Russias economy remains dependent on commodities

Russia's economy remains dependent on commodities

After the turmoil of last year, confidence is seemingly returning to the Russian economy – and almost as quickly as it departed.

According to research from EPFR Global released yesterday (18 March), investment in Russia for the week ended 11 March outstripped that flowing into the other BRIC markets – reversing the recent trend that has seen Russia trailing its BRIC peers.

Russian funds – which range from companies involved in the commodities markets to banks and retailers – received US$411m in foreign investment during the seven-day period. In comparison, China received $83m, India $67m and Brazil $47m, EPFR said.

Meanwhile, the Russian Economic Development Ministry has upped its prediction for economic growth in 2010 from 3-3.5% to 4-4.5%.

However, a note of caution should be sounded here.

These high spirits have been prompted, in part, by fluctuations in the price of oil and the strengthening of the rouble. That's right, two of the primary contributing factors that sparked the sudden collapse of the country's economy last year.

The price of oil has now increased to US$80 per barrel, having hit lows of around half that in 2009. The rouble looks likely to continue its ascent for some time to come. Foreign investment has begun to flow once more.

All these signs point to a rosy outlook for the Russian economy, meaning in theory that unemployment and concerns over job security will subside and confidence will return to the Russian consumer.

But, with Russia's economic health still fundamentally tied to the swings of the commodities markets, the question is not if but when will the Russian economy take another turn for the worse?

Until Russia's economy diversifies, its health will remain tied to that of notoriously volatile commodities.

The key for multinational food manufacturers and retailers looking to succeed in this huge and underdeveloped market will therefore be an ability to prosper in bad times as well as good.

Today, Swiss food giant Nestle told just-food that it has done just that.

Despite last year's challenging conditions, Nestle was able to grow sales in the country by 12%. Its key to success? A rapid response to the changing mood of the Russian consumer.

Nestle believes that this, coupled with the company's heavy investment in manufacturing and product development in the region, leaves the group well positioned to continue its march in Russia.