Medvedev Tells Executives Russia to Rebound Fast

By Yuriy Humber and Paul Abelsky

June 8 (Bloomberg) -- President Dmitry Medvedev says the Russian economy will rebound faster than expected. An audience of government officials and executives meeting at the weekend mainly agreed, while demurring on the shape of the recovery.

“I expect the Russian economy, as one of these rapidly developing markets, to overcome its problems more quickly than had perhaps been expected,” Medvedev said at the St. Petersburg Economic Forum, an annual gathering in Russia’s former imperial capital that closed on June 6.

Citigroup Inc. Chief Executive Officer Vikram Pandit and Jim Mulva, head of ConocoPhillips were among 3,500 business people, along with five heads of state, who attended the meeting, at which companies signed deals worth “several tens of billions” of dollars, Economy Minister Elvira Nabiullina said.

Foreign observers including the World Bank, which has consistently forecast a deeper recession for Russia than its government, found reasons to be “guardedly optimistic.”

An 85 percent surge in Russian stocks this year, the best performance of any benchmark index bar Peru after their worst year on record in 2008, can’t be ignored as the rally may “anticipate developments” in the economy, said Klaus Rohland, the Washington-based lender’s chief representative in Russia.

The world’s biggest energy exporter faced a more upbeat outlook at the opening of last year’s gathering as crude oil surged to a then-record by jumping $10 on the eve of the forum.

Severe Contraction

Russia’s economy contracted an annual 9.5 percent in the first quarter after oil prices slumped by more than 50 percent from a peak of $147.27 in July and companies struggled to repay debt and fund projects. Gross domestic product may fall as much as 8 percent this year, Nabiullina says, after 10 years of expansion averaging almost 7 percent.

The government has earmarked 3 trillion rubles ($97 billion) in stimulus spending and the central bank cut the main interest rates three times in six weeks to spur bank lending.

“We think that the worst is behind us, and that we should see a slowing in the coming months of the downturn and a beginning of the upturn,” said John Lipsky, first deputy managing director at the International Monetary Fund. “There has been a sharp response in terms of fiscal stimulus, monetary action and of course, more recently, the general outlook globally has improved, the price of oil has come back up.”

Medvedev is handling this financial crisis better than his predecessor Boris Yeltsin did in 1998, according to Union Bancaire Privee, a privately held Swiss bank.

‘Event-Driven’

“Russia is coming out of this crisis very well” even as the country still has some “fundamental, event-driven” problems to solve, said Gregg Robins, UBP’s head for Russia and eastern Europe.

Still, some participants appeared far from a consensus on the likely course of a recovery and the severity of the downturn, the country’s worst since the 1998 default on $40 billion of domestic debt.

“We have not yet reached the bottom, it is clear,” Russian Finance Minister Alexei Kudrin said. “After some improvement we are going to see another turn for the worse.”

The slump in manufacturing and plunging consumer demand may trigger a “second wave” of problems for banks as companies fail to repay loans.

The share of overdue debt in Russian banks’ portfolios is likely to exceed 10 percent of the total this year, Kudrin said, a level the government has termed a critical “threshold.”

Not Optimistic

“I wouldn’t be seriously, exceedingly optimistic,” said Vasily Titov, deputy chairman of VTB Group, Russia’s second biggest bank. “I am confident we are yet to see the second wave of the crisis, this time the crisis of bad debt.”

The most important question left unanswered in St. Petersburg may be what contours the aftermath of the crisis will take, not the timing of the economic recovery.

Any perception that the crisis is easing may deflect Russia from overhauling management and restructuring the economy, said Troika Dialog Chairman Ruben Vardanian, founder of Russia’s oldest investment bank, in an interview.

“It’s a shame” so many officials and business leaders think the crisis is over because it removes the incentive to reform, he said. “A crisis forces you to change many ineffective things. It’s impossible to say if we’ve hit the bottom of the crisis. That would be pure speculation.”

To contact the reporters on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net; Yuriy Humber in St. Petersburg via the Moscow newsroom at yhumber@bloomberg.net.