Recent Economic Developments
Russia’s economy emerged from recession to recovery in 2017, with GDP expanding by 1.5% year-on-year. Deepening macroeconomic stability, firming energy prices, and a recovering global economy contributed to the return to growth. Domestic demand was the main engine of growth. Both household and investment demand expanded.
The Russian Government plans to stay the course on fiscal consolidation. Russia’s new fiscal rule—a major structural reform—is expected to reduce the influence of external volatility on the budget and the real exchange rate. Coming into effect in 2019, the new rule requires fiscal consolidation in 2018–20 and underscores, together with inflation targeting, the Russian authorities’ commitment to enhancing macro-stability.
In 2017, the fiscal stance improved, aided by higher oil prices, a recovering economy, improved tax administration, and lower expenditures. The general government budget primary deficit narrowed to 0.6% of GDP in 2017 from 2.8% in 2016, and general government primary expenditures decreased by 1.7% of GDP compared to 2016.
However, many households remain close to the poverty line, and many individuals lack formal jobs. The poverty rate, under the national definition, increased from 13.3% in 2015 to 13.4% in 2016. The international moderate poverty rate (below US$5.5/day in 2011 purchasing power parity terms) is estimated to have decreased to 2.9% in 2017 from 3.3% in 2016, mainly due to a growth in wages and pensions. The extreme poverty rate remains marginal at 0.3%.
In 2017, unemployment declined further, to 5.2%, while real wages and pensions increased on the back of low inflation. Wage growth was highest in the tradable sector and above the rate of inflation in the non-tradable and public sectors. However, growth in real disposable incomes remained negative, driven by a decline in income from other sources, including some not directly registered by statistics.
Amid the recovered oil prices, macro stabilization, and recovering global economy, Russia’s economy is expected to keep growing. With the projected price of oil remaining robust at US$58, $59, and $60 per barrel in 2018, 2019, and 2020, respectively, the economy is estimated to grow by 1.7% in 2018, 1.8% in 2019, and 1.8% in 2020. The moderate poverty rate is expected to fall in 2018 and further through 2019.
As public spending is constrained, labor income will become the most important driver of income growth for the bottom 40%. Wage growth and pension indexation at the inflation level will support disposable incomes and contribute to a gradual decline in the poverty rate. However, many households remain close to the poverty line, and many individuals lack formal jobs.
External downside risks stem from the significant drop in oil prices, a sudden tightening of global financial conditions, and an upsurge in geopolitical tension. The performance of the banking sector is expected to remain stable. However, the bailout of three large private banks points to the sector’s continued fragility, and the quality of capital and assets and related-party lending will likely remain a concern.
Weak productivity growth and a shrinking labor force will constrain GDP growth.
Priority policy objectives include limiting the role of the state in the economy, increasing investment, and promoting fair competition. Also, measures to improve the quality of and access to health and education services will be needed to promote longer and more productive working lives.
Last Updated: Apr 18, 2018