Recent Economic Developments
Russia’s output contraction eased from 2.8% in 2015 to 0.2% in 2016, as the economy adjusted to low oil prices and restricted access to international financial markets. A protracted decline in real incomes has reduced private consumption, but this trend has slowed as consumer confidence has improved.
Monetary policy remains prudent and consistent with inflation targeting. The authorities successfully reduced the inflation rate from 15.5% in 2015 to 7.1% in 2016. Recognizing that several one-off factors supported the reduction in headline inflation, the Central Bank of Russia maintained a moderately tight monetary stance as inflation expectations remained elevated.
The banking system has largely stabilized but has not yet fully recovered, and credit growth remains stalled.
The balance of payments remained stable despite adverse terms-of-trade conditions and restricted access to international capital markets. The current account surplus shrank from US$69 billion in 2015 to US$22.2 billion in 2016 as the trade surplus weakened. A decrease in net capital outflows mirrored the decline in the current account surplus.
The fiscal stance deteriorated, but the deficit remained contained. The general government’s primary budget deficit widened from 2.6% of GDP in 2015 to 2.8% in 2016, driven by a slight increase in expenditures, although higher nonoil revenues compensated for falling oil revenues.
Poverty increased in 2015, and estimates indicate a further increase in 2016. Moderate poverty (US$5 per day) rose from 5.8% in 2014 to 6.7% in 2015 as inflation eroded the real value of wages and social benefits, and the middle class contracted for the first time since 2009. The estimated poverty rate for 2016 is 7.9%. In 2016, inflation slowed and real wage growth resumed, but income from other sources, including pensions, contracted again.
Given the relatively weak external environment, it is projected that the Russian economy will grow at a rate of 1.3% in 2017 and 1.4% in 2018–19. The terms of trade are expected to moderately improve, with average oil prices rising to US$55 per barrel in 2017, US$60.0 in 2018, and US$61.5 in 2019, driving a recovery in domestic demand. Supported by the anticipated resumption of real wage and income growth, consumption is projected to reassert its role as an important contributor to growth in 2017–19. A gradual monetary easing and improved investor confidence are expected to support an increase in fixed capital investment in 2017.
The Government is planning further fiscal consolidation measures. A new fiscal rule slated to take effect in 2020 will mandate that oil revenues be saved or spent based on a threshold price of US$40 per barrel. The Ministry of Finance has already started executing daily foreign currency transactions based on this threshold. The approved medium-term fiscal framework, which envisions an expenditure-focused consolidation effort, is also supporting the transition to the new rule.
The moderate poverty rate is expected to fall in 2017 but will remain elevated. During 2010–14, increases in pensions and public sector wages drove income growth among households in the bottom 40% of the income distribution. However, in a context of fiscal consolidation, labor income is expected to become the main contributor to shared prosperity. As the economy rebounds, wage growth in the private sector and a modest real increase in pension payments in 2017 will support income growth and reduce poverty. However, many households remain very close to the poverty line and without formal jobs.
Last Updated: Apr 20, 2017