports by up to 900,000 barrels per day. In short, there are causes to doubt nearly every reason for the stock boom.
The sudden rise in Russian stocks suggests that some of the same speculative forces that drove the market before the ruble crash have now returned. But it is still too early to tell whether the economy will support such exuberance.
If the market is relying on higher oil prices, it is likely to be just as vulnerable to bad news if the price rise cannot be sustained. Without long-term economic growth, there may be little reason to hope that the Russian market will advance beyond its cycle of boom and bust.