Russia

Details

Country assessments

Highlights

• Economic growth has been decelerating. GDP growth slowed, from 3.4 per cent in 2012 to 1.4 per cent in the first half of 2013, against the backdrop of lower export demand and moderation of commodity prices. High capacity utilisation and relatively low unemployment also point to apparent limits to potential growth.
• A new agricultural policy framework came into effect. It aligns the instruments of state support to the agriculture sector with the requirements of membership of the World Trade Organization (WTO), following Russia’s accession in August 2012.
• The Central Bank of Russia assumed the responsibilities of a single financial market regulator. It became responsible for the regulation and supervision of both bank and non-bank financial institutions. The Central Bank’s mandate has also been broadened to include creation of the right conditions for balanced and sustainable economic growth.

Key priorities for 2014

• Sustained improvements in the investment climate and supply-side reforms are needed to boost investment and improve productivity in the economy, which in turn should help increase growth potential. Various regulations governing the establishment of firms, as well as their growth and dissolution, need to be streamlined, at both the federal and regional levels. Efforts to diversify the economy should be stepped up.
• Credibility of the fiscal framework needs to be strengthened. The need to support the economy through expansionary fiscal policy should be balanced with maintaining the credibility of the recently amended countercyclical fiscal framework. Any policy stimulus may have a limited impact unless improving the economy’s supply response is first addressed.
• Implementation of the privatisation programme needs to be accelerated. The programme has the potential to make an important contribution to the modernisation of the economy, and to improving governance and boosting the development of local capital markets.

Macroeconomic performance

Economic growth has been decelerating. Growth slowed, from 4.3 per cent in 2011 to 3.4 per cent in 2012, and again in the first half of 2013, to 1.4 per cent, year-on-year. The deceleration reflects a combination of the weaker global environment, a lower average oil price, and worsening investor and consumer confidence, as well as supply-side constraints. Inflation increased, from a record low of 3.6 per cent in May 2012, to 7.4 per cent in May 2013. The upward trend in headline inflation mainly reflected rising food prices; however supply-side constraints could also be playing a role.  

Net private capital outflows persist. They declined from US$ 81 billion in 2011, to US$ 54 billion in 2012 (around 3 per cent of GDP), but the rate of outflow appears to have picked up again in 2013. The trends reflect investment activity of Russian companies abroad, as well as a perception of a difficult business environment in the country. The current account has remained in surplus, at around 4 per cent of GDP in 2012, reflecting high export receipts related to sales of oil and gas. As a result, the international reserves remained broadly stable, at around US$ 530 billion (27 per cent of GDP).

The consolidated fiscal accounts were near-balanced in 2012. The budget-balancing oil price thus amounted to around US$ 110 per barrel of Urals oil. Savings in the Reserve Fund and the National Welfare Fund totalled around 8 per cent of GDP as of mid-2013, and have remained broadly unchanged in recent years. At the same time, regional budgets have been facing higher pressures in the light of lower revenues and high social spending commitments. As a result, the overall deficit of regional governments increased significantly in 2012, to over 3 per cent of their total expenditure.

GDP growth is expected to moderate to below 2 per cent in 2013. In the medium term, Russia’s outlook for economic growth and exchange rate stability remains highly dependent on two factors: first, on supply-side reforms and improvements in the business climate to boost the growth potential and diversify the economy; and second, on the prices of oil and other commodities. The new fiscal framework, if adhered to, should help to increase fiscal savings buffers over time, and these could be deployed to support the economy during periods of lower commodity prices.

Major structural reform developments

A new fiscal framework came into force in 2013. The framework was approved by the parliament in December 2012, together with the medium-term budget for 2013-15. It links overall spending to the average oil price over the past five years, which is currently around US$ 92 per barrel of Urals oil. Excess revenues from oil exports are to be transferred to the Reserve Fund until this fund reaches 7 per cent of GDP, from the current 4 per cent of GDP. Oil proceeds above that level will be divided equally between the National Welfare Fund (currently also around 4 per cent of GDP) and infrastructure projects. Political pressures to relax this framework increased in 2013, as economic growth slowed. Use of National Welfare Fund savings to finance selected infrastructure projects is also being considered.

Changes to the pension system are being made. Under the amendments approved in late 2012, the default rate of contributions to individual savings accounts (the second pillar of the system) will be reduced from 6 per cent to 2 per cent, to allow for a corresponding increase in contributions to the first – solidarity – pillar. However, individual contributors will be given the option to opt out of the change, and to retain their contributions at the rate of 6 per cent. Further reforms are currently under discussion.

A new agricultural policy framework came into effect in 2013. The framework covers the period 2013-20, and aligns farm subsidies with WTO requirements, following Russia’s accession to the organisation in August 2012. Under the framework, price support for production inputs will be gradually replaced with direct income support to farmers, calculated on per-hectare basis. Trade-distorting support instruments, such as the use of subsidised interest rates, will be gradually phased out. Russia’s WTO membership is helping to precipitate important reforms.

Regulated tariffs growth will be capped at the level of inflation of the previous year. This regime, which was announced in July 2013, is expected to be in place for five years and is effective from 2014. While this rule may contribute to lower inflation and higher industry competitiveness, it will negatively affect incentives to invest in the modernisation of essential infrastructure assets.

Sberbank sold a US$ 5 billion stake in a public offering. In September 2012, Sberbank – Russia’s largest bank, holding nearly half of Russia’s retail deposits – sold a 7.6 per cent stake in its equity through a London-Moscow public offering. As a result, the Central Bank’s shareholding in Sberbank has been diluted to 50 per cent plus one voting share.

The privatisation programme has been subject to further delays. The programme, which has been revised several times, aims to improve the management of state-owned property, and to reduce the number of state-owned or state-controlled companies to less than half the current level. Currently, the programme envisages the sale of a minority stake in VTB Bank – a major, state-controlled bank – by the end of 2015, and the sale of a stake in Rostelecom by the end of 2014. Rosselkhozbank – one of the largest banks in Russia – and oil company Rosneft have been removed from the immediate privatisation pipeline. At the same time, in April 2013, VTB Group – a large state-owned financial group – acquired mobile telecommunications operator, Tele2 Russia.

A number of recently adopted “road maps” aim to improve the overall business climate in Russia. The road maps, developed by the Agency for Strategic Initiatives and the Ministry of Economic Development, cover various areas of business environment, such as obtaining construction permits or exporting and importing goods. The primary objective of the initiative is to improve Russia’s ranking in the World Bank’s Doing Business index to twentieth place by 2018. To this end, the road maps contain various intermediate benchmarks; for example a step-by-step reduction in the number of procedures required for the import and export of goods. Following progress in the areas of obtaining electricity and registering property, Russia improved its overall ranking in terms of ease of doing business by 19 positions over the previous year, and is ranked ninety-second of 189 countries, in the World Bank 2014 Doing Business report.

The initiative also targets improvements in business environments in the regions, and envisages regional road maps, as well as the introduction of a regional standard of investment attractiveness – a set of guidelines for supporting investment at the regional level – which is being piloted in a number of regions. Furthermore, in July 2013 the parliament adopted a law providing amnesty to entrepreneurs convicted of various economic crimes. It is hoped that this step will encourage entrepreneurship.

The Central Bank assumed the responsibilities of a single financial market regulator in September 2013. It thus took over the regulation and supervision of non-bank financial institutions and markets from the Federal Service for Financial Markets. The Central Bank’s mandate has also been broadened to include creation of the right conditions for balanced and sustainable economic growth, in addition to ensuring price stability.

The National Settlement Depository obtained the status of central depository. The move, announced by the Federal Service for Financial Markets in November 2012, will help to make securities registration and the setting of ownership rights compliant with international standards, thus simplifying access to the domestic debt market for foreign investors. The international clearing systems, Euroclear and Clearstream, received access to the local debt market.

Further major steps in terms of regional economic integration within the framework of the Eurasian Economic Union are expected in 2015. At a summit in Astana, the heads of the member states of the Eurasian Economic Union – Belarus, Kazakhstan and Russia – agreed to prepare draft documents on further integration by May 2014, and to adopt them in May 2015.

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