Ratings agency warns of economic slowdown in Russia, calls for structural reform

MOSCOW – Russia faces harsh times ahead for its economy unless the government improves the country’s poor investment climate and implements long-delayed privatizations and reforms, U.S ratings agency Standard & Poor’s has warned.

Russia has seen more than a decade of largely uninterrupted economic growth, thanks to its lucrative oil and gas industries, to become the world’s 8th largest economy. However now that energy prices have stabilized, experts say Russia is unlikely to grow as quickly unless it aggressively reforms its economy.

S&P said in a report published Thursday that it expects Russia’s economic growth to slow to 3 per cent this year — the lowest rate the country has seen since 1999 — and that “growth will remain constrained without structural reforms to support it.”

The ratings agency’s report adds to lengthening list of warnings for the Russian economy. The European Bank for Reconstruction and Development forecasts just 1.8 per cent growth while the country’s own economic ministry predicts 2.4 per cent growth.

Even the country’s Economic Development Minister, Andrei Belousov, has warned Russia risks a recession unless rapid steps are taken.

S&P is concerned that Russian authorities would not be ready for tough measures if the economic situation gets worse.

Kai Stukenbrock, a senior director at S&P, told reporters on Thursday that Russia needs to improve business climate and increase productivity if it wants to see robust development.

“In terms of what has actually been implemented in the past couple of years, there isn’t too much that points to a direction that the government would be willing to take difficult decisions to increase the long-term sustainability of public finances,” Stukenbrock said.

President Vladimir Putin won his third term in office in March 2012 promising a strong social agenda, lavish spending for public sector workers and the army. However, many economists, including former finance minister turned opposition politician Alexei Kudrin, consider the campaign promises unsustainable and dangerous for the budget’s balance.

President Putin last week gave his government ministers a dressing-down for failing to deliver a stronger economic performance, saying that the country “needs high growth rates and investor activity right now.” Ministers were given a week to come up with their ideas of how to spur growth.

One area that Russia needs to develop is the accessibility of its industry to international competitors and investment. However global investors continually run into a hostile environment in Russia. Last year, for example, BP’s Russian venture TNK-BP was taken over by state-owned oil conglomerate Rosneft. Since the deal, international minority investors holding some 3.5 per cent in TNK-BP have been left in limbo with Rosneft showing no sign of buying up the remaining shares, and the investors unable to find other buyers for their stake.

Another cause for concern is the large number of Russian companies still in state hands. Analysts at S&P pointed to a slowdown in the privatization drive which Russia announced years ago as a way to reduce state presence in the economy. The government last year raised $5.2 billion by selling 7.6 per cent in Russia’s biggest bank Sberbank but still held on to 57.6 per cent in the company. Russia’s second-largest bank, VTB, is getting ready for a stock issue later this month with an eye to cut down the government’s share from 75 to 61 per cent.

Stukenbrock said these can hardly be “considered to be privatizations in a sense that the government did this in order to liberalize the economy and reduce the influence of the state — rather it was done with a purpose of raising funds or capitalizing the bank.”

Investors have been frustrated by the low amount of the shares on offer and the fact that Russia’s most lucrative state-owned assets like oil firm Rosneft are not on the privatization schedule.