Russia’s Recovery: How Strong are its Shoots?
MOSCOW, November 29, 2017 – The Russian economy has returned to modest growth – amidst positive global growth, a recovery in trade, rising oil prices, and growing macroeconomic stability – according to the World Bank’s latest Russia Economic Report (no. 38 in the series), launched today in Moscow.
These shoots have allowed consumer demand and consumption to rise, as the business environment improved, and underpin projections that Russia’s economy will grow 1.7% in both 2017 and 2018, and 1.8% in 2019.
Supported by a rebound in domestic demand in the first half of 2017, the growth momentum of the second half of 2016 spilled over to 2017, and was especially strong in the second quarter. However, due to sluggish investment demand, this growth momentum seems to have slowed down in the third quarter, contributing to uneven growth dynamics overall in 2017.
The importance of growing macroeconomic stability is highlighted in the report. The Russian authorities continue to adhere to a path of fiscal consolidation and introduced a new fiscal rule, which comes into effect in 2019, that is expected to smoothen the impact of external volatility on the budget and the real exchange rate.
“Based on a fixed benchmark oil price, Russia’s new fiscal rule is a major structural reform,” said Apurva Sanghi, World Bank Lead Economist for Russia and main author of the report. “Combined with a move towards inflation-targeting, the fiscal rule underscores the Russian authorities’ strong commitment to deepening macroeconomic stability.”
The Central Bank of Russia has continued its gradual approach to monetary easing and reduced its main interest rate from 10% in annual terms at the beginning of 2017 to 8.25% at the end of October. The report points out that, although banking sector fundamentals have improved since the crisis years, the bail-out of two large private banks in August and September 2017 points to continued fragility in Russia’s banking system.
The report finds that unemployment rates are at a historical low, but due to low labor mobility, unemployment across regions remains uneven. The lowest level of unemployment was registered in Moscow (1.3% in the third quarter of 2017) and Saint Petersburg (1.7%), while the highest levels were recorded in Ingushetia (27%) and Tuva Republic (18.7%).
“Declining inflation and growing real wages led to a modest decline in Russia’s poverty rate in the first half of 2017, compared to the same period last year,” said Andras Horvai, World Bank Country Director and Resident Representative in the Russian Federation “However, the current poverty rate at 14.4% remains elevated and the share of vulnerable people, who may fall back to poverty, is still on the rise. Preserving growth-enhancing investments and strengthening the efficiency of the social safety net, will be key to reducing both poverty and vulnerability.”
The special topic of the 38th edition of the Russia Economic Report examines the country’s agriculture sector, which plays an important role in the economy. Over the past five years, Russia has not only become the world’s largest exporter of wheat, but it has reached self-sufficiency in pork and poultry. However, policies that broaden productivity, improve market infrastructure, and expand research and development could lead to stronger competitiveness of the sector in the long-term.