Skip to main content
Clouds pass over the Peterhof Palace in St Petersburg, Russia, July 15, 2006.     REUTERS/Jason Reed    (RUSSIA) - RTR1FJEQ
Future Development

The Russian economy inches forward

Apurva Sanghi

In the span of four months I have been based in Moscow, one truism about Russia stands out: There is a hunger to know what “truly” goes on in the world’s largest country (by area) and its economy. So any report we publish on Russia gets a lot of attention, and our latest Russia Economic Report is no exception. While we analyzed and discussed many economic issues, here are three noteworthy ones:

Author

First, amidst external headwinds of weak global growth, the recession continues in Russia. However, the country seems to have turned the corner and growth is expected to be positive in 2017-2018 (Figure 1). One key reason is that over the last two years, the government’s policy response package of a flexible exchange rate policy, expenditure cuts in real terms, and bank recapitalization—along with tapping the Reserve Fund—has helped buffer the economy against multiple shocks. And after a prolonged economic decline, headline economic and financial trends and indicators are now picking up. Inflation from January 2016 to October 2016 was 7.4 percent—less than half of the 15.9 percent in the year before. The banking sector has also now largely stabilized. The consolidated budget of regional governments even registered a surplus in the first eight months of 2016. Indeed, on the back of projected rising oil prices, we expect the economy to enter positive territory in 2017 and 2018, reaching 1.5-1.7 percent. Nuances and details matter though: The reduction in inflation, for example, is partly due to the base effect while inflation expectations remain elevated. The banking sector, though stable, remains vulnerable to macroeconomic risks of low growth and weak demand. Though the regions registered a fiscal surplus, they are expected to be in deficit by the end of 2016.

Figure 1: The economy is expected to inch towards growth in 2017 and 2018 (real GDP growth, percent)

11-23-fig-1

Source: World Bank staff estimates

Second, one proactive step toward policy reform is the proposed return to the medium-term budgeting framework. With a growing federal fiscal deficit (3.7 percent of GDP by end 2016), one proactive step the government has taken is to reintroduce a three-year, medium-term fiscal framework, which proposes to cut the deficit by about 1 percent each year ultimately leading to a balanced budget by 2020. The budget is conservatively costed at a $40 per barrel oil price, and cuts are driven mostly by a reduction in expenditures in mostly defense/military and social policy. If adhered to, this medium-term framework will be an important step toward reducing overall policy uncertainty. 

Third, Russia’s fiscal policy is more re-distributive than the United States’ but less so than some European Union countries. The good news is that when it comes to reducing inequality, Russia’s fiscal policy (combination of taxes and transfers) performs better than in Brazil, Chile, Colombia, Turkey, and the U.S. (Figure 2).

Figure 2: Russia’s fiscal policy is redistributive
Gini coefficient before and after taxes and transfers, selected countries

11-23-fig-2

Notes: Market income is income before taxes and government transfers. Disposable income is income after taxes and government transfers. The OECD methodology for calculating the disposable income Gini assumes that pensions are a government transfer (and social insurance contributions are a tax). In-kind spending on education and health is not included in the calculations for OECD countries.

Sources: Data for the Gini for all OECD countries is from the OECD, and for the remaining countries, it is from the Commitment to Equity country papers. Russia’s data is for 2014.

While that’s the good news, with a similar budget size (as measured by government expenditure as share of GDP), many other countries achieve a much higher reduction in inequality. The implication is that Russia can achieve more redistribution for its current level of government spending and revenues. And though transfers (largely, pensions) have played an admirable role in reducing inequality, with fewer and fewer contributors to the pension system, it is getting fiscally unsustainable in its current state. 

On a cautionary note, even though the economy is turning the corner, it is unlikely to turn the tide toward a more diversified economy anytime soon. This recovery is mostly on the back of expected rising oil prices. Indeed, the total (nominal) value of non-oil exports of goods decreased by over 13 percent in the first nine months of 2016. And sectors, constituting slightly more than half of non-oil exports, actually registered a contraction in the first half of 2016. So the diversification process advances slowly. What may help turn the tide? Well, that’s the subject of a future blog so stay tuned…

This blog was first launched in September 2013 by the World Bank in an effort to hold governments more accountable to poor people and offer solutions to the most prominent development challenges. Continuing this goal, Future Development was re-launched in January 2015 at brookings.edu.

For archived content, visit worldbank.org »

Get daily updates from Brookings