Russian Economic Report 27: Moderating Risks, Bolstering Growth

March 27, 2012

MOSCOW, March 27, 2012 – Russia’s latest economic performance has been robust, in spite of the fact that output growth is slowing this year in line with weaker growth in Europe and in a number of emerging economies, says the World Bank’s Russian Economic Report №27 launched today in Moscow. The report analyzes the country’s recent economic developments and prospects. Special focus is on the invitation to Russia to accede to the WTO by the summer of 2012 - a unique and important opportunity for the country’s economic development.

Half a year ago, Russia’s economic prospects looked uncertain since the global economy was losing momentum, the expansion in the euro zone was grinding to a halt, and the commodities prices were beginning to fall. But at the end of 2011, the country’s economy returned to its pre-crisis level supported by the growing domestic consumption. 

In 2011, measured in current dollar terms, Russia’s economy was the ninth biggest in the world, compared to the eleventh biggest in 2007.  In 2012, Russia’s output might exceed US$ 2 trillion. Equalizing for prices difference with purchasing power parity, today Russian economy is already the sixth biggest in the world. 

“In 2012, the current account looks strong as a result of a large surplus in the trade balance,” said Michal Rutkowski, World Bank Country Director for the Russian Federation. “Although, the net capital outflows increased considerably in 2011, the main reasons seem to lie outside Russia and relate to uncertainty about the global recovery and concerns over the euro zone that led to a flight to safety. Also, the Central Bank of Russia has added to its stock of foreign reserves, unemployment has returned to its pre-crisis levels of around 6.5 percent, and wages have grown at double-digit rates in early 2012. In February 2012, headline inflation was 3.8 percent, which is the lowest level for the last two decades. In 2011, inequality has declined, and consumption levels of poorer people have improved.  The fiscal balance has returned to a surplus. And while the average public debt level in the advanced economies exceeded 100 percent of their GDP; Russia’s public debt was about 10 percent of GDP.”

However, the best part of Russia’s recent economic achievements is based on the high global oil prices. Boosted by supply constraints rather than by strong global demand, the price of Urals passed a US$125 per barrel level in early March 2012, the first time since July 2008.  High oil prices have translated into large export revenues, buoyant fiscal revenues, and a bullish stock market.  Nevertheless, Russia’s further economic growth remains subdued, in spite of high oil prices.  Indeed, Russia’s recovery from the 2008 crisis was slow compared to many other economies of the world and to its own recovery from the 1998 crisis.

“On a closer examination, the country’s economic situation reveals a number of weaknesses. In the second half of 2011, growth of the manufacturing industries slowed down, fixed investments have started picking up only recently, and foreign direct investments stayed sluggish,” said Kaspar Richter, World Bank Country Sector Coordinator for Economic Policy and Public Sector in Russia and the main author of the Report. “In 2011, the non-oil current account deficit reached a record high of 13 percent of GDP underlying Russia’s export dependency on global oil prices. The non-oil fiscal deficit remained about 10 percent of GDP, and might increase further in 2012.  Inflation is foreseen to pick up later in the year, when delayed increase in the utilities and gasoline prices will come into effect, and prices pressure increases due to the tighter labor markets.”

Good economic policies can help shore up Russia’s resilience in a volatile economic environment, diversify its economy, and strengthen its growth potential.  First of all, fiscal policy should be used to rebuild fiscal buffers, while oil prices remain high.  This could help not only prepare for the next crisis, but also make sure that fiscal policy does not become procyclical, as the output gap closes.  Secondly, monetary policy should continue to keep inflation low, and financial policies to strengthen the oversight. Finally, removing structural barriers to growth can help to bolster investments and productivity.  Improving business climate would go a long way to make the most of the economic benefits of Russia’s World Trade Organization accession in the summer of 2012.

 “After 18 years of negotiations, Russia successfully negotiated the terms of its accession to the World Trade Organization.  The World Bank estimates large and broad based gains to Russia from the accession. In the medium term, the gains should be about 3 percent of GDP per year with wages rising 4-5 percent and more than 99 percent of the households gaining income. In the long run, the gains should be about 11 percent of Russian GDP per year with wages rising about 13-17 percent,” concluded David Tarr, author of the World Bank’s focus note on Russia’s accession to the WTO. “Despite the tariff reductions, the majority of sectors will increase profitability and competitiveness due to lowered input costs (especially services inputs) and increased prices for exports. For sectors where workers may be displaced, appropriate government policy is to focus on assisting with the adjustment of displaced workers by providing resources for retraining and relocation of displaced workers to higher wage jobs—as opposed to subsidizing declining sectors and delaying the adjustment to a more productive economy.”

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The report was prepared by a World Bank core team consisting of Sergei Ulatov (Economist), Karlis Smits (Senior Economist), Stepan Titov (Senior Economist), Victor Sulla (Economist), Kate Mansfield (Consultant), and Olga Emelyanova (Research Analyst), under the direction of Kaspar Richter (Lead Economist and Country Sector Coordinator for economic policy and public sector in Russia). David Tarr (consultant) authored the focus note on WTO accession, Shane Streifel (Consultant) provided the box on the global oil market, and Dilek Aykut (Senior Economist) provided the assessment on the global outlook. Advice from and discussions with Michal Rutkowski (Country Director for Russia), Yvonne Tsikata (Director for Poverty Reduction and Economic Management in the Europe and Central Asia Region), Benu Bidani (Sector Manager for Russia, Ukraine, Belarus, and Moldova), Lada Strelkova (Country Program Coordinator for Russia), and Carolina Sanchez (Lead Economist and Regional Poverty Coordinator) are gratefully acknowledged.

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