Russia: A Bumpy Recovery

Amid heightened global uncertainties, Russia is experiencing a bumpy recovery. Domestic demand is rising, but unemployment remains high, and credit and investment remain limited.

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A Bumpy Recovery

Video (2:30): Pedro Alba, the World Bank’s Country Director for Russia, about Russian Economic Reports

Video (1:20): Zeljko Bogetic, the World Bank’s Chief Economist for Russia

Video from St.Petersburg international economic forum

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• Russian Economic Report #22 (full text)
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• Macroeconomic Indicators
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Russian Economic Reports

A series of periodic economic reports from the Moscow office of the World Bank. Each report contains a concise description of the major economic trends and issues facing the Russian economy.

• March 2010: Jobless Recovery for Russia?
• November 2009: From Rebound to Recovery?
• June 2009: From Crisis to Recovery
• March 2009: Refocusing Policy on Households

MOSCOW, June 16, 2010 ― Against heightened global uncertainties, Russia is experiencing a bumpy economic recovery supported by rising household consumption, but with continued high unemployment and limited credit and investment activity, says the World Bank’s Russian Economic Report No. 22, launched today in Moscow.

Pedro Alba
World Bank Country Director
for Russia

The new report provides up-to-date analysis of the recent economic developments and policies in Russia, as well as the economic and social outlook for 2010-11, given future possible policy initiatives.

With slower-than-expected recovery in the first quarter of 2010, and new downside risks to global economic recovery, the real GDP in Russia is expected to grow by 4.5 percent in 2010 followed by a 4.8 percent growth in 2011.

“Overall, developments in early 2010 indicate that Russia is recovering, but the ride has been bumpier than forecasted at the beginning of the year,” said Pedro Alba, the World Bank’s Country Director for Russia.  “The slower-than-expected recovery in domestic demand, coupled with the risks of broader contagion of the Greek crisis to other Western and Eastern European economies, has increased uncertainties over the recovery of the Russian economy.”

Alba added that “In this environment, macroeconomic policy must carefully balance the objectives of implementing the required fiscal consolidation, while also supporting the nascent recovery and dealing with the remaining social and regional issues.”

In the first quarter of 2010, real GDP increased by only 2.9 percent compared to the year before, which is less than expected.  The growth momentum of the second half of 2009, which was supported by the fiscal stimulus, declined in the first quarter of 2010.  The most recent output statistics for April 2010, however, display more positive dynamics, with manufacturing industries taking the lead and non-tradables likely gaining momentum.

With a bumpy recovery and weak demand conditions, unemployment remained high in the first quarter of 2010, followed by a drop in April, likely reflecting seasonal gains in employment. Real incomes grew mainly due to the increases in wages, pensions, and social benefits.

Zeljko Bogetic
the World Bank’s Chief Economist for Russia

“As expected, household consumption supported by the gains in real incomes and wages drove year-on-year gains in domestic and aggregate demand.  But with sluggish credit activity, the pace of recovery is gradual and has not yet spread significantly to other components of demand,” said Zeljko Bogetic, the World Bank’s Chief Economist for Russia and the main author of the Report. “The low investment activity indicates that the majority of companies have yet not returned to a more active investment strategy in the environment of high uncertainty and limited credit.”

The balance of payments position in Russia improved as a result of higher oil and gas prices and increased demand for non-oil exports, but capital flows remain volatile both in the banking and nonbanking sector, reflecting the movement in oil prices and the remaining uncertainties regarding the recovery of global demand.

Sergei Ulatov
World Bank economist

“The recent shift in oil prices is reflected in the exchange rate dynamics,” said Sergei Ulatov, World Bank economist and member of the core report team. “The exchange rate has been volatile due to the fluctuations in oil prices and growing uncertainty as a result of higher risk aversion associated with the debt crisis in Europe.  However, with the more flexible monetary-exchange policy now in place, the impact on Russia’s external accounts should not be large.”

Inflation continued to slow down in 2010. The remaining output gap, the slow recovery in domestic demand, and the previously depressed money supply remain the main factors keeping inflation in check. At the end of April 2010, the 12-month inflation rate dropped to 6.0 percent, down from 8.8 percent at the end of 2009.

Following the sizeable expenditure stimulus in 2009, the government now aims to gradually withdraw the fiscal stimulus and strengthen the fiscal position in the medium term.

Karlis Smits
World Bank economist

“Looking to the rest of 2010, while a fiscal consolidation is necessary and important, there is a risk that a significant part of the adjustment will again fall on the much-needed infrastructure maintenance expenditures,” said Karlis Smits, World Bank economist and member of the core report team. “Dilapidated infrastructure, especially in transport, could pose a risk to competitiveness and longer-term growth prospects.”

The debt crisis in the West European periphery has increased downside risks to global recovery and oil prices. Assuming that the measures in place in the European Union prevent a default or major restructuring of sovereign debt, global GDP is projected to increase 3.3 percent in 2010 and 2011, and 3.6 percent in 2012 as private capital flows to developing countries rise from around 3.0 percent of their GDP in 2009 to 3.5 percent in 2012. Oil prices are expected to average US$ 78 a barrel in 2010 and slip to US$ 74 a barrel in 2011.

The Russian outlook discussed above is based on this global scenario presented recently in the Global Economic Prospects of the World Bank. Nevertheless, downside risks of the debt crisis in Europe remain. While Russia’s fiscal and debt outlook is much less pressing than in other countries because both fiscal deficits and debt-to-GDP ratios are much lower, the possible contagion and the broader debt crisis in Europe could transmit new shocks to Russia through two key channels: oil prices and financial/capital flows.