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Russian Economic Report 29: Recovery and Beyond

February 26, 2013

Russian Economic Report 30: Structural Challenges to Growth Become Binding (September 2013)

MOSCOW, February 26, 2013 -- Weak external environment, elevated inflation, flat oil prices and sluggish domestic demand could postpone a pickup in growth in Russia towards the second half of 2013. Nevertheless, higher growth and lower inflation are projected to reduce poverty from 11.7 percent in 2012 to 11.2 percent in 2014, says the World Bank’s Russian Economic Report №29 launched today in Moscow.

Russia’s economy grew 3.4 percent in 2012, down from 4.3 percent in 2011. In the second half of 2012  Russia’s economy slowed due to weak net exports, negative base effects, and destocking at the end of the year.  Growth will continue further slowing down to 3.3 percent  in 2013, and then is set up to pick up modestly to 3.6 percent in 2014,” said Kaspar Richter, World Bank Country Sector Coordinator for Economic Policy in Russia and the main author of the Report. “Improving growth prospects will be difficult with further increases in oil prices unlikely, capacity utilization similar to pre-crisis peaks, unemployment at a record low, an aging and shrinking workforce and declining oil production in the absence of large investments and new discoveries.”

On the face of it, Russia’s economy looks strong enough. In 2012, when the global economy was losing momentum and the euro area stuck in recession, growth in Russia was solid based on resilient domestic consumption. The pace of economic growth in Russia was faster than in Brazil, South Korea and Turkey, something that was unconceivable only two years ago.

But achievements were not limited to economic growth only:

  • In 2012, the current account was strong thanks to a large surplus in the trade balance.
  • Capital outflows declined, allowing the Central Bank of Russia to add again to its stock of reserves.
  • The budget was balanced, and the government started to replenish its reserve funds that were depleted during the crisis. While average public debt in advanced economies exceeds 110 percent of GDP, Russia’s public debt is no more than 10 percent of GDP.
  • Unemployment dropped to 5.4 percent in January 2012, a record low for the last two decades, and wages grew at a solid pace.

However, a closer look reveals weaknesses:

  • Economic growth dropped to half the level of the decade up to the 2008 crisis. Industrial output declined in early 2013 for the first time since 2009. 
  • Fixed investment remains dependent on public funds, and foreign direct investment is subdued.  Inflation increased in the second half of 2012 and is set to remain stubbornly high in early 2013, weighing on consumption.
  • Russia is also stagnating in global economic rankings. Measuring the size of the economy in current dollars, Russia improved globally from the 18th to the 8th position between 2000 and 2008, and remained in this position in 2012.
  • Low unemployment, wage growth and the reduction in inflation are set to reduce the number of poor people from 16.9 million in 2012 to 15.9 million in 2014.
  • Vacancy rates continued to rise with fewer people looking for work, businesses have trouble filling job vacancies. The share of vacant jobs in total jobs increased continuously from 1.6 percent in early 2011 to close to 2.2 percent in late 2012. Vacancy rates are especially high in finance, transport and communication and energy.
  • By 2014, growth in Russia is set to be lower again than in Brazil, South Korea and Turkey. 

In order to revive and modernize the economy and reduce its dependence on natural resources, policymakers face two challenges. Russia has to manage macroeconomic policies so as to ensure economic stability in the face of domestic and external vulnerabilities.  This implies three policy priorities: sticking with prudent spending plans and saving oil revenues that come in over and above budget; focusing monetary policy on low inflation to keep inflationary expectations in check; and strengthening banking supervision and taking additional measures to mitigate emerging risks in consumer lending.

“Also, Russia has to step up structural reforms so as to lift the growth potential. Reviving growth requires, among others, reducing the state’s footprint on the economy and improving the investment climate; confronting the challenges of the aging and shrinking of the population; and strengthening governance through more transparency, better regulations and more effective control of corruption,” said Michal Rutkowski, World Bank Country Director for the Russian Federation.

The special focus of this report presents findings from the 2011/2012 round of the Business Environment and Enterprise Performance Survey (BEEPS) for Russia.  This survey looks at trends over time in administrative burden, corruption and state capture in Russia, draws comparisons with emerging economies from Europe and Central Asia, and for the first time uses BEEPS to make comparisons across 37 Russian regions—from Moscow to Primorski Krai and from Kaliningrad to Rostov Oblast—accounting for the majority of economic activity, value-added and population in the country.  It also identifies regions where the private sector confronts the most serious challenges, and regions where problems are much less severe.

Cross-regional variation in corruption and regulatory burden in Russia are potentially important factors in explaining differential performance in private sector development, income levels and growth rates. In the longer run, sustained growth that is more balanced, both geographically and across a more diverse set of sectors, will likely require a steadfast focus on improving Russia’s regulatory climate for private investment and enterprise,” said Gregory Kisunko, World Bank Senior Public Sector Specialist and the main author of the BEEPS for Russia.

The report was prepared by a World Bank team consisting of Sergei Ulatov (Senior Economist), Stepan Titov (Senior Economist), Mikhail Matytsin (Consultant), and Olga Emelyanova (Research Analyst), under the direction of Kaspar Richter (Lead Economist and Country Sector Coordinator for economic policy in Russia). Gregory Kisunko (Senior Public Sector Specialist) and Stephen Knack (Lead Economist) authored the focus note on national and regional trends in regulatory burden and corruption in Russia. John Baffes (Senior Economist) provided the box on the global oil market, Alvaro Gonzalez (Lead Economist) the box on the survival of firms, Maya Gusarova (Public Sector Specialist) and Maria Ovchinnikova (Research Analyst) the box on the open budget index, Lawrence Kay (Сonsultant) the assessment on credit, and Theo van Rensburg (Senior Economist) the assessment on the global outlook. We are grateful for 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), Elisabeth Huybens (Acting Sector Manager for Russia, Ukraine, Belarus, and Moldova), Lada Strelkova (Country Program Coordinator for Russia), and Carolina Sanchez (Lead Economist and Regional Poverty Coordinator.

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