Russia Economic Report 35: The Long Journey to Recovery

April 6, 2016

MOSCOW, April 6, 2016 — Russia’s anticipated economic recovery has been delayed, and the country continues to adjust to an adverse external environment of lower oil prices and international sanctions. In 2015, the consequences of these twin shocks caused real GDP to contract 3.7 percent, the World Bank said in its latest Russia Economic Report launched in Moscow today.

The report notes that the adjustment to the worsening external environment caused an estimated 10 percent drop in gross domestic income, which sapped consumer demand and discouraged investment. The decline in real income has had a significant impact on poverty - the poor population increased by 3.1 million to 19.2 million total in 2015.

“Thus far, the government’s policy response has facilitated Russia’s economic adjustment. Thanks to the Central Bank’s flexible exchange rate policy, the exchange rate alignment improved which supported the economic transition. Due to the flexible exchange rate, the fiscal impact of the adjustment was less severe for Russia than it was for other oil exporters, though a fiscal consolidation plan remains necessary,” said Birgit Hansl, World Bank Lead Economist for the Russian Federation and the main author of the Report. “Moreover, the depreciation has presented Russia with an opportunity for a broad-based improvement in Russia’s international competitiveness and to transform its export profile by diversifying away from primary commodities. Leveraging emerging opportunities to develop a broader and more sophisticated product and export mix will require a substantial and sustained increase in private investment.”

The World Bank expects that the Russian economy faces a long journey to recovery. While the conditions that pushed Russia’s economy into recession may be gradually abating, the World Bank’s current baseline scenario anticipates a further contraction of 1.9 percent in 2016, before growth is expected to resume at a modest rate of 1.1 percent in 2017.

Meanwhile, the continuing recession is projected to partially reverse Russia’s recent progress in alleviating poverty and promoting shared prosperity. Weak income dynamics are expected to continue to adversely affect poverty projections. The poverty rate is expected to increase from 13.4 percent in 2015 to 14.2 percent in 2016. The projected increase in 2016 would return poverty rates to their 2007 levels, undoing nearly a decade’s worth of gains.

The report emphasizes that risks to Russia’s economic outlook are tilted to the downside. The economy faces strong headwinds from an uncertain global recovery. As the Russian economy gradually adapts to an adverse external environment marked by lower oil prices and ongoing economic sanctions, the focus of its economic adjustment is now shifting to fiscal and financial sector challenges. At the same time, the policy space for Russia’s continued adjustment has shrunk in light of depleting fiscal buffers.

“Russia’s longer-term growth path will depend on the strength of its structural reforms. Economic reforms designed to bolster investor confidence could greatly enhance Russia’s long-term growth prospects. Administrative barriers to doing business, high transportation and logistics costs, and the perception of an uneven playing field all discourage investment, particularly in the non-resource sectors,” said Andras Horvai, World Bank Country Director for the Russian Federation. 

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