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Summary of Russia's Medium-Term Economic Prospects

Core Content

This report provides an analysis of Russia's medium-term economic outlook, focusing on the factors that have contributed to its current recession and the potential for recovery. The key drivers of economic growth during the 1999-2008 boom, the causes of the current economic decline, and the policy implications for future growth are examined. The authors suggest that with appropriate reforms, Russia's economic growth could be accelerated by up to 4.4 percentage points per year.

Main Points

Economic Growth in 1999-2008

• GDP Growth: Russia experienced rapid GDP growth averaging 6.9 percent per year from 1999 to 2008.
• Key Sectors: The most dynamic sectors were construction, retail and wholesale trade, and transport and telecommunications, not oil and gas.
• Private Sector Role: Market disciplines and the expansion of the private sector significantly improved the efficiency of resource use.

Recession and Recovery (2008-2014)

• Recession in 2009: Russia fell into a severe recession, with output declining by 7.9 percent.
• Slow Recovery: Growth slowed to an average of 1.7 percent per year between 2012 and 2014, far below the previous rate.
• Investment Decline: Investment in fixed capital fell sharply in 2009 and did not recover until 2012.

Causes of Current Recession

• Terms of Trade Deterioration: A 30-percent decline in export prices led to a 3.6-percent fall in consumption, 5.2-percent reduction in government consumption, and an 8.7-percent decline in long-run fixed investment.
• Renationalization: The state has increased control over the economy, particularly in the energy sector, leading to a drop in total factor productivity growth from 5.5 percent to 1.1 percent.
• Corruption: Corruption costs Russia approximately 3.5 to 25 percent of GDP, according to different estimates.
• Business Environment: Despite improvements in some areas, the business environment remains less hospitable than in most developed countries.
• Sanctions and Capital Costs: Sanctions and increased costs of capital have led to higher interest rates and reduced investment.
• Declining Labor Force: The working-age population is expected to decline by 12 percent between 2012 and 2025, reducing GDP by 7 percent.

Prospects for Growth Through 2025

• Continuation of Trends: Without significant policy changes, Russia's growth will remain slow.
• Potential Growth Factors:
  • Improved Terms of Trade: A rebound in oil prices and REER appreciation could lead to a one-off GDP increase of 4.5 percent.
  • Privatization: Aggressive privatization could boost GDP growth by 4.4 percentage points.
  • Reduced Corruption: Lowering corruption to levels similar to Romania could increase GDP growth by 0.3 percentage point.
  • End of Sanctions: Ending sanctions and improving economic policies could add 1.4 percentage points to growth.
  • Improved Business Climate: Enhancing the business environment could increase GDP growth by 2.2 percentage points.
  • Increased Immigration: More favorable immigration policies could raise growth by 0.1 percentage point.

Key Information

• Growth Potential: The combination of the above policy changes could lead to a significant acceleration in GDP growth.
• Current Outlook: The Russian economy is in recession, with GDP projected to fall by 4.2 percent in 2015 and 1.2 percent in 2016.
• IMF Projections: The IMF expects trend line growth of 1.5 percent per year after the recession, which is far below the previous average.
• Government Policy: The Russian government has not shown signs of implementing major privatization or anti-corruption measures.
• Opportunity Costs: The report highlights the opportunity costs of the current economic policies and the potential benefits of reform.

Policy Implications

• Need for Reform: To accelerate growth, Russia needs to address renationalization, corruption, and the business environment.
• Sanctions and Policies: Full implementation of the Minsk accords could eliminate most sanctions and boost growth by at least 1.4 percentage points.
• Long-Term Challenges: The declining labor force and structural inefficiencies will continue to constrain growth unless addressed.

Conclusion

Russia's medium-term economic prospects are constrained by several factors, including renationalization, corruption, an inhospitable business environment, and Western sanctions. However, policy changes could significantly boost economic growth. The report emphasizes the importance of privatization, reducing corruption, and improving the business climate to stimulate long-term recovery.