Russian Economy Will Struggle to Grow 3% Per Year, Ruble to Weaken – HSBC

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MOSCOW. Oct 24 (Interfax) – Russian GDP will grow 3% in 2012 and 2.5% in 2013, but that is as good as it will get until structural changes are implemented, Alexander Morozov, chief economist for Russia and the CIS at HSBC, said at a meeting with reporters.

The ruble will continue to weaken, falling to 32.27 rubles/$1 by the end of 2012 and 33.78 rubles/$1 by the end of next year, Morozov said.

Inflation can be expected to slow in the second half of 2013, he said, but chiefly because it will accelerate in the second half of this year due to hikes in service charges and the lower harvest, and as the result of the Central Bank’s monetary policy. Inflation could be 5.9% in 2013, Morozov said.

“We expect that economic growth in Russia will stabilize or even tend to slow at current or lower oil prices. Unless there is a breakthrough in structural reforms or the investment climate improves, the potential for the Russian economy to grow will not exceed 3% and will only decrease,” Morozov said.

The Russian economy has to be modernized, and that cannot be done without investment, which in today’s conditions is likely to grow at a very low rate, he said.

“Company profits are falling and these are the main source of investment, so the resources for investment even in nominal terms are lower than they were pre-crisis. Also, the business community is not confident the economy will grow rapidly, and in order to recoup investment you have to get past 20 barriers, obtain 20 permits and endure various administrative problems in doing business. In these conditions a company has to think 20 times before investing money,” Morozov said.

On-going capital outflow is also a consequence of a poor investment climate, he said. Capital outflow without the Rosneft (RTS: ROSN) deal will be $75 billion-$80 billion this year. Outflow will continue in 2013 and will be $50 billion-$60 billion, he said.

“Unfortunately, capital outflow from Russia is the rule, and inflow the exception. I’ll say that capital flight is a significant constituent of capital outflow. Capital flight can include what the Central Bank describes as dubious transactions, and errors and omissions. These figures are quite big, in the region of $10 billion-$20 billion a quarter,” he said.

High corruption is also a major factor in capital outflow. “If the level of corruption falls then capital outflow will fall,” Morozov said.

In addition, households are buying more foreign currency, and this tendency will only increase as the ruble weakens, he said.

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