The World Bank projects a negative growth outlook for Russia in 2015-2016, with the economy expected to contract by 3.8 percent in 2015 and modestly decline by 0.3 percent in 2016. Investment is projected to contract for a second year in a row as the Russian government is delaying some large infrastructure projects and private investors are cutting back on investment programs, while capital remains expensive and demand uncertain.
The weak investment demand resulting from deep structural problems in the Russian economy was an important cause of the slowing Russian growth in 2014, and this was compounded by the terms of trade shock, geopolitical uncertainties, and the economic sanctions later in the year.
And yet, despite the confluence of adverse factors that hit the economy in 2014, Russia has so far avoided recession. The impact of the main shock, the slump in oil prices, only began to affect the economy in the final quarter of last year, and the impact is likely to be more profound in 2015 and 2016. Moreover, the Russian government and Central Bank were able to respond swiftly with policy responses that successfully stabilized the economy.
Consumption growth is expected to turn negative for the first time since 2009, eroded by declining real incomes and wages. The only bright spot is that the depreciated ruble could create incentives for expansion in some tradable industries. However, structural rigidities and the surging cost of imported investment goods and credit may dampen these benefits.
The economic impact of sanctions is likely to linger for a long time. As lessons from international experience demonstrate, economic sanctions could well alter the structure of the Russian economy and the ways in which Russia integrates with the rest of the world. And going forward, risks arising from a lower oil price and continued economic sanctions environment will need to be managed.
The main medium-term risk for Russia’s growth lies in the continued dearth of investment and lack of affordable credit, according to the report. In particular, less foreign direct investment could limit the transfer of innovation and technology that is critical to increasing Russia’s growth potential. The World Bank notices that systematically lower investment rates will ultimately lessen Russia’s prospects for growth in the coming years and limit already modest growth potential. Also, the Bank emphasizes that as long as access to external finance continues to be a constraint, a policy of careful management of financial sector risks and buffers will be important.
Russian Federation: Commitments by Fiscal Year (in millions of dollars)*
*Amounts include IBRD and IDA commitments
The current 2012–16 Country Partnership Strategy was discussed by the Board of Executive Directors on December 20, 2011. It is 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 cross-cutting 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 committed to invest between US$3.8 and US$4.8 billion for its own account, plus the significant mobilization of counterpart funds. The Multilateral Investment Guarantee Agency (MIGA) continues to support foreign investors through the provision of political risk guarantees.
Russia is a strategic partner for ECA. The World Bank Group engagement with the country is unique in that it is three-dimensional: global, regional, and national. At theglobal level, Russia has increased its contributions to IDA and supports the provision of global public goods through contributions to global funds. In addition, the Bank offers its expertise to help prepare Russia for the presidency of international forums. At theregional level, the World Bank Group 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 thenational level, the World Bank Group aims to maximize its development by reaching out to the regions in Russia with the most development needs.
The Russia program is distinguished by several cooperation and innovation initiatives. These include IFC and IBRD subnational lending, IBRD RAS, and IFC advisory programs. The World Bank Group is in constant search of innovative engagement opportunities and instruments, such as direct lending to regions with a sovereign guarantee and a mechanism to fund analytical work and technical assistance to poorer regions. For IFC, Russia serves as a platform for innovations, and advisory solutions developed in Russia have been replicated in many other countries within the ECA region as well as across the globe. These, among others, include advisory services on resource efficiency, cleaner production, and sustainable energy finance. IFC and IBRD are now in the process of developing new “one-World Bank Group” solutions for solid waste management.
Russian Federation: Commitments by Fiscal Year (in millions of dollars)*
*Amounts include IBRD and IDA commitments
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 US$10.5 billion in IBRD loans. About 95 percent of the total portfolio has already been disbursed.
The current IBRD portfolio consists of 10 projects with a total current commitment of US$668.3 million (as of March 2015). All of the Bank’s financing to Russia is currently provided in the form of investment project financing. 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 Financial Education and Financial Literacy Project, which holds a moderately unsatisfactory rating in implementation progress, all other projects are rated at the moderately satisfactory or satisfactory level. The Judicial Reform Support Project went through two intensive restructurings and has been upgraded to moderately satisfactory. The current disbursement ratio is around 11 percent. The average project age is 5.7 years, attributable to the fact that the majority of the projects are designed as five-year investment operations.
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 and improve social service delivery and the investment climate. The Bank expanded its technical assistance to areas of early childhood development and social development, such as technical assistance on indigenous people and social accountability. In FY15, along with two traditional flagship Russia Economic Reports, the World Bank plans to present a report on Social Mobility and Opportunity and another on Aging.
In October 2015, the World Bank and IFC presented “Doing Business 2015: Going beyond Efficiency.” The report found that the Russian Federation has made starting a business easier by eliminating the requirement to deposit the charter capital before company registration as well as the requirement to notify tax authorities of the opening of a bank account—a reform applying to both Moscow and St. Petersburg. In addition, it made transferring property easier by eliminating the requirement for notarization and introducing tighter time limits for completing the property registration. This reform also applies to both Moscow and St. Petersburg. Russia’s ease of doing business ranking in Doing Business 2015 was 62, and its 2014 back-calculated ranking was 64. Its distance to frontier score in Doing Business 2015 was 66.7, and the 2014 back-calculated score was 65.0, with an improvement of 1.6.
Demand has grown rapidly for RAS. Since 2007, the World Bank has entered into more than 80 RAS. Agreements cover a wide range of activities that are well aligned with Russia’s development challenges. RAS are also of increasing importance for Russia’s regions, as more than 30 of Russia’s subnational governments have signed at least one RAS with the World Bank (15 currently active in nine different regions).
Innovative RAS products allow the World Bank Group to build and keep a lead in global knowledge provision. One of the areas of early demand for RAS was in support of a large-scale infrastructure project in which the World Bank Group advisory services supported the St. Petersburg Pulkovo airport expansion based on a PPP. Pulkovo attracted more than €1.2 billion in private investments and was awarded the title of “Global PPP Deal of the Year” by Infrastructure Investors in 2011. As international experience and analytical components are often critical success factors for education, health, and social protection, demand from clients has led to the widespread use of RAS in associated global practices as well. During the past two years, RAS are also in demand for improving the investment climate, providing economic policy advice, and bolstering the local initiatives support program.
International Finance Corporation
Russia became an IFC member in 1993. Since then, IFC’s long-term investments in Russia have totaled US$10 billion, including US$3.5 billion in syndicated loans across 263 projects. IFC’s current committed investment portfolio in Russia is US$1.5 billion in about 100 projects with roughly 70 clients. In FY14, IFC committed US$655 million for its own account and mobilized US$104 million from partners. Since the beginning of FY15, IFC has committed about US$60 million for its own account.
In line with the World Bank Group CPS, IFC continues to support economic diversification and growth in Russia by helping its private sector clients realize long-term development potential, with a particular focus on maximizing impact in less-developed regions. These efforts include the creation of new high-skilled jobs; the expansion of high value-added manufacturing; and the improvement of transport and social infrastructure to provide people and companies with better access to goods and services. In addition, IFC provides Russian companies and banks with strategic advice on achieving long-term sustainable growth, increasing energy and resource efficiency, and improving corporate governance, and also advises Russian regions on structuring municipal infrastructure projects.
Multilateral Investment Guarantee Agency
MIGA’s gross exposure in Russia was US$804 million as of February 2015 (MIGA’s third-largest gross and net exposure). MIGA is involved in eight projects in finance, infrastructure, manufacturing, agribusiness, and services. In dollar terms, MIGA’s exposure is concentrated in Russia’s financial sector (some 80 percent of MIGA’s gross exposure), supporting the investments of global financial institutions in their banking, mortgage, and leasing subsidiaries in Russia. Five out of MIGA’s eight projects are in non-financial sectors, some of them in Russia’s regions, such as agribusiness in Russia’s “black earth” regions of Penza and Tambov and manufacturing in Novocherkassk.