|GDP, current US$ billion||1324.8|
|GDP per capita, current US$||9242|
|Poverty rate ($2.5/day 2005PPP terms)||0.8|
|Poverty rate ($5/day 2005PPP terms)||7.3|
|School enrollment, primary (% gross)||100.6|
|Life Expectancy at birth, years||70.4
Facing a difficult economic adjustment, Russia’s economy went through a deep recession in 2015, hitting its low point in the second quarter of 2015. Expectations that Russia’s economy would rebound in the third quarter of 2015 did not materialize. By the end of the year, Russia’s economy had contracted for six consecutive quarters, with year-over-year negative growth only moderating slightly to -4.1 percent in the third quarter and -3.7 percent in quarter four.
An unanticipated second oil price shock in August renewed pressure on the ruble and kept inflation in double digits at 15.6 percent. Rising inflation eroded real wages, pensions, and other transfers, contributing to an estimated 7.9 percent decline in consumption, the first contraction since the global financial crisis of 2008. The authorities’ efforts to contain inflationary pressures presented an obstacle to monetary easing, and the central bank has kept its key policy rates at 11 percent since August 2015. Meanwhile, international sanctions have been extended, limiting access to global financial markets, restricting capital inflows, and damaging investor confidence. High capital costs and plummeting consumer demand provided firms with little incentive to invest in expanded production; as a result, gross capital formation dropped by 18.3 percent in 2015, contracting for a third consecutive year.
The central bank’s adherence to a flexible exchange rate regime fostered currency realignment and supported the economic transition. In 2015, the ruble’s average exchange rate depreciated 37.4 percent against the US dollar, while oil prices dropped 47 percent. Meanwhile, a 16.5 percent depreciation of the real effective exchange rate drove import volumes down 25.6 percent, nearly doubling the current-account surplus to 5 percent of GDP. Relative prices now favor Russian firms, and export performance improved in some non-energy commodity sectors, such as coal, metals, and chemicals. Helped by the free float, the fiscal impact of the adjustment was less severe than for other oil-exporter countries, yet Russia’s government needed to launch a fiscal-consolidation plan.
Federal expenditure decreased in real terms but not enough to compensate for declining oil revenues, resulting in a deficit of 2.4 percent. This was financed by the Reserve Fund, which halved by the end of 2015 to US$46.0 billion. A RUB2.4 billion anti-crisis plan helped to cushion some of the consolidation’s impacts—e.g., through the full indexation of pensions—and supported financial-sector stability through bank recapitalization.
The moderate poverty rate (US$5 in 2005 PPP) rose from 7.0 percent in 2014 to 7.7 percent in 2015. Adverse trends in inflation and income both played roles in the higher poverty rate. Food price inflation averaged 19.1 percent in 2015 and disproportionately reduced the purchasing power of poorer households, where food makes up over 40 percent of total consumption. Nominal wage growth could not compensate for the high inflation, and The moderate poverty rate (US$5 in 2005 PPP) rose from 7.0 percent in 2014 to 7.7 percent in 2015. Adverse trends in inflation and income both played roles in the higher poverty rate. Food price inflation averaged 19.1 percent in 2015 and disproportionately reduced the purchasing power of poorer households, where food makes up over 40 percent of total consumption. Nominal wage growth could not compensate for the high inflation, and real wages fell 9.5 percent in 2015. The bright spot is that unemployment increased only slightly to 5.6 percent, up from a record low of 5.3 percent in 2014. However, the limited indexation of public wages, pensions, and transfers impacted poor households that rely on the public sector for a significant part of their incomes (close to 60 percent of the income of the poorest 20 percent of the population comes from public-sector wages, pensions, and other transfers). Real income growth among the bottom 40 percent of the population did not continue to converge with average income growth—so progress on shared prosperity slowed.
The conditions that pushed Russia’s economy into recession are likely to linger, and the World Bank’s current baseline scenario anticipates another tough year, with a decline in real GDP of 1.9 percent in 2016. Oil prices are projected to average US$37 per barrel in 2016, then rebound in 2017 to their 2015 average of around US$50 per barrel. Commodity prices will continue to dominate Russia’s medium-term outlook. GDP growth is projected to return to a positive 1.1 percent in 2017 due to improving investment dynamics, led by rising oil prices and declining credit cost.
Russia’s poverty rate is expected to rise further in 2016 as the economy continues to contract and unemployment rises. Meanwhile, fiscal consolidation will limit the government’s latitude for countercyclical policies and antipoverty spending. Poverty, as measured by the international moderate poverty line, is expected to rise from 7.7 percent in 2015 to 8.0 percent in 2016. The economic recovery envisaged in 2017 and stronger targeting of social benefits are expected to support a decline in the poverty rate to 7.7 percent in 2017.
Risks and Challenges
The focus of Russia’s economic adjustment is now shifting to challenges in fiscal policy and financial-sector restructuring. At the same time, the policy space for Russia’s second phase of adjustment is shrinking in light of depleting fiscal buffers. Maintaining fiscal discipline will require bold choices during the 2017 budget-planning process, with authorities striving to determine the structure and policy priorities of the medium-term fiscal framework. A massive bank recapitalization temporarily stabilized the financial sector, but managing systemic vulnerabilities will require constant vigilance and a readiness to implement further measures. Russia’s longer-term growth will depend on the strength of its structural reforms.
Poor households have come to rely increasingly on fiscal transfers, pensions, and public-sector wages. There is scope to extend support to the most vulnerable through improved targeting of social-protection programs—i.e., allocating public funds with fewer leakages to the non-poor and a higher poverty-reduction impact. Over the medium-term, the challenge will be restoring the labor market as the driver of poverty reduction and the income growth among the bottom 40 percent of the population.
Last Updated: Sep 13, 2016