Overview

The Russian Federation weathered the global crisis of 2008-2009 well, in part due to a large fiscal stimulus. The Government took decisive action to provide emergency support to banks and enterprises bringing returned growth, and implemented social protection measures to prevent a collapse in consumption.

In 2010, Russia’s economy returned to moderate growth, on the heels of domestic demand and higher oil prices, with lower than expected unemployment and poverty. In 2011, the country recovered its pre-crisis output level and returned to a fiscal surplus.  Russia is the top producer and number two exporter of oil, so when oil prices plummeted during the crisis it served as a stark reminder of the Government’s over-dependence on oil and gas and the need to diversify.

Nevertheless, in the past decade, this dependence has increased.  The share of oil and gas exports has risen from less than one half of total exports in 2000 to two-thirds in recent years. However, Russia’s oil output is projected to reach a plateau from the middle of this decade onwards.

There has been some shift to services over the years but the economic structure is still dominated by large corporations with a concentration in natural resources and low value-added industries, while contributions from the small and medium enterprises sectors are limited.

The 2011 fiscal outcomes were strong, bolstered by high oil prices a cautious expenditures execution. The economy grew by 4.3% in 2011 and expected to grow by 3.5% in 2012, and by 3.9% in 2013.

However, Russia still faces some short-term challenges. It remains vulnerable to a prolonged recession in Europe that could trigger a global slowdown.

The sovereign debt crisis in Europe is putting renewed pressure on Russia’s banking sector. Russian banks have limited direct exposure to European sovereign risks, but they increasingly rely on funding from Eurobonds and syndicated loans from Europe. As a result, they have recently started to face tighter access to wholesale funding in international markets. In these conditions, debt refinancing could be a challenge for Russian banks.

Russia may also face fiscal pressure if the prices for its main commodity exports decline due to a slowdown in global demand. To reduce this vulnerability, Russia needs to exercise fiscal restraint and to rebuild fiscal buffers while oil prices are still high. This requires a prudent spending plan and saving of oil revenues.

A fiscal policy aimed at improving the non-oil fiscal balance would put Russia in a stronger position to weather a new crisis. Currently Russia’s non-oil fiscal deficit remains at about 10% of GDP. At the same time, there is much potential to raise the quality of public spending to improve public services without additional spending.

In the medium and long term, Russia’s growth will depend on the success of establishing a new growth model that addresses two critical challenges: increasing the competitiveness of the economy and fostering innovation to diversify the economy; and coping with demographic change pertaining to Russia’s declining and aging population.

Russia’s longer-term challenge is to sustain high rates of economic growth in spite of declining oil and gas production and a shrinking workforce. This calls for a policy of modernization across many areas: business environment, innovation, public administration, and social services.

The accession agreement with the World Trade Organization (WTO) is an important step, as trade openness will stimulate Russian firms to increase their competitiveness. Also, the operation of the Customs Union between Russia, Kazakhstan, and Belarus could widen regional benefits of stronger trade ties, especially if it leads to a reduction in the many non-tariff barriers that persist. Russia is also a member of the Group of 8 and the Group of 20, and is becoming a significant provider of crisis response funds and development assistance. Russia’s competitiveness will also benefit from further economic integration with the rest of the word.

Russia is an upper middle-income country that strives to move to a high-income status. In the period since 2005, the per capita GDP of Russia doubled to approximately US$ 10,360 in 2010. The poverty rate was at 12.8 percent at the end of 2011, and is projected to drop slightly to 12.7% in 2012 as the economy continues to recover. The unemployment rate has also declined, reaching 6.6 percent on average in 2011.

Russia spends a smaller share of the overall government budget on education compared to other high-income countries, but they achieve similar outcomes. Reforms aim to improve the quality and the efficiency of public spending on education.Health indicators remain low in Russia compared to countries with similar levels of development, and the differences in health outcomes across regions are profound. Life expectancy is slowly increasing and measures to fight HIV/AIDS and Tuberculosis are showing initial positive results.

Regional development continues to be a challenge for the largest country in the world by land area. Across its 83 regions there are significant contrasts in socio-economic, climatic, and geographic conditions. The Government has embarked on a series of reforms to provide equal access to social services and infrastructure across the country.

With nearly one-quarter of the world’s pristine forests, Russia has a major impact on the global climate-change agenda. But, the country’s position on climate change is evolving slowly and Russia has yet to become an active participant in global climate change initiatives. Concentration has been put on increasing energy efficiency measures and establishing the legal and financial framework for carbon finance.

Russia’s long-term complex challenges call for coordinated actions by all levels of the Government.  Russia must rise to these challenges to reach its goal of becoming an advanced, high-income economy. Russia’s Strategy for the period until 2020 clearly recognizes these critical challenges.

Source: World Bank