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December 03, 2013

Russia's Stagnation Raises Pressure for new Growth Model

by Reuters

​​Russia said on Tuesday that its oil- and gas-dependent economy will stagnate over the next two years, increasing the pressure on President Vladimir Putin to fulfill pledges to expand and diversify Russian industry.
 
The Economy Ministry cut its 2013-2015 gross domestic product growth forecast after months of data pointing to stagnant corporate investment as well as declining growth in consumer demand.
 
The revisions, a few weeks after Russia admitted for the first time that its economy would lag global growth over the next two decades, added ammunition to arguments that Russia needs a new growth model.
 
“Stagnation will definitely continue, with moments of recovery,” Economy Minister Alexei Ulyukayev said, in comments quoted by RIA Novosti agency.
 
Despite an average price of oil, Russia's chief export, above $100 this year, Ulyukayev said GDP was likely to grow only by 1.4 percent, compared to an earlier forecast - itself reduced - of 1.8 percent.
 
The new forecasts envisage growth inching up to 2.5 percent next year, and 2.8 percent in 2015: down from previous forecasts of 3 percent and 3.1 percent respectively.
 
The ministry then expects growth to average 2.5 percent over the next two decades, very modest for an emerging market more used to growth rates above 6 percent in the previous decade.
 
“This is not an economic crisis: this is a crisis of an economic model,” Andrei Makarov, head of the State Duma budget and tax committee, said in a recent parliamentary discussion.

Pressure on Putin
 
The new forecasts are far below the 5 percent rate President Vladimir Putin targeted before his return to the Kremlin last year, when he pledged to lift Russia into the world's top five economies by the end of this decade, from around eighth at present.
 
His approval ratings, still at 61 percent last month, are nonetheless the lowest since June 2000, the month after he was first elected president, according to the independent Levada polling agency.
 
“[The forecast revision] is a kind of an attempt by the Economy Ministry to attract more attention to the problem,” said Liza Ermolenko, economist at Capital Economics in London.
 
Consumer demand and company investment have been the main drivers of growth since the 2008-2009 debt crisis, with exports weighed down by the weakness of external markets.
 
Slower growth in income and in retail lending suggests that retail sales growth - a good barometer of consumer demand - will slow down.
 
However, it is moribund investment activity - money that firms put into infrastructure - that has been hurting the economy the most.
 
Investment has been stagnating since mid-2012. Now the Economy Ministry envisages it growing just 0.2 percent this year, nowhere near its earlier forecast of 2.5 percent.
 
“Prevailing low investment sentiment can introduce capacity constraints that will ultimately transform into a lower potential GDP growth rate,” Rosbank economist Evgeny Koshelev said in a recent note.

Oil optimism
 
And even Russia's much reduced long-term growth forecasts assume the price of oil will rise in a way that many analysts view as over-optimistic.
 
Russia is the world's largest oil producer. Oil and gas account for two-thirds of its exports, and commodities in general for 90 percent - a sign that few other sectors are globally competitive and therefore have rapid growth potential.
 
The International Monetary Fund has urged Russia to embrace a new model of growth, complemented by diversification of the economy, more efficient use of resources and higher investment.
 
It also has urged Moscow to cut its non-oil budget deficit, which now stands at around 10 percent of GDP.
 
A new growth model, which would also address deficits in labor productivity and infrastructure, does not have to mean a radical departure, Bikas Joshi, IMF's country director for Russia, told foreign companies at a recent conference.
 
“It is crazy to think that, in a country so blessed with natural resources, the model does not incorporate that.”
 
But economists and analysts have long called for structural reforms to make the conditions for doing business outside the energy sector less offputting to foreign investors.
 
“Weak growth is raising the pressure for some sort of policy response,” Ivan Tchakarov, an analyst at Citi in Moscow said in a note this week.
 
“Ideally, this would involve a 'positive shock' to the investment climate, but, in our view, the more likely response is easier monetary conditions and a rise in the public-debt-to-GDP ratio.”