The FINANCIAL -- The Russian Federation is showing encouraging signs of overcoming the recession it entered in 2014. The economy is projected to grow 1.3% in 2017, and then 1.4% in both 2018 and 2019, according to the World Bank’s latest Russia Economic Report (no. 37 in the series) launched on May 23 in Moscow.
Growing macro-stability, driven by the government’s policy response package of a flexible exchange rate policy, expenditure cuts, and bank recapitalization – along with tapping into the Reserve Fund – has helped facilitate the adjustment of an economy hit by the double shocks of low oil prices and restricted access to international financial markets. The positive terms-of-trade effect from rising oil prices, coupled with more stable macroeconomic conditions, are expected to drive Russia’s economic recovery going forward.
“Macro stability and oil prices are the main factors driving this recovery,” said Apurva Sanghi, World Bank Lead Economist for the Russian Federation and the main author of the report. “Successful adherence to the 2017 – 2019 Budget Law will be key for laying the proper groundwork for the planned fiscal rule, which will subsequently reduce the sensitivity of the budget to oil prices and improve economic predictability”.
Consumption is expected to drive growth in 2017-2019, with investment playing a supporting role, says the report. Headline inflation is expected to continue moderating, falling slightly below 4% at the end of 2017 and stabilizing at around 4% in 2018-2019. Lower inflation will support real wages, which will be the main source of real income growth. Along with these developments, improving consumer sentiments and better credit conditions are all expected to lead to a growth in private consumption of 1.8% in 2017 and 2.5% in both 2018 and 2019.
Investment demand is expected to increase in 2017-2019, due to a pick-up in fixed capital investment growth and a restocking of inventories, predominantly in 2017. Additionally, the 2018 FIFA World Cup – which will take place in Russia – could further support public investment.
The report emphasizes that the poverty rate is expected to decrease because of decelerated inflation and recoveries in household incomes and consumption: the poverty headcount is projected to decline from 13.5% in 2016 to 13% in 2017, and to continue declining to 12.3% and 11.6% in 2018 and 2019, respectively.
The special topic of the report examines how Russia’s regions fared during the crisis years of 2014-16. While they fared well as a whole, significant disparities and variations remain in the fiscal health of the regions. Moreover, the adverse effects of the crisis were averted by a strategy of significant expenditure cuts in the regions, which may have deleterious medium-term effects on regional productivity.
In that context, Russia’s regions have room to improve their fiscal buffers, by tapping more into the revenue side, raising select taxes and increasing yields of other taxes, for example. In the long run, a rebalancing of the division of revenues and functional responsibilities between the federal government and the regions may need to be considered.
Russia’s longer-term growth prospects, however, remain constrained by its low productivity.
“Boosting productivity growth remains key to achieving inclusive, sustainable and fast-paced growth in Russia,” said Andras Horvai, World Bank Country Director and Resident Representative in the Russian Federation. “While we already see the benefits of increasing macro-stability – not only through a return to growth, but also in declining poverty – addressing deeper structural issues related to demography and competitiveness would enable Russia to take full advantage of the positive momentum.”