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18 Nov 2013

Russian growth to fall behind

Alexander Morozov

by Alexander Morozov

Chief Economist, Moscow, HSBC

Russian growth to fall behind (Getty Images/Vladimir Godnik)

Russia will spend RUB450 billion on infrastructure projects

Russia’s Ministry of Economic Development now expects the country’s economy to grow at an average annual rate of just 2.5 per cent until 2030. That compares with its earlier forecast of 4.3 per cent and means Russia will lag the rest of the world in the long term, reducing its share of global GDP from 4.0 per cent to 3.4 per cent by 2030.

The new forecasts highlight the need for large-scale improvements in business conditions and the Russian investment climate

The dramatic downgrade means the ministry no longer considers as its baseline the so-called innovative economic scenario under which investment into transport infrastructure, high-tech industries and the knowledge economy grow significantly. Instead, GDP growth is expected to fall steadily from 3.0 per cent in 2014 to 1.6 per cent in 2030.

An apparent preference for quick-fix solutions over systemic policy measures has undermined the efficiency of the government’s policies and contributed to increasingly unpredictable regulations. This adds to commercial risks and may further hamper economic growth in Russia in the medium term.

Effectively, the new forecasts highlight the need for large-scale improvements in business conditions and the Russian investment climate. Without them, the country will over time lose its importance in the global economy and trade.

President Vladimir Putin has authorised spending of RUB450 billion (USD14 billion) from the National Wealth Fund for infrastructure projects, but actual disbursement of this money has not yet started and will probably be spread over several years.

We believe there is a cyclical weakness in Russia’s economy. While the authorities are running broadly prudent fiscal and monetary policies, avoiding large-scale stimulus, there are questions about the adequacy of decisions to address the structural challenges.

Federal budget expenditures remained unchanged from the plan for 2013, but the government has had to soften the interpretation of the fiscal rule that allows extra oil and gas revenues to substitute a shortfall in other revenues.

Many believe the government will have to increase taxes such as VAT to offset a decline in oil and gas revenues as a proportion of GDP, but the Ministry of Finance is hoping pension reform will reduce the amount of subsidies from the federal budget to the state pension fund.

That could preserve fiscal stability in the medium term, but higher regular taxes or lower pension income would hinder economic growth.

This research was first published on 7 November 2013.

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