At first glance, Russia’s economy looks strong. In 2012, when the global economy was losing momentum and the Eurozone was stuck in recession, growth in Russia was solid, based on resilient domestic consumption. But a closer look reveals weaknesses. Read More »
The World Bank projection for Russia’s growth in 2014 remains moderately positive at 3.1 percent, but with downside risks, after the country’s economy lost some momentum in 2013.
Although Russia’s growth outlook for 2013 is positive, it is well below the strong growth outturn of 2012. Following 3.4 percent GDP growth in 2012, the World Bank revised its 2013 growth projection for Russia down to 1.8 percent.
In Russia, economic growth slowed significantly during the first half of 2013:
The slowdown was a result of weaker demand due to a combination of external and domestic factors, some cyclical, and others structural.
A large part of the cyclical component is related to Russia’s high dependence on oil and gas exports and with it, its exposure to commodity-price volatility.
Structural challenges to the Russian economy and its growth, such as non-competitive sectors and markets, are another important factor, and they recently moved to the forefront of policy discussions as the economy seems to operate close to its current capacity limit.
Weakness in domestic demand was reflected in subdued investment and consumption activities. Consumption, the main growth driver in the past, expanded at a much slower pace than a year ago. Investment activities tapered sharply as large infrastructure projects for the Winter Olympic Games in Sochi and the Northern Stream pipeline neared completion. Business sentiments remained skeptical, which affected investment demand negatively.
External demand remained sluggish. Trade in global markets did not provide the expected relief while oil prices retreated, stabilizing below $ 100/bbl during the second quarter of 2013. Weak export performance was an important factor for lower growth in the first quarter of 2013.
Recent consumer and business confidence indices point to deteriorating sentiments and lingering uncertainty on how the global economy, and specifically the Russian economy, will play out. While investors were already in a wait-and-see mode, consumers appear to have joined them and the players in the Russian economy are on the fence.
The economy is close to its current growth potential. Despite the observed broad-based slowdown in the economy, most recent estimates show that the level of capacity utilization remained close to 80 percent in the first half of 2013. That is comparable with rates observed in 2006 and 2007, when the economy was expanding at 8 percent annually. Given the still-tight labor market and the depressed investment activities of the last four quarters, it appears that the economy could be running very close to its maximum capacity.
Weaker growth potential is also reflected in the sector composition of growth. In the first half 2013, growth in key non-tradable sectors, such as construction, financial services, transport and communication slowed dramatically and is not compensating anymore for the gradually deteriorating industrial performance, and the manufacturing of tradable goods, in particular.
Considering these observations, overcoming structural challenges to the Russian economy and its growth would need to constitute an important aspect of growth-stimulating policies. For Russia, this would constitute a shift from the growth model followed in the past, which focused at stimulating domestic demand. As structural challenges become binding, constraints such as non-competitive sectors and markets would need to be addressed to lift Russia’s growth potential.
Despite the slowdown this year, the Russian economy is projected to accelerate to 3.1 percent growth in 2014. Global recovery could result in an increase in Russian exports starting in the fourth quarter of 2013, while the World Bank projects oil prices to remain stable at about $105/bbl. Next year’s growth prospects will largely depend on the recovery in Russia's most important economic partner, the Euro Area, and the increased investment activities associated with the recently announced large state investment projects to be financed off-budget.
However, this moderately positive outlook is subject to downside risks.Russian exports could remain depressed if the recovery in global demand is further delayed. The tapering of quantitative easing policies, notably in the United States, could temporarily negatively impact Russia's economy through lower oil prices, restricted access to international capital markets, and higher capital outflows. The Bank notes also vulnerability to increasing risks in regard to the quality of the credit portfolio given continuously high credit growth.
The current World Bank Group 2012-2016 CPS was discussed by the World Bank Group’s Board of Executive Directors on December 20, 2011. Itis aligned with government priorities and covers four themes: (i) Increasing Growth and Diversification, (ii) Expanding Human Potential, (iii) Deepening Russia’s Global and Regional Role, and (iv) Improving Governance and Transparency (as a crosscutting theme). The strategy endorsed an envelope of up to US$5 billion in IBRD lending to support the program over the five-year period. IFC foresees total investments between US$3.8-4.8 billion for its own account, plus significant mobilization of counterpart funds. MIGA continues to support foreign investors through the provision of political risk guarantees.
Russia is a strategic partner for the Europe and Central Asia unit of the Bank. The WBG engagement with the country is unique in that it is three-dimensional: global, regional, and national. At the global level, Russia has increased its contributions to IDA and supports the provision of global public goods through contributions to global funds. The WBG offers its expertise to help prepare Russia’s presidencies of international forums. At the regional level, the WBG supports Russia as an emerging donor for less developed countries in ECA. Russia is already a significant provider of development assistance through a growing portfolio of IDA-IBRD-administered trust funds. At the national level, the WBG aims to maximize its development by reaching out to the regions in Russia with the most development needs.
The Russia strategy has several unique cooperation initiatives. These include IFC-IBRD sub-national lending, reimbursable advisory services, and a joint strategy that gives IFC (International Finance Corporation) and MIGA (Multilateral Investment Guarantee Agency) a key role in private sector development.
The strategy aims to consolidate the Bank Group’s support for Russia through greater synergy among its members—IBRD, IFC, and MIGA — in support of the Government’s development goals in diversifying growth through more effective management of public finances, better investment climate, stronger financial sector development, more sustainable development, and maximizing Russia’s human potential through better education, health, social protection, and social inclusion.
The Bank Group will continue to support Russia’s growing and varied civil society in its public-private partnership roles. It will also foster partnerships with leading Russian universities and academia and encourage close cooperation with other multilateral institutions, such as the International Monetary Fund (IMF), the Eurasian Development Bank (EDB), the European Union (EU), and the European Bank for Reconstruction and Development (EBRD).
Russia’s Regional and Global Role
Russia has taken on an important regional and global role through its memberships in the Group of 8 (G-8), the Group of 20 (G-20), the Asia-Pacific Economic Cooperation (APEC). Russia is shaping its own unique profile in addressing the major challenges of the 21st century as a chair in APEC in 2012, G-20 in 2013, and G-8 in 2014. Russia is already on track to becoming a member of the OECD.
During the past decade levels of Russia’s Official Development Assistance (ODA) have been steadily growing and rose from about $50 million in 2002-2003 to $465.94 million in 2012. Favorable macroeconomic conditions based on strong economic growth and changes in the emphasis of Russia’s foreign policy after Vladimir Putin was elected president in 2000 have had notable impact on Russia’s growing role in development cooperation and increasing levels of Official Development Assistance. Russia officially started to report its level of development assistance to OECD DAC in 2011.
The majority of Russian development assistance is currently being channeled through multilateral institutions, including the World Bank Group.
The World Bank is a partner of choice for Russia’s development cooperation with the poorest countries. During the period of 2008-2013, total Russia WBG development aid contributions amounted to $660 million. International Development Association represents 32 percent of the total contributions ($213 million), Financial Intermediary Funds – 42 percent ($273 million), and IBRD/IDA Trust Funds (TFs) – 26 percent ($172.6 million).
Russia has increased its regional role and become the second largest trust fund donor in Europe and Central Asia (ECA) in the World Bank after the European Union. Russia has five trust funds ($74 million, or 31 percent of total Russian trust fund pledges) exclusively targeting ECA countries: (i) Public Expenditure Management and Peer-Assisted Learning (PEMPAL), (ii) Public Financial Management (PFM) trust fund, iii) ECA Statistical Capacity Building trust fund, (iv) ECA Capacity Development trust fund, which finances program and project preparation, and (v) Global Food Price Crisis Response Program for Tajikistan and the Kyrgyz Republic.
Russia is increasing its regional role in ECA also through Eurasian Development Bank (EDB), multilateral organization focused on CIS countries and EurAsEC Anti-Crisis Fund managed by EDB. The Anti-Crisis Fund received resources in the amount of $8.514 billion, of which $7.5 billion were contributed by the Russian Federation to support CIS countries in response to crisis during 2008-2009. On Mar. 14, 2011, the World Bank and the EDB signed a Framework Agreement that outlines their collaboration with regard to the projects of the EurAsEC Anti-Crisis Fund via parallel co-financing of investment projects and joint analytical work,
Deepening Russia’s global and regional role is one of four strategic themes of the WBG-Russia 2012-2016 Country Partnership Strategy (CPS).The WBG has been involved in development assistance policy dialog with Russia since the 2006 G-8 St. Petersburg Summit. An up to date capacity building program for the Russian development aid system started in 2009 as “Russia as a Donor Initiative (RDI)” funded by the UK Department for International Development (DFID) and has since been extended by the World Bank. The RDI has laid down foundation for Russia’s system of assistance development by providing support in the areas of ODA statistics (resulting in Russia’s reporting its ODA to in November 2011 for FY10), ODA strategic communication, and elaboration of a learning curriculum on international development cooperation for the Russian universities. The Bank has built up and will continue to grow a larger than usual portfolio of technical assistance and analytical activities to support Russia’s regional and global role as provider of public goods and enhancing Russia’s contribution to international forums such as the G8, G20, and APEC.
The World Bank
The Russian Federation joined the World Bank (IBRD and IDA) in 1992. The Bank has provided financing for 70 projects in different sectors totaling slightly over $10.5 billion in IBRD loans. About 95 percent of the total portfolio has already been disbursed.
The current IBRD portfolio consists of 11 projects for a total current commitment of $656 million (as of September 2013). All the Bank’s financing to Russia is currently provided in the form of investment lending operations. Reimbursable Advisory Services (RAS) show steady demand with continued interest from the regions and growing demand from the federal government.
Portfolio quality is relatively high. Except for the Housing and Communal Services Project, Financial Education and Financial Literacy Project, and Registration Projects, which hold moderately unsatisfactory ratings, all other projects are rated at moderately satisfactory or satisfactory level. Judicial Reform Support Project went through intensive restructuring and has been upgraded to moderately satisfactory. Fiscal year 2013 closed with the disbursement ratio of 15.3 percent, which was still below ECA’s average of 21.3 percent. Average project age is 5.3 years given that the majority of the projects are designed as five-year investment operations.
The Russia program is distinguished by several cooperation and innovation initiatives. These include IFC-Bank sub-national lending, reimbursable advisory services, and a joint strategy that capitalizes on IFC’s and MIGA’s (Multilateral Investment Guarantee Agency) work in the private sector. The WBG is in constant search for innovative engagement opportunities and instruments, such as direct lending to regions with sovereign guarantee and a mechanism to fund analytical work and technical assistance to poorer regions.
Analytical and Advisory Services (AAA) remain an important part of IBRD’s engagement in Russia. In close cooperation with the Government, AAA products are helping to modernize public finance and administration, improve social service delivery, and investment climate. The Bank expanded its technical assistance to areas of early childhood development (ECD) and social development, such as TA on indigenous people and social accountability. In FY13, the Report on Professional Education and Skills was presented along with two Russian Economic Reports, the traditional flagship product, which provide advice and recommendations to address structural constraints to sustainable growth. A Report on Social Mobility and one on Environmental Performance are being prepared for release in FY14.
In October 2012, the World Bank and IFC presented the Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. The report finds that Russia made obtaining a construction permit simpler by eliminating requirements for several preconstruction approvals. It also eased the administrative burden of paying taxes for companies by simplifying procedures for complying with value added tax and by promoting the use of tax accounting software and electronic services. This was part of a broader E-government initiative. Starting a business became faster in Russia thanks to improved coordination between the federal agencies involved in the business start-up process. Also the report finds that since 2005, Russia has implemented a total of 17 institutional or regulatory reforms that improve the business regulatory environment for domestic firms.
Demand has grown rapidly for the Reimbursable Advisory Services (RAS). Demand covers a wide range of activities that are well aligned with Russia’s development challenges, from human development to social assistance, PPPs, and capacity-building for ODA. Since 2007, the World Bank Group (WBG) has provided Government-endorsed reimbursable advisory services to about 40 of Russia's subnational governments, including 24 active projects.
In Russia, as in other MICs, one of the areas of demand for RASs is support for large-scale projects. One of the examples is St. Petersburg Pulkovo airport expansion, which was awarded the title of "Global PPP deal of the Year" by Infrastructure Investors in 2011. As international experience and analytical components are often the critical success factors in the human development and social assistance sectors, demand from clients has led to widespread use of RASs in these sectors as well. Recent trend shows that for the past two years RASs are also demanded for improving investment climate and capacity building for ODA management.
International Finance Corporation (IFC)
Russia became an IFC member in 1993. Since then, IFC’s investments in Russia have totaled $11.1 billion, including $3.4 billion in syndicated loans across 294 projects. IFC’s current committed investment portfolio in Russia is US$1.8 billion, which makes it IFC’s fifth largest country exposure. There are currently no non-performing loans (NPLs) out of 113 projects with 79 clients. In FY13, IFC invested $1.02 billion in Russia, including $200 million in mobilization. IFC also delivered a number landmark capital market transactions, including participation as anchor investor in Brunswick Rail’s debut US$600 million Eurobond; and issue of the first inflation-linked ruble bond, raising 13 billion Russian rubles ($410 million), of which 10 billion Russian rubles were purchased by Vnesheconombank.
In line with the WBG CPS, IFC promotes sustainable private sector development through its advisory and investment operations. IFC’s investments support key sectors, including financial services, infrastructure, manufacturing, retail, agribusiness, health care, telecommunications and information technology. Across all sectors, IFC prioritizes investment in Russia’s less-developed regions and in projects that contribute to greater economic diversification and modernization. Active advisory programs focus on (i) developing the market for investment in sustainable resource use to mitigate climate change and increase economic competitiveness, (ii) building risk management capacity in the financial sector, and (iii) implementing best corporate governance practices at company and regulatory levels. IFC seeks to introduce new models and innovative approaches to address pressing development challenges and open new markets (e.g., PPPs and resource efficiency, described below). IFC works closely with WBG partners, the Russian government, and other IFIs to maximize the impact and reach of these programs, which are often replicated in other markets, making Russia an important platform for innovation within IFC.
Development of PPPs in partnership with IBRD is one example of IFC’s strategic engagement in Russia. The success of Pulkovo Airport, Russia’s first large-scale PPP, should have an important demonstration effect in the market, leading to additional public-private investment in infrastructure. Going forward, IFC is seeking to develop projects in frontier regions with a strong resource efficiency component, e.g., municipal solid waste and district heating, or with social impact, e.g., health and education, as well as opportunities in transport infrastructure. IFC has shared its new study “Municipal Solid Waste Management: Opportunities for Russia” with the Deputy Prime Minister for Industry and Energy. The report recommends that Russia adopt a national waste management and recycling system to manage growing volumes of waste and current limited landfill capacity, using private sector involvement, including PPPs, to introduce best practices and technologies to the Russian market.
Building on a World Bank Group energy efficiency study and passage of a new Energy Efficiency Law (2009), IFC has developed strong working partnerships with government agencies, the private sector and other stakeholders to create a favorable environment for investment in resource-efficiency. IFC’s initiatives include a GEF-funded project to develop renewable energy at the national level and in pilot regions through policy dialogue, analysis and support of project developers. IFC also supports commercialization of sustainable energy finance (including residential energy efficiency) through private banks, and provides direct advice and financing to businesses seeking to boost competitiveness through greater resource efficiency. In March 2013, IFC Sustainable Energy Finance Program signed a project services agreement with Vnesheconombank to help launch new energy efficiency financing products targeting industry.
Multilateral Investment Guarantee Agency
MIGA’s gross exposure in Russia is close to $534 million (with a net exposure, after reinsurance, of slightly more than $286 million) in 11 active projects as of Aug. 31, 2013 – MIGA’s fifth largest net exposure.
In dollar terms, MIGA's exposure is still concentrated in Russia's financial sector,having mainly supported investments of global financial institutions into their banking, mortgage, and leasing subsidiaries in Russia.
As these financial sector transactions are rolling off MIGA’s books (currently about 60 percent of MIGA’s net exposure in Russia resides in the financial sector, forecasted to decline to about 40 percent by the end of FY2013), the Russian portfolio is starting to look more diversified. Especially since all new transactions signed since the 2008/09 crisis have been in nonfinancial sectors - manufacturing, telecom, and agribusiness – with the latter project establishing MIGA’s first presence in Russia’s rural ‘black earth’ regions of Penza and Tambov (400-600 miles SE of Moscow).