World Bank Semiannual Russia Economic Report

For pdf of the report, click hereWB11.17

Introduction taken from a press release by Apurva Sanghi, Lead Economist for the Russian Federation, The World Bank Group

Apurva Sanghi, Lead Economist for the Russian Federation, The World Bank Group at the RBCC RussiaTALK Investment Forum in November 2017

In addition to our projected growth and poverty rates in the coming years (growth rate, 1.7 to 1.8%; poverty rate, modest decline but still in double digits), the report features some novel aspects of Russia’s economy:

  • Russia’s move towards a new bank resolution framework: We compare the new Russian framework with other countries’ (US and EU) in terms of bailout/ bail-in provisions; how resolution costs are funded and so on. Though the risks are not deemed systemic, given these recent failures, preserving the sector’s stability and maintaining public confidence remains an ongoing priority…
  • Russia’s fiscal rule – third time the charm? We analyze Russia’s new fiscal rule, which we deem to be major structural reform (I’ll be happy to explain to my economist friends why we view this as a “structural” reform and not a “policy” reform). We also point out a few future considerations, for example, related to escape clauses and in the long run, accumulating more fiscal savings in the NWF. Combined with inflation-targeting, the fiscal rule underscores the Russian authorities’ strong commitment to deepening macroeconomic stability…
  • Russia’s wage – income paradox? In Russia, wages increased more than disposable incomes during periods of economic expansion. During economic contractions—in 2009 and from 2015— wages fell more than disposable incomes. The situation is the opposite in most of OECD countries, including resource-rich Australia, Canada and Norway, where disposable income has grown faster than real wages in recent decades. Is there a Russian paradox? While not fully conclusive, we believe this paradox to arise from two factors: (a) wages are just a tiny share – just over a third – of overall incomes, and (b) reporting, data and statistics issues (wage-growth statistics cover mostly those working in large & medium enterprises, which is only 35 million people – less than half of the total employed population)…

The report enumerates various other aspects of the Russian economy we hope you find useful. Overall, positive tailwinds and firming oil prices; growing macro-stability and improving business environment  (at least as measured by our World Bank Doing Business indicators in which Russia is 35th from the frontier) have allowed consumer demand and consumption to rise…

The big question, though, is what next – will Russia be able to address its central constraint of low and declining productivity? In only so doing will it ensure that the shoots of this recovery will not wither away, but grow strong, and keep growing…


Vedomosti reported (30.11.17) that the World Bank appears to be placing confidence in the Russian economy, but that further growth depends entirely on oil prices and structural reforms.

…’Experts from the WB expect that this year Russian GDP will grow by 1.7%, and not 1.3%, as the bank forecasted in May. In 2018, the economy will maintain the same growth rates and will accelerate to 1.8% in 2019 (the forecast has improved by 0.3 and 0.4 percentage points, respectively). After a reduction of 12.2% in 2014-2016 domestic demand grew by 1.5%, and in the second – by 6%. In the future it will be supported by the growth of salaries, a return to their indexation for state employees and the growth of other incomes.

‘The gradual restoration of consumption is connected with state financing and is unlikely to be sustainable, BCS chief economist Vladimir Tikhomirov says. Export growth will also support the economy, which for the first half of 2017 increased by 5.1% in annual terms, the WB reports. The economy is coping quite well with the crisis, but behind the stable indicators are nuances. In the first half of 2017, the poverty level slightly decreased to 14.4%, but this is due to the slow nominal increase in the subsistence minimum (in the first quarter only by 1.4%)… Unemployment is not growing – because of the reduction in the working-age population (in 2016, almost 1 million people). Gradually, income levels will recover, but the main contribution will be from earnings in the ‘informal’ sector, and not from official salaries.

‘Inflation in November almost froze In Russia, but the decrease in annual inflation to 2.4% is a sign of weakness of the economy. Economic growth itself is unstable: in the third quarter growth slowed to 1.8%, and in quarterly terms, has stopped. The main reason is weak investment growth (only 3.1% after 6.3% in the second quarter). We see slower growth rates of mining and gas, the acceleration of the construction sector has been reduced to almost zero, the only industry that has grown strongly is agriculture. And then only because of the record harvest, which briefly brought the index to plus, Tikhomirov notes. Prospects for the economy will continue to be linked to the price of oil, warns the WB: a 15% decrease could slow the economy to 1.4% in 2018 and 1.5% in 2019, and an increase – to accelerate the economy to 2,1% by 2019 (this is the basic forecast of the Ministry of Economic Development for 2017-2019). But even this economic growth is not enough to close the gap with global growth. In the first half of 2017, the main growth factor remained non-tradable sectors: retail and wholesale, real estate and construction, but the growth in wholesale trade is due to replenishment of stocks, and construction – to large state infrastructure projects.

‘The branches of production with high added value, not related to oil, are unlikely to become beneficiaries of economic recovery: diversification is slow because of structural constraints. The only way out is to carry out structural reforms, the World Bank indicates, but so far the only example is the transition to a new budgetary rule that should reduce the sensitivity of the economy to fluctuations in oil prices. For example, it is necessary to allocate health expenditure more efficiently, Tikhomirov’s experts write: high-priority in-patient medical care is being given the highest priority, but the efficiency of the health care system itself is falling…

‘Without reforms, the risks to the economy remain the same: a decline in oil prices, an increase in sanctions, an increase in the gap between real wages and incomes, the vulnerability of the banking sector and a decline in productivity. Of all the factors that will determine the dynamics of economic growth in the coming years, the key is reform, Tikhomirov considers. Valery Mironov of the Center for Development of the Higher School of Economics believes: domestic demand is still weak, the dynamics of non-tradable sectors remains limited.

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