Russia Economic Report 33: The Dawn of a New Economic Era?

MOSCOW, April 1, 2015 — The World Bank projects a negative growth outlook for Russia in 2015-2016, with the economy expected to contract by 3.8 percent in 2015 and modestly decline by 0.3 percent in 2016. Investment is projected to contract for a second year in a row as the Russian government is delaying some large infrastructure projects and private investors are cutting back on investment programs, while capital remains expensive and demand uncertain, according to the World Bank’s latest Russia Economic Report, launched today in Moscow.

The report notes that the weak investment demand resulting from deep structural problems in the Russian economy was an important cause of the slowing Russian growth in 2014, and this was compounded by the terms of trade shock, geopolitical uncertainties, and the economic sanctions later in the year.

And yet, despite the confluence of adverse factors that hit the economy in 2014, Russia has so far avoided recession. “The impact of the main shock, the slump in oil prices, only began to affect the economy in the final quarter of last year, and the impact is likely to be more profound in 2015 and 2016,” said Birgit Hansl, World Bank Lead Economist for the Russian Federation and the main author of the Report.  “Moreover, the Russian government and Central Bank were able to respond swiftly with policy responses that successfully stabilized the economy.”

According to the report, consumption growth is expected to turn negative for the first time since 2009, eroded by declining real incomes and wages. The only bright spot is that the depreciated ruble could create incentives for expansion in some tradable industries. However, structural rigidities and the surging cost of imported investment goods and credit may dampen these benefits.

The report notes that the economic impact of sanctions is likely to linger for a long time. “As lessons from international experience demonstrate, economic sanctions could well alter the structure of the Russian economy and the ways in which Russia integrates with the rest of the world. And going forward, risks arising from a lower oil price and continued economic sanctions environment will need to be managed,” said Michal Rutkowski, World Bank Country Director for Russia.

The main medium-term risk for Russia’s growth lies in the continued dearth of investment and lack of affordable credit, according to the report. In particular, less foreign direct investment could limit the transfer of innovation and technology that is critical to increasing Russia’s growth potential. The report says that systematically lower investment rates will ultimately lessen Russia’s prospects for growth in the coming years and limit already modest growth potential. Finally, the report emphasizes that as long as access to external finance continues to be a constraint, a policy of careful management of financial sector risks and buffers will be important.