Daily analyst comments

The scenarios still consider two main options of a moderate decline in the price of Urals crude from $55 a barrel in 2007 to $50 in 2010. The first (inertia) scenario provides for lower GDP growth – from 6.7% in 2006 to 5.3-5.2% in 2009-2010. The second (baseline) envisages the same structure of global energy prices and focuses on stronger competitive edge of Russian business and improved structure of the economy. In addition, GDP growth is upgraded compared to the previous (March) forecast. In 2007, EDTM expects 6.5% GDP growth instead of 6.2%, 6.1% instead of 5.9% in 2008, 6.0% instead of 5.9% in 2009 and 6.2% instead of 6.1% in 2010. Meanwhile, GDP growth estimate for 2006 was corrected downward – from 6.8% to 6.7% in line with estimates from the Federal State Statistics Service.

The main difference between the baseline scenario from the previous version is that EDTM has become much more optimistic in terms of industrial growth (the forecast is upgraded from 4.5-4.7% to 4.8-5.2%). The forecast was also upgraded for fixed asset investment and retail turnover.

The main parameters of EDTM’s scenario forecasts (baseline forecast):

	2006	2007	2007	2008	2008	2009	2009	2010	2010
	EDTM’s estimate	EDTM’s new forecast	EDTM’s previous forecast, March 12, 2007	EDTM’s new forecast	EDTM’s previous forecast, March 12, 2007	EDTM’s new forecast	EDTM’s previous forecast, March 12, 2007	EDTM’s new forecast	EDTM’s previous forecast, March 12, 2007
Average annual price of Urals, $/bbl	61.1	55	55	53	53	52	52	50	50
GDP, change (%)	6.7 (6.8)	6.5 (^)	6.2	6.1 (^)	5.9	6.0 (^)	5.9	6.2(^)	6.1
Nominal GDP, Rub bln	26,781	30,690 (^)	30,670	35,000(^)	34,870	39,690(^)	39,480	44,800 (^)	44,470
Inflation (CPI), %	9	7-8	7-8	6-7	6-7	5.5-6.5	5.5-6.5	5-6	5-6
Growth of GDP deflator index, %	16.1 (16.4)	7.6 (^)	7.5	7.5 (^)	7.4	7.0 (^)	6.9	6.3 (^)	6.2
Average annual exchange rate, Rub/$	27.2	26.0	26.2	25.9	26.1	26.2	26.4	26.8	27.0
Exchange rate as of year-end, Rub/$	26.3	25.8	26.1	25.9	26.2	26.4	26.6	27.2	27.5
Industrial growth, %	4.4	5.2 (^)	4.3	5.1 (^)	4.5	4.8 (^)	4.7	5.2 (^)	4.5
Retail turnover growth, %	13.0	11.6 (^)	11.3	10.5 (^)	10.2	9.1 (^)	9.0	8.4	8.4
Real per capita income growth, %	10.2	9.8 (^)	9.5	9.1 (^)	8.8	8.0	8.0	7.5 (v)	7.9
Fixed asset investment growth	13.7	12.8 (^)	12.4	11.9 (^)	11.2	10.5 (v)	10.8	11.4 (^)	9.8
Foreign direct investments, $ bln	26.2 (31.0)	30.0	30.0	39	39	41	41	44	44

The forecast provides for a downturn in global commodity prices after their growth – both for energy and metals prices. This, coupled with fast import growth, should considerably decrease forex revenue inflow from exports. Under the baseline scenario, the $94.5 bln surplus from current account operations in 2006 is to be replaced with a deficit which could reach $20-30 bln by 2010. However, EDTM expects this trend to be partly offset by a growing net private capital inflow in the corporate and banking sectors of $40-50 bln per year. As a result of lower export revenues, expansion of international currency reserves should ease (from $121 bln in 2006 to $90-95 bln in 2007 and $10-20 bln by 2010) as well as money supply (from 48.8% in 2006 to 32-34% in 2007 and 17-19% in 2010). This should help reduce inflation. However, the external economic factor is expected to hinder economic development in the coming years. According to the baseline forecast, exports will decrease 2% in 2010 compared to 2006, while import will spike 79% for the same period!

Thus, EDTM upgrades the economic development forecast with a focus on strong investment and consumer demand. The most important task is to create conditions for stable development of the processing and primarily, machine engineering industries. According to the baseline scenario, the extraction industries will continue to stagnate (annual growth of 1.9-2.3%), while the processing sectors will grow at least 6% a year. The strongest growth is projected among power engineering (+35.0%), machine and equipment manufacture (+25.0%), vehicle output (+25.0%), wood processing (28.8%) and metal production (30.4%).

In the event that the country fails to diversify the economy, Russia will develop based on the first, inertia scenario: GDP will ease to 5.2-5.7% and industrial growth will dip to 2.7-3.2%.