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Last Updated: Wednesday, 4 July 2007, 23:05 GMT 00:05 UK
Russia's economic might: spooky or soothing?
By Jorn Madslien
Business reporter, BBC News

Russian President Vladimir Putin
President Putin's power has made him hugely popular in Russia

The Russians are displaying their wealth with pride, whether on the streets of Moscow or on the global geopolitical arena.

Retail sales in the country soared 13% last year, well ahead of the rest of Europe.

And almost half the Russian people believe it important to be fashionably dressed, according to a recent Wall Street Journal survey.

But unlike many fashion victims in the West, Russia's elite can really afford to strut.

Last year, the number of so-called "high net worth individuals" - people whose spending power exceeds $1m (500,000) - in Russia rose 15.5% - compared with an 8% swelling in their number globally, according to the Merrill Lynch and CapGemini World Wealth Report.

Similarly, President Vladimir Putin's confident swagger on the international stage is that of a man who has delivered what his people want: stability, prosperity and national pride.

Regional growth

"There's been a fantastic transfer of wealth to Russia," observes Accenture energy analyst, Mark Spelman.

In just four years, Russia's GDP has almost trebled, from $345bn in 2002 to $984bn in 2006, in dollar terms (partly due to economic growth, but also because the value of the rouble has soared). The economy is now growing at almost 7% per year - up from less than 5% four years ago.

Inflation, meanwhile, has slipped from almost 16% in 2002 to single-digit figures.

Exports have trebled - largely thanks to metals, oil and gas - to about $300bn, by far outpacing import growth. This has enabled Russia to pump up its foreign cash reserves.

In 2002, the reserves stood at $44bn. By 2006, they had ballooned to more than $295bn.

Hence, as far as the Russian people is concerned, it seems President Putin can do nothing wrong. "Putin has the highest [voter] approval rating of anyone in the world," says Mr Spelman.

"Everyone's focussing on the fact that there are more billionaires in Moscow than there are in London, but what we're actually also seeing is that the disposable income of skilled people in Russia is going up.

"You see a lot of infrastructure, a lot of housing, shopping malls. The commodity boom is now percolating beyond Moscow."

Agrees Global Insight Russia analyst Natalia Leshchenko: "Living standards are slowly beginning to improve, also for the poorest, and that's why Putin is popular."

International image problem

Internationally, though, the Russians' confident demeanour is often met with a mixture of suspicion and fear, as well as perhaps a dash of envy, and at times even a desire to join the party.

Murmansk housing
The Kremlin has started investing in regional housing

At the grassroots level, big-spending Russians are often scoffed at. One particularly stark example was seen in Austria last winter, when luxury hotels in the alpine resort Kitzbuhel agreed to limit the number of Russian visitors to one in ten.

On a loftier scale, Russia has come under fire for employing an aggressive energy policy as a lever to aid its political power beyond Russia's own borders.

"It's done some very clever things and some very clumsy things," observes Ms Leshchenko.

In particular, concerns remain in the West about Russia's apparent ruthlessness after it cut supplies to neighbouring countries that refused to switch from paying subsidised prices to paying international market prices for their gas.

This "backfired", according to Ms Leshchenko. "It's an image problem for Russia, which is partly unfair and partly well deserved."

Indeed, agrees Mr Spelman, "it is much more nuanced than it has been presented. Why should Russia subsidise gas deliveries to former Soviet nations?"

Strategic control

However, Mr Spelman acknowledges that Russia is quite prepared to use its energy reserves strategically.

There is no doubt about Russia becoming more powerful economically
Global Insight Russia analyst Natalia Leshchenko

Back in the 19th century, Russia used its army as a weapon of foreign policy. Then, during the Cold War in the 20th century, it applied its nuclear and rocket science to influence its friends and enemies.

These days, its main leaver is natural gas, observes Mr Spelman, adding that 56% of the world's proven gas reserves are in Russia.

"But whereas the West is concerned about the security of supply, Russia is genuinely concerned about security of demand," he says. In other words, Russia needs both the West's custom and foreign investment.

And as long as Western investors play along with the Kremlin's desire for control of national assets through majority ownership there is plenty of scope for profits to be made for foreign partners - despite the impressions created by, say, the ousting of Shell from the Sakhalin-II project.

Moreover, when Russia's state controlled gas monopoly goes on the acquisition trail abroad, it is not merely motivated by the Kremlin's desire for power. Commercial concerns also range high.

Ownership of downstream assets gives Gazprom better control of the demand for its gas, which is crucial to secure proper investment in exploration, extraction and transport - the upstream parts of the business.

Sensible approach

Gazprom's at times haphazard behaviour could be seen as symptomatic of the Russian government's own ability to manage the economy.

Metals and minerals mining in Monchegorsk
Demand is strong for Russia's metals and minerals, oil and gas

Indeed, though Russia's economy has grown at breakneck speed in recent years, much of this has been more on the back of luck than skill.

Strong global demand for commodities, with the subsequent boom in energy and metals markets, has accounted for much of Russia's wealth creation in recent years.

However, it is quite possible to be both lucky and smart, points out Ms Leshchenko.

"Russia remains very much a resource-based economy," she says, acknowledging that Russia has "undoubtedly benefited" a great deal from this.

"But at least they did not squander the money."

"There is no doubt about Russia becoming more powerful economically," she adds, while stressing that its policies have been "rather sound" and not nearly as aggressive as some of the Kremlin's pronouncements in other areas.



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