tutkimuia

Eastern European Markets

(May 2011)

The Republic of Karelia in 2010. Biannual Economic Review.
University of Eastern Finland – Karelian Science Centre, CEMAT 2011

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Karelia digs itself out from the recession

The biggest news in Karelia in 2010 was the resignation of the twelve-year leader of the region, Governor Katanandov, in June. President Medvedev appointed Andrei Nelidov to succeed him. Nelidov has tackled the problem of the high share of loss-making companies in Karelia, and promised notable changes in the regional economic development strategy. While it is too early to judge his success, he has a good relationship with Moscow, which may prove useful for
the future of Karelia.

After the disastrous year of 2009, Karelia is slowly reviving itself. Industrial production has almost reached 2008 levels, exports have grown considerably, and the financial situation of the region’s budget and companies has clearly improved.

The recovery is still fragile, as fixed investments and construction thrive mainly because of federal funds, foreign investments are in a slump, and unemployment is decreasing very slowly. A lot depends on the global recovery, and the fragile recovery in Karelia might come to a sudden halt if for example the crisis surrounding the Euro gets worse, or if China’s cooling efforts start to dampen Asia’s development.

Forecast on Karelia Republic’s economic development for 2011

CEMAT’s May forecast2 for Karelia republic’s industrial production growth for 2010 was 15% and for retail trade growth 2%. With the full year data at hand, we can see that our industrial growth forecast was too optimistic compared to the actual 11% figure.

This was due to late rebound of investment activity and notable easing of the extractive industry growth from its major surge in the first half. Industrial growth in 2011 will be more robust than previously anticipated due to increase in global raw material prices which is beneficial to region’s export orientated economy. However, despite of this we expect the industrial growth to ease up notably from 2010 as the low base effect is exhausted. Our forecast for Karelia’s industrial growth for 2011 is 5%.

Retail trade on the other hand surprised positively (5 % growth in 2010) aided by decent income growth. It has been surprisingly resilient to the increase in food and gas prices. As we laid out in the previous report, we expect retail sales growth to remain clearly above 5% in the first half of 2011 and then moderate towards the end of the year. While we slightly upgrade the second half growth we expect the price growth to put pressure on retail sales which will keep it below the pre-crisis double digit figures.

Our forecast for Karelia’s retail sales growth for 2011 is 6%. In the figures below we no longer include single month growth figures due their high volatility and revisions by the statistical authorities. Thus, to show the relevant trends we include only four month moving average and its corresponding forecast.

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Economic Monitoring of North-West Russia (http://www.hse.fi/ecomon)
The project “Economic Monitoring of Northwest Russia” was launched in 2000 with the aim to provide regular, comprehensive and systematic reporting on the socio-economic development in the region. The monitoring covers today six Northwest Russian regions: The City of St Petersburg, Leningrad, Kaliningrad, Murmansk and Novgorod provinces, and the Republic of Karelia.

More Information
Professor Riitta Kosonen
Director, Center for Markets in Transition (CEMAT)
riitta.kosonen@aalto.fi
cemat@aalto.fi


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