Recent Economic Developments
In 2018, GDP growth accelerated above expectations to 2.3 percent from 1.6 percent in 2017. This was largely due to robust global growth, higher oil prices, one-off construction projects, and Russia’s hosting of the FIFA World Cup. However, the medium-term outlook remains modest at between 1.4 and 1.8 percent for the period 2019–21, reflecting lower oil prices and Russia’s growth potential more broadly.
A sound macroeconomic framework, with relatively high levels of international reserves (US$468.5 billion), low external debt levels (about 29 percent of GDP), and comfortable import cover (15.9 months), positions Russia well to absorb external shocks.
Higher oil prices, combined with a weaker ruble, better tax administration, and a conservative fiscal policy, improved fiscal balances at all levels of the budget system in 2018. Also in 2018, the general government posted a surplus of 2.9 percent of GDP compared to a deficit of 1.5 percent of GDP in 2017.
The Central Bank moved to inflation targeting in 2015, which was a welcome step. Monetary policy remained consistent with the inflation-targeting regime of 4 percent in 2018.
Russia's banking sector remains relatively weak, with less of a capital buffer and a higher nonperforming loan ratio than other BRICS countries (referring to Brazil, Russia, India, China, and South Africa). However, the situation is stabilizing, and lending activity is recovering. Public dominance in the banking sector has increased even further: five large banks control 60 percent of the system's assets, up from 52 percent at the end of 2013. State-owned entities account for nearly 70 percent of Russian bank assets. As such, increasing competition in the financial sector is one of the priorities of the Central Bank’s financial sector development strategy for 2018–21.
The poverty rate under the national definition fell by 0.5 percentage points (from 13.8 to 13.3 percent) in the first nine months of 2018, as the poverty line grew below the rate of inflation and incomes rebounded at the bottom of the distribution. Poverty also declined under the World Bank’s upper-middle-income country poverty measure (population share with per capita consumption under US$5.5/day in 2011 purchasing power parity), falling from 2.6 percent in 2017 to 2.4 percent in 2018. Income inequality remained broadly unchanged.
The unemployment rate fell to 4.8 percent in 2018 from 5.2 percent in 2017. Rising real wages in 2018 reflected low average inflation and higher public sector wage growth. Real disposable incomes, however, remained unchanged compared to 2017, suggesting a contraction in real terms of some unobserved components (informal earnings, for example). Nevertheless, incomes at the bottom of the distribution grew slightly faster than at the top, possibly driven by the higher minimum wage and new family benefits.
Priority policy objectives include limiting the role of the state in the economy, increasing investment, and promoting fair competition, as well as measures to improve investments in human capital.
Russia's overall growth prospects for 2019–21 are modest. Supported by relatively high oil prices, the general government budget is expected to remain in surplus in 2019–21. Inflation is forecast to accelerate in 2019 on the back of the value added tax rate increase and ruble depreciation pass-through but return to the Central Bank’s target of 4 percent in 2020–21. The forecast of a narrower external surplus reflects lower oil prices and a pickup in import spending. Stable economic growth, wage growth in the private sector, and the indexation of pensions to inflation should support disposable incomes and contribute to a gradual decline in the poverty rate in 2019–21. However, many Russians lack formal employment, and many households will remain close to the poverty line.
Last Updated: Apr 11, 2019