Bank staff calculations.
Consumer price inflation has been rising since July 2018, though it remained below the Central Bank of the Russian Federation’s (CBR) annual 4% target (Figure 5).
The increase in inflation since end of 2017 was mostly attributable to two factors. First, higher prices for oil, which affected gasoline prices and transportation costs for producers, and second ruble depreciation (Figure 6), which exerted an upward pressure on inflation through higher prices of imported food and utilities.
Household inflation expectations remain elevated, prompted by a hike in gasoline prices. Domestic inflationary risks stem mainly from VAT rate increase, the closing output gap in 2018, pass-through from the ruble depreciation and elevated inflation expectations. Risks to inflation in the near term tilt towards the upside.
Russia’s banking sector remains relatively weak, with less capital buffer (12.2% as of end of September) and higher non-performing loan (NPL) ratio (10.8% as of end of September) than other emerging nations (15.6% and 4.4%, respectively). However, the situation has stabilised, lending activity is recovering and profitability is improving, though the sector remains weighed down by high provisioning charges. Lending growth continued in both the retail and corporate segments, though it was much weaker on the corporate side due to weak economic growth. Credit to the corporate sector grew by 9.7%, year-on-year, in the last 10 months. During the same period, loans to households grew by 22.5%, year-on-year. The growth was lead mostly by unsecured loans and mortgage loans, and household debt is at an all-time high. A strong demand for residential mortgages reflects the declining interest rates and anticipated increases in real estate prices due to a change in the funding scheme for the construction companies.
Figure 5:Inflation rose but remained below the CBR’s target (CPI index and its components, in %, year-on-year).
Source: CBR and Haver Analytics.
Figure 6:Ruble depreciation since the beginning of 2018 (change in oil prices and the nominal exchange rate, logarithmic scale).
Source: CBR.
The fiscal balance improved at all levels of the budget system due to higher oil prices, combined with a weaker ruble, a better tax administration and a conservative fiscal policy. To boost growth, the President of Russia issued a “May Decree” in 2018, which introduced a set of goals for 2024. Putin wants Russia to become one of the five largest economies in the world (currently Russia is ranking 6th in terms of PPP); the GDP growth rate to be on par with the world’s average; halving the poverty rate; fostering population growth; raising life expectancy to 78 years and paving the way for the digital economy to reach 30% of GDP. These goals have already prompted the government to increase spending on education, health, infrastructure, social policy, digital economy, support of SME and exports starting in 2019. Twelve national projects and the comprehensive plan for modernisation and expansion of infrastructure are included in the federal budget for this purpose.
The World Bank forecasts Russia’s growth for 2018–2020 will remain modest at 1.5–1.8% (Figure 7), rates below the EMDE average (4.6%), but exceeding the AE average (1.7%) in 2020. The key factors governing the World Bank’s projection are a dyspeptic global environment, a declining labour force and slowing total factor productivity growth (TFP).
The declining trend in TFP is a global phenomenon. Weaker productivity growth has been attributed to slower investment growth, partly because of deleveraging pressures and other crisis legacies, combined with an ageing population and maturing global value chains. In Russia, TFP growth slowed as productivity gains of first-generation reforms wore off. The changing composition of investment from machinery to construction could also have contributed to the lower TFP growth. Globally, investment growth halved between 2010 and 2016, with the weakness shifting from advanced economies to EMDEs over this period. In Russia, although investment growth slowed from an average growth of 10.4% during the previous decade to 2.8% in 2010–2017, the investment as a share of GDP increased (Figure 8). This helped to accelerate capital growth over the period 2010–2017.
Figure 7:The growth forecast for Russia suggests benign growth (real GDP growth, %).
Source: Rosstat, World Bank.
Figure 8:Russia’s investment-to-GDP ratio stopped increasing; capital-to-GDP ratio remains low. (a) Gross fixed capital formation as a percent of GDP for Russia. Capital as a percent of GDP for Russia. (b) Lower line indicates GDP weighted average of 32 advanced economies.
Source: Haver Analytics, Penn World Table, World Bank.
Russian demographic trends are worse than those found in many EMDEs (but not China) as the country’s low total fertility rate in the early 1990s accelerated population ageing. Russia’s total fertility rate remained low until the mid-2000s. The decline in the total fertility rate began to take a toll on the working-age population after 15 years, with potential labour force growth peaking in 2007 at 0.7% before declining to −0.7% in 2017. This suggests to the World Bank that short of unexpected surges in productivity growth, the outlook for Russian GDP growth is mediocre.
Misleading Benchmark
The World Bank’s modest short- and near-term expectations for the Russian economy reflect its outlook for a maturing global economy (perhaps even a climacteric) (Kindleberger, 1974). Its optimistic long-term attitude is a corollary of its faith in globalisation. The World Bank and International Monetary Fund consider most economies “normal” in a comprehensive development scheme that moves backward nations in stages from autarkic illiberal regimes to high-performing liberal members of the global community (Shleifer and Treisman, 2005; Rosefielde, 2005a). Each nation’s position in the global development hierarchy and a handful of technical factors including foreign direct investment, technology transfer, state macroeconomic management skills, education and integration into competitive global trade and financial networks determine economic performance everywhere. Moreover, the World Bank believes that political and social progress go hand-in-hand with economic globalisation. It expects Russia to eventually discard its Muscovite characteristics, democratise, liberalise, transition and integrate into a Western-led transnational global order with progressive values.
The World Bank knows that Russia has distinctive Muscovite characteristics, but as it perceives things, this does not change the fundamentals. The immutable laws of globalisation it insists must inevitably govern Russia’s economic, political and social performance. The attitude has some empirical validity. GDP growth does decelerate as emerging nations move up the development ladder. The transfer of macroeconomic management skills does allow less developed nations to cope better with involuntary underemployment, inflation, budgetary deficits, poverty, insurance transfers, education and social safety nets.
However,
