Policy Uncertainty Clouds Medium-Term Prospects

Russia Economic Report

September 2014 | Edition No. 32

Russia Economic Report No. 32

1. Recent Economic
Developments
2. Outlook and Risks
3. Paths to Diversified
Development in
Russia

Main messages
1

Russias economy is Seasonally adjusted growth for the first two quarters was near zero.
Structural impediments slowed economic expansion even before the impact of
stagnating and
increased policy uncertainty amid increased geopolitical tensions.
uncertainty is impacting
The economy needed to internalize several rounds of sanctions,
investor and consumer countersanctions and measures to stabilize the economy: this meant operating
decisions in an environment of higher risk, which depressed domestic demand.

Macroeconomic stability prevails and Russia remains in possession of large

There are substantial buffers to uphold stability in the near future.
risks to Russias It is now policy uncertainty about the economic course the country will take
that is casting the longest shadow on Russias medium-term prospects.
medium-term outlook

Our baseline projection is one of near stagnation with growth of 0.5 percent in
2014, 0.3 percent in 2015, and 0.4 percent and 2016.

Economic recovery will The stabilization effort should go hand in hand with renewed focus on
need a predictable improving the economys microeconomic fundamentals.
policy environment and A more balanced portfolio of national assets will help overcome structural
constraints to growth.
a new model of
Stabilization, transparent rules, better quality of public investment, and
diversified development competition should be the reform priorities for the next decade.
Prospects for future Restrained investment makes it less likely that well-paying jobs will be created,
poverty reduction and which could counterbalance the slowdown in income growth.
shared prosperity are Unless addressed, high inflation will hurt consumption growth, dimming the
likelihood for further poverty reduction.
limited

Russias Quarterly Growth

GDP growth, y-o-y and q-o-q sa, percent

6
5
4
3
2

1
0

1.4

1.0

0.8 0.7

1.0

1.3

0.4
0.4 0.0
0.2
0.3 0.3 0.4 0.1

-1

GDP growth, y-o-y

GDP growth, q-o-q, sa

Russias Growth Outlook

GDP growth, percent, y-o-y
3
2
1
0
-1
-2

2012

2013

Pessimistic scenario
Low risk scenario (March 2014)
Baseline scenario

2014

2015

2016

Optimistic scenario
High risk scenario (March 2014)

Russias current asset base: abundant natural resources, good

human capital, improving infrastructure, but weak institutions
Russias asset portfolio is heavy on natural resources: distribution of wealth
by assets, 2005, in percent.
100%
90%
33

80%
70%
60%
24

50%
40%
30%
43

20%
10%
0%
AUS

AZE

CAN

KAZ

MYS

NLD
Natural capital

NOR

RUS

Produced capital

SAU

TKM

Intangibles

UKR

ARE

USA

UZB

VEN

 Development Challenges
Poverty and Shared Prosperity
16

0.424

15

0.422

0.420

14

0.418

13

0.416

12

0.414

11

0.412

10

0.410
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Poverty rate, %
Baseline scenario
Optimistic scenario
Pessimistic scenario
Gini (rhs)

Recent Economic Developments:

An Economy on the Threshold of Recession

 Weak Domestic Demand

Growth composition, percent, y-o-y
17
9
1
-7
-15

Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14

-23

Consumption
Export
GDP growth

GFCF
Import

Note: Q2 2014: World Bank estimate

Change in stock
Discrepancy

11.01.2011
15.03.2011
10.05.2011
05.07.2011
30.08.2011
25.10.2011
20.12.2011
28.02.2012
24.04.2012
19.06.2012
14.08.2012
09.10.2012
04.12.2012
12.02.2013
09.04.2013
04.06.2013
30.07.2013
24.09.2013
19.11.2013
04.02.2014
01.04.2014
27.05.2014
22.07.2014
16.09.2014

Increasing Borrowing Cost Depress Investment

Central Banks Key Policy Rate (percent) and Russias CDS spreads (bps) for 5 year bonds
8.5

5.5

4.5

300

280

7.5

7
260

6.5
240

220

200

180

160

140

 Depreciation and Inflation Dampen Consumption

Exchange rate dynamics (Euro-Dollar basket) and Russias CPI inflation by components
0.0265

12

0.026

10

0.0255

0.025
0.0245

0.024

0.0235

0.023
0.0225

0
2011
Food

2012
Non-Food

2013
Services

2014
CPI

 Consumption Held Back by Stagnating Real Wages

Real wage growth, percent, y-o-y

15
10
5

0
-5
-10

2009

2010

non-Market
Tradables

2011

2012

2013

non-Tradables
Total

2014

 and by Households Debt Obligations

Non-performing Loans as a share of total credit, y-o-y, percent
10
9
8

7
6
5
2010

2011

2012

2013

2014

Nonperforming Loans:Total Loans

Loan Loss Provisions:Total Loans
Nonperforming HH Loans: Total HH Loans

 Output Growth by Sectors

Non-tradable and tradable sector growth, y-o-y
14

4
3.5
3

2.5

4
-1

1.5
1
2013

Q1 2014

Q2 2014

0.5
0

-6

-0.5

Electricity, gas, and water

Retail trade
Financial services

Construction
Transport
Real estate

2013

Q1 2014

Q2 2014

-1
Agriculture

Mineral extraction

Manufacturing

 Limited Import Substitution Potential

Capacity utilization rate in manufacturing in percent and unit labor cost (2005=100)
70

300
280
260
240
220
200
180
160
140
120
100

65
60
55
50

45
40

Electronic and Optical Equip

Transport Vehicles
Textile & Clothing

Food
Machinery & Equip
Manufacturing

World Bank Outlook for Russia:

Stagnation in the Face of Policy Uncertainty

Russias Growth Outlook

GDP growth, percent, y-o-y
3
2
1
0
-1
-2

2012

2013

Pessimistic scenario
Low risk scenario (March 2014)
Baseline scenario

2014

2015

2016

Optimistic scenario
High risk scenario (March 2014)

Benchmarking Russias Growth

Global GDP growth, percent, y-o-y

12

8
4
0

-4
-8
-12
Russia
EU Emerging

OECD HI
Other Emerging

Subdued Global Growth Outlook

Global real GDP growth, percent, y-o-y
2009

2010

2011

2012

2013

2014f

2015f

2016f

World

-1.9

4.3

3.1

2.5

2.4

2.6

3.2

3.4

High Income

-3.6

3.0

1.8

1.5

1.2

1.8

2.4

2.5

Developing Countries

3.0

7.8

6.3

4.8

4.8

4.5

5.0

5.3

Euro Area

-4.4

1.9

1.6

-0.6

-0.4

0.9

1.4

1.8

Russia

-7.8

4.5

4.3

3.4

1.3

0.5

0.3

0.4

 Development Challenges
Poverty and Shared prosperity
16

0.424

15

0.422

0.420

14

0.418

13

0.416

12

0.414

11

0.412

10

0.410
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Poverty rate, %
Baseline scenario
Optimistic scenario
Pessimistic scenario
Gini (rhs)

Policy Risks
The stalling of structural reforms
represents a down-side risk to Russias
medium- and long-term outlook.
Structural constraints in the economy
could diminish the effectiveness of
the Central Banks disinflation policy.
In the current environment of elevated
inflation risk, it will be particularly
important to adhere to fiscal prudency.

Special Focus Note

Paths to Diversified Development in Russia

Russia reached its potential output

Russias potential growth (in percent) may be slowing.
7
6
5
4
3
2
Russia
BRICS Average (excluding Russia)
EU11 Average (excluding Croatia, Latvia and Luthuania)
Resource Rich* Average

1
0
2009

2010

2011

2012

2013

How to reverse the slowdown in potential output?

In the boom years growth became gradually less driven by productivity increases.
Total factor productivity growth growth slowed as productivity gains from first generation
reforms wore off
15
10

-5
-10

-15

Total Factor Productivity

Capital
Labor
GDP Growth

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Percent

The National Asset Approach

Assets can be classified into three categories: natural resources, built capital, and national institutions.
Natural resources - minerals, arable land, and forests - are largely endowed, but technological progress and better
management can radically alter their economic value.
Built capital - physical and human capital, in the form of adequate infrastructure and a healthy and skilled labor force.
National institutions - the regulations and mechanisms that a country has put in place to manage resource rents,
deliver public services - such as roads, security, health care, and education - and regulate private enterprise.

Three ways to integrate and grow: export product share, by factor intensity

Russias current asset base: abundant natural resources, good

human capital, improving infrastructure, but weak institutions
Russias asset portfolio is heavy on natural resources: distribution of wealth
by assets, 2005, in percent.
100%
90%
33

80%
70%
60%
24

50%
40%
30%
43

20%
10%
0%
AUS

AZE

CAN

KAZ

MYS

NLD
Natural capital

NOR

RUS

Produced capital

SAU

TKM

Intangibles

UKR

ARE

USA

UZB

VEN

 Abundant natural resources

Russia is one of the richest countries in the world in subsoil wealth: Subsoil
natural resource wealth per capita, 2005, in constant 2005 US$.
United Arab Emirates (3)
Norway (4)
Saudi Arabia (6)
Turkmenistan (12)
Russian Federation (13)
Venezuela, RB (14)
Australia (15)
Kazakhstan (16)
Canada (19)
Malaysia (22)
Chile (23)
Azerbaijan (24)
Netherlands (26)
Uzbekistan (28)
Nigeria (30)
United States (33)
Ukraine (44)
Botswana (55)

118,111
99,706
86,620

32,468
24,238
24,090
20,328
20,268
12,644
10,102
9,563
9,194
7,061
5,365
3,940
3,478
1,970
982

 Improving infrastructure
Investment rates have improved but remain lower than comparators: Gross
capital formation, percent of GDP
Quality of infrastructure has been improving: Global Competitiveness Index:
Quality of infrastructure, score 1 (low) to 7 (high)
35

30

25

20

15

5
0

Russia
BRICS Average (excluding Russia)
EU11 Average
Resource Rich* Average
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

10

4
3
3

Russia
BRICS Average (excluding Russia)

 Good Human Capital

The quality of human capital is higher than predicted by income by capita.
But there is a mismatch between education achievements and employer perception of
the quality of education: Global Competitiveness Index: Quality of education, score 1
(low) to 7 (high)
1.00

AUS

0.90

CAN
UAE

HDI Value, 2012

CHI

USA

NOR

NLD

4.0

SAU

0.80

UKR AZE
VEN

UZB

0.70

3.5

RUS
KAZMYS

3.0

TKM BWA

0.60

2.5

y = 7E-06x + 0.6294
R = 0.7405

NIG

0.50

4.5

2.0

0.40

10,000

20,000

30,000

40,000

GDP per capita, PPP (constant 2005 international $), 2012

50,000

Russia
BRICS Average (excluding Russia)
EU11 Average
Resource Rich* Average

But Weak Institutions for Managing Volatility,

Providing Public Services and Regulating Enterprises
The quality of institutions lags in several dimensions:
World Governance Indicators, 1996-2012 average
Average of
Government Control of
Governance
Effectiveness Corrup tion
Indicators

Political
Stability
and
Absence of
Violence

Regulatory
Quality

Rule of Law

Voice and
Accountability

Netherlands

1.71

1.89

2.15

1.11

1.79

1.75

1.58

Norway

1.71

1.92

2.12

1.29

1.39

1.91

1.6

Canada

1.62

1.87

2.04

1.01

1.59

1.73

1.5

Australia

1.59

1.75

1.98

0.98

1.63

1.75

1.45

United States

1.32

1.64

1.51

0.44

1.54

1.55

1.22

Chile

1.15

1.21

1.43

0.56

1.48

1.25

0.98

0.7

0.54

0.89

0.97

0.61

0.61

0.58

0.49

0.85

0.84

0.86

0.66

0.54

-0.81

M alay sia

0.36

1.06

0.27

0.2

0.53

0.5

-0.39

Saudi Arabia

-0.36

-0.2

-0.23

-0.29

0.03

0.16

-1.62

Ukraine

-0.58

-0.68

-0.92

-0.21

-0.53

-0.85

-0.27

Kazakhstan

-0.63

-0.6

-0.98

0.16

-0.4

-0.89

-1.06

Russian Federation

-0.73

-0.47

-0.93

-1.05

-0.33

-0.89

-0.7

Azerbaijan

-0.88

-0.8

-1.08

-0.79

-0.59

-0.88

-1.13

Venezuela, RB

-1.02

-0.98

-1.01

-1.12

-1.07

-1.33

-0.62

Nigeria

-1.14

-1.02

-1.11

-1.73

-0.89

-1.24

-0.84

Turkmenistan

-1.32

-1.47

-1.25

0.15

-1.99

-1.42

-1.94

Uzbekistan

-1.34

-1

-1.07

-1.16

-1.66

-1.27

-1.91

Botswana
United Arab Emirates

Weak Institutions
for regulating enterprises
The regulatory environment is highly restrictive of competition: Product market
regulation, OECD Product Market Regulation Index
4.5
Russia 2008

3.5

OECD Average 2008

OECD Average 2013

2.5

1.5

1.52

0.5
-0.5 Product Market Regulation (PMR)

State Control

Barriers to Enterpreneurship Barriers to Trade and Investment

Rebalancing Russias Asset Portfolio: Transparent

Rules, Better Public Investment and Competition
More transparent rules for investors
would enhance the contribution of
natural resources to Russias growth.

Better prioritization of expenditures

and focus on results will strengthen
the quality of public service provision.
Increased private participation could
improve the quantity and quality of
the delivery of public services.
Effective competition policy will
increase the productivity of the
business sector.
32

Thank you!
For more information about the World Bank and its
activities in the Russian Federation, please visit:
http://www.worldbank.org/en/country/russia
If you would like to be access our Russia Economic Reports,
please visit:
www.worldbank.org/eca/rer

For questions and comments relating to this publication,

please contact bhansl@worldbank.org.

EXTRA SLIDES

Baseline Scenario Projections

Main economic indicators
2012
2013
2014
GDP growth (%)
3.4
1.3
0.5
6.8
3.5
2.1
Consumption growth, percent
0.6
-6.0
-8.1
Gross capital formation growth, percent
General government balance (percent of
0.4
-1.3
-1.1
GDP)
Current account (US$ billions)
71.3
34.1
62.8
percent of GDP
3.6
1.6
3.1
Capital account (US$ billions)
-32.3
-62.2
-113.0
percent of GDP
-1.6
-3.0
-5.6
Oil price assumption (US$ per barrel)
105.0
104.0
102.9
Gross Domestic Product (mp), bln Rub
62218.4
66755.3
71785.3
CPI inflation
5.1
6.8
8.0

2015

2016

0.3

0.4

0.5

0.6

0.3

1.0

-2.1

-1.0

57.9

54.3

2.8

2.5

-60.1

-55.6

-2.9

-2.6

99.5

100.1

76320.7

81223.6

7.0

5.0

Optimistic Scenario Projections

Main economic indicators
2012

2013

2014

2015

2016

GDP growth (%)

3.4

1.3

0.5

0.9

1.3

Consumption growth, percent

6.8

3.5

2.2

0.9

1.5

Gross capital formation growth, percent

0.6

-6.0

-8.1

1.5

2.5

General government balance (percent of GDP)

0.4

-1.3

-1.1

-2.3

-1.2

Current account (US$ billions)

71.3

34.1

62.8

42.9

28.6

3.6

1.6

3.1

2.0

1.3

-32.3

-62.2

-113.0

-45.0

-25.5

-1.6

-3.0

-5.6

-2.1

-1.1

105.0

104.0

102.9

99.5

100.1

62218.4

66755.3

71785.3

76777.3

82441.9

5.1

6.8

8.0

6.0

5.0

percent of GDP
Capital account (US$ billions)
percent of GDP
Oil price assumption (US$ per barrel)
Gross Domestic Product (mp), bln Rub
CPI inflation

Pessimistic Scenario Projections

Main economic indicators
`

2012

2013

2014

2015

2016

GDP growth (%)

3.4

1.3

0.4

-0.9

-0.4

Consumption growth, percent

6.8

3.5

2.0

-0.3

-0.3

Gross capital formation growth, percent

0.6

-6.0

-8.5

-4.3

-1.2

General government balance (percent of GDP)

0.4

-1.3

-0.7

-2.8

-1.2

Current account (US$ billions)

71.3

34.1

69.3

82.2

80.8

3.6

1.6

3.6

4.5

4.3

-32.3

-62.2

-128.0

-82.3

-80.0

-1.6

-3.0

-6.6

-4.5

-4.3

105.0

104.0

102.9

99.5

100.1

62218.4

66755.3

71713.9

76753.9

81798.2

5.1

6.8

8.0

10.0

8.0

percent of GDP
Capital account (US$ billions)
percent of GDP
Oil price assumption (US$ per barrel)
Gross Domestic Product (mp), bln Rub
CPI inflation

Fiscal Impact: Balances under Pressure

Federal budget revenue and balance, 2007-2014, percent of GDP
25

10

20

15

10

-5

-10

-15
2007

2008

2009

2010

2011

2012

2013

2014

Non-oil revenues, percent of GDP

Oil revenues, percent of GDP

Non-oil balance, percent of GDP

Total balance, percent of GDP