Investment Crash Blamed for Decline

A crash in investment dug the Russian economy 6 percent further into its post-Soviet hole in 1996, according to official figures released Monday, but analysts said the toll on personal living standards has not been so harsh.


"The recovery didn't happen last year," Renaissance Capital economist Roland Nash said, and "to turn around a 6 percent decline this year is going to be pretty tough going."


By official measures, Russia's gross domestic product has now more than halved since the start of market reforms in 1992. But despite adjusting its calculations, the State Statistics Committee has not captured much of the growth of the new private sector, which is estimated as high as 30 or 40 percent of GDP.


"There are all sorts of components that go into GDP, but many of those components don't enter into people's pay packets or consumption baskets," said Alastair Mcauley, a visiting professor at Moscow's New Economics School.


"Whether you really feel that much better with another SS-20 ballistic missile system deployed is a very questionable issue."


Real wages rose in 1996 and consumption stayed broadly at the level it has for the last several years, other statistics have shown.


But a fall in investment of 18 percent last year -- more than the 10 percent contraction in 1995 -- contributed to the fall in GDP and threatens future prosperity, economists said.


"Ignoring investment means you're ignoring the ability of the economy to go on generating that level of consumption in the future," said Mcauley.


Output fell across the board in most sectors of the economy, according to the State Statistics Committee figures released Monday. The electricity and energy sectors posted the smallest decline, with falls of 2 and 3 percent respectively, while output in light industries plunged 25 percent and in the building sector 25 percent. Car output, however, rose 4 percent.


The raw materials sector in general has fared better than industry, with crude oil production down just 2 percent and natural gas output up 1 percent. Gold output fell 7 percent in 1996 from 1995 levels, nickel output was off 3 percent, aluminum rose 3 percent and copper production increased 7 percent.


"It shows that the economy is reacting to market forces," Nash said. "Those areas of the economy that are the least competitive have declined the most."Although some critics have said Russia's high natural resources exports threaten to turn it into a "banana republic" by leading to a shrinkage of the manufacturing sector, Richard Layard of the London School of Economics said Monday that the strong export-led trade is doing Russia more good than harm.


"It is important to expand the production of oil and gas as far as possible in order to pay for the high level of consumption and investment that are needed," he told a press conference in Moscow.


Russian manufacturing gets a boost from the cheap energy inputs, Nash said.


For growth to happen next year, economists say Russia must move beyond reliance on raw-materials exports and implement broad structural reforms such as improved bankruptcy and accounting procedures and easier licensing for new businesses.


The government has projected 2 percent growth for 1997 and promised to increase state investment. But previous growth forecasts have proved too rosy and budget-watchers say the federal deficit is still so high as to crowd out money from the industrial sector.