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Monday, 12 January 2009

Slow econ to spur social unrest

MOSCOW - RUSSIA faces a jarring economic slowdown in 2009, leading the government to tackle severe social instability, the Eurasia Group Consultancy said in a report.

Investors this year face uncertainty over the rouble, currency reserves, slower growth of gross domestic product (GDP) and real incomes.

'Russia... demands serious reassessment of long-held assumptions,' analysts Alexander Kliment and Cliff Kupchan said in the report late on Friday.

They added that GDP growth in 2009 was 'unlikely' to top 3 per cent - in line with other analysts' expectations - and negative growth is a real possibility early in the year.

In December last year, growth contracted for the first time in a decade. Russian President Vladimir Putin said in December that full year GDP growth would stand at 6.0 per cent in 2008.

Russia's consumption boom will be further dampened by a fall in real incomes, and further waves of layoffs are expected in early 2009, the report adds.

Russia's reserves - which it piled up during a decade-long boom and sorely lacked in the 1998 crisis - have served as a cushion in the present crunch but have fallen by a third since November to roughly US$430 billion (S$638.5 billion).

But the reserves are also at risk of further pressure at the beginning of next year, when they will be used as part of anti-crisis measures, the report added.

'Against this gloomy economic backdrop, social unrest is a real possibility,' Eurasia said, adding that company towns in the Urals and Siberian industrial regions could be hit hardest as firms are forced to cut operations and staff.

At the end of last year, thousands protested against higher import duties on used foreign cars in Russia's Far East region, in what was seen as the first large scale public reaction to growing economic hardships.

The state has since taken a zero-tolerance stance on dissent.

'For investors, the potential for more serious unrest will increase political uncertainty and could threaten the smooth functioning of the Russian consumer economy and supply chains.'

Russia's often-questioned corporate governance, coupled with the deepening crisis, could lead the state to increase its role in many indebted sectors of the economy, Eurasia noted, which would increase risk for investors already in those sectors. -- REUTERS

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