Russian Economy Inches Forward, says World Bank

November 9, 2016

MOSCOW, November 9, 2016 —Russia continued its adjustment to lower oil prices in 2016, in an environment of economic sanctions. A sustained fall in real incomes kept domestic demand depressed, and the unfavorable external conditions repeatedly affected Russia’s economic growth. Thus, the recession has continued, albeit at a slower pace. In 2016, the economy is projected to contract by 0.6 percent, and grow by 1.5 percent in 2017 and 1.7 percent in 2018, as hydrocarbon prices are forecast to continue recovering and positively affect domestic demand, the World Bank said in its latest Russia Economic Report, no. 36 in the series, launched in Moscow today.

The report notes that supported by the return of growth momentum in the non-tradable sectors, the pace of the recession declined substantially and headline economic and financial trends and indicators are encouraging. Despite adverse terms of international trade and restricted access to international capital markets, the balance of payments is stable. At 5.6 percent, unemployment is at near minimum levels. In September 2016, inflation was 7.5 percent – less than half of the 15.9 percent in the same period in 2015.

The report also flags that disposable income continues to decline in real terms, contracting by 5.8 percent in the first eight months of 2016. Despite this contraction, the poverty rate is expected to slightly decline from 13.3 percent in 2015 to 13 percent in 2016 primarily because of low food inflation. However, there has been an 8 percent increase in the share of the vulnerable population with per capita incomes below $US 10 /day – a significant increase, undoing recent gains in sharing prosperity more broadly among citizens.

“Given tightening budget constraints, it becomes important to ensure gains in reducing poverty and increasing prosperity are not lost. The good news is Russia’s fiscal policy is redistributive in its nature,” said Apurva Sanghi, World Bank Lead Economist for the Russian Federation and the main author of the report. “However, there is room for improvement. Many EU countries with government spending similar to Russia’s - as a share of GDP - achieve a much higher reduction in inequality, and there is room for Russia to achieve more.”

The report emphasizes that fiscal constraints at the federal level may also adversely affect the performance of some regions. Fiscal constraints can lead to a cut in transfers to subnational governments, affecting two-thirds of Russian regions where federal transfers constitute 15 to 50 percent of revenue.

“Reducing economic policy uncertainty can help bolster investor sentiment. An important step forward, particularly in light of eroding fiscal buffers, is a return of the medium-term fiscal framework,” said Andras Horvai, World Bank Country Director for the Russian Federation. “Over recent years, Russia has accomplished many positive changes across multiple areas of business regulation, helping improve its investment climate. Removing structural constraints that would lead to increased productivity and addressing the complex socio-economic issues of an aging society would help even more in attaining higher and sustainable economic growth.”

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