Ben Aris in Moscow -

Confusion reigns over what will happen to the Russian economy in due course: is it headed into the "dustbin of history", in Trotsky's immortal phrase, or will it be the fastest growing in Europe by the end of the year?

Compare the headlines following the release of the final first-quarter GDP figures. "Russia posts bleak growth," wrote the Wall St Journal after Russia's economy grew just 1.6% over the first three months of this year. "Russia's GDP growth beats expectations," declared Uralsib in a research note, pointing out the consensus expectation was for only 1.2% growth and the final figure was revised up from the initial 1.1% growth.

Of course, both points of view are right, but the situation is even more confusing if you start looking at the full-year forecasts. The European Bank for Reconstruction and Development (EBRD) slashed its 2013 expectation in half in May, forecasting only 1.8% growth this year, whereas Goldman Sachs downgraded its forecast - but not by much: at the start of the year the bank was predicting growth of 3.8% this year, now it believes it will grow by 3.1%. The government also cut its own forecast from 3.6% to 2.4% in April, which is in the middle of most estimates.

That's a big spread of guesses over a pretty short time horizon, and when this happens it usually means analysts are pretty clueless as what is really going on. The trouble is that large negative and positive forces are both in play at the moment. There is talk of a looming recession and even of stagnation. Concerns over the future were sufficiently bad that Prime Minister Dmitry Medvedev had to tell Russians not to panic on May 20. "I am confident we will succeed in avoiding a crisis like that of 2008-2009. There is no need to stockpile canned meat, soap, matches and salt!" Medvedev said in an interview with Komsomolskaya Pravda newspaper.

The more positive pundits argue the fears are overblown, as there is nothing fundamentally wrong with the Russian economy; much of the current slowdown is due to a statistical quirk. "Part of the current slowdown is due to the high base effects from last year, rather than any fundamental problem," says Clement Grafe, chief economist for CEMEA at Goldman Sachs. "Inflation was high, there was a food price shock, and investment has been undermined by politics, which has increased the uncertainty for businessmen... The growth drivers in the second quarter will not change, but the growth will be better due to the base effects."

The slowdown over the start of this year was widely expected by economists, but what surprised was just how dramatic it was; the economy basically stalled in February, whereas most economists were predicting growth of around 2.2% between January and April.

Called to account

The Kremlin has leapt into action, with Russian President Vladimir Putin very publically calling state officials and government ministers to account. Several short-term measures to give the economy a shot in the arm have also been introduced, including a "budget manoeuvre", which shifts spending from state-owned companies to teacher and doctor salaries. The amount to be invested in infrastructure has also been increased. And a game has been played with the exchange rate used in the budget that has effectively increased the crucial oil price assumption, which determines overall spending power of the government, from $91 to $103. "We expect the negative trend to break in the second quarter. The economic growth will exceed 3% in July-December," Economic Development Minister Andrei Belousov said in May.

The Central Bank of Russia is even more confident and decided not to cut interest rates at the start of May against wide expectations of a cut of 0.25 percentage points or even 0.5 points. The CBR is still putting the fight against uncomfortably high levels of inflation above the need to stimulate growth. "We don't see an output gap," says Grafe, who believes the decision to leave rates on hold was the right one. "You should only cut rates if growth is falling - that causes the output gap to widen - or if inflation is falling, but neither of these things have happened."

Traditionally inflation falls on its own in the summer as agricultural product prices come down, so this by itself should help boost growth.

Investment

The lack of investment is the biggest drag on the economy. Rosstat reported on May 21 that employment was at its highest level since the fall of the Soviet Union. As of March, Russia's employed included 71m people, nearly 1m more than a year earlier. The number of unemployed persons at 4.3m was down by nearly 500,000 from a year ago and by 1m from two years ago, according to the International Labour Organization (ILO) methodology.

Russia's factories are running at full capacity and with retail turnover growth running at around 6%, Russia's consumer market is in robust health. But despite operating in one of the few European economies growing above 1%, owners are not investing in new capacity.

There are several major changes underway at the moment that has put most business people on the back foot, the main one being the new rules that ban state officials from holding assets or bank accounts abroad. "For the first time since 1992, Russia has imposed restrictions on the flow of capital out of the country. People don't understand the motive or what the next steps will be," says Grafe. "The wealthy are worried this is all the start of something bigger. Putin has gone out of his way to say it won't happen, but we did have the conversation [about introducing capital controls] during the worst of the crisis."

Russia still has one of the most open currency regimes of any emerging market and the new rules currently only apply to politicians serving in government, high public officials or those at the top of state-owned companies. But just broaching the subject of restrictions on sending money abroad has put the willies up most oligarchs, who are worried that the rules may eventually be broadened to include them as well. (And remember that Putin explicitly "recommended" the oligarchs that cashed out of TNK-BP to reinvest their billions in Russia.) It is these collywobbles that have been contributing to the disappointingly high levels of capital flight: the CBR was predicting that capital flight would fall to $10bn this year, but it had already reached some $25bn by the end of the first quarter, according to Goldman Sachs.

Still, there may be more clarity come July. The ban on foreign asset ownership is already on the books, but the all-important instructions that explain how the law is to be implemented have not been written yet. These will determine how strictly the new law is to be enforced and how much resources will be given to policing it. Business people are waiting anxiously for these details before deciding what to do next.