Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RUSSIA ECONOMICREPORT Policy UncertaintyCloudsMedium-TermProspects The WorldBankintheRussianFederation 32 |September2014 Russia Economic Report Policy Uncertainty Clouds Medium-Term Prospects I. Recent Economic Developments II. Economic Outlook III. In Focus: Paths to Diversified Development in Russia This report is produced twice a year by World Bank economists of the Macroeconomics and Fiscal Management Global Practice. The team was led by Birgit Hansl (Lead Economist and Program Leader for Macroeconomics and Fiscal Management, Governance and Social Policy in Russia, [email protected]) and consisted of the following members: Sergei Ulatov (Senior Economist), Stepan Titov (Senior Economist), Olga Emelyanova (Research Analyst), Mikhail Matytsin (Consultant), Michael Ferrantino (Lead Economist), John Pollner (Lead Financial Officer), Lawrence Kay (Сonsultant), Mizuho Kida (Economist), Ekaterine Vashkmadze (Senior Economist), Damir Cosic (Economist), John Baffes (Senior Economist) and Irina Rostovtseva (Team Assistant). Donato de Rosa (Senior Economist), Elena Bondarenko (Consultant) and Ekaterina Ushakova (Program Assitant) produced the focus note on paths to diversified development for Russia. Peer reviewers were Souleymane Coulibaly (Lead Economist), Fritzi Koehler-Geib (Senior Economist) and Karlis Smits (Senior Economist). The report was edited by Christopher Pala (Сonsultant), and the graphic design was provided by Robert Waiharo (Сonsultant). We are grateful for advice from Michal Rutkowski (Country Director for Russia), Lada Strelkova (Country Program Coordinator for Russia), Ivailo Izvorski (Program Manager of the Macroeconomics and Fiscal Management Global Practice), Satu Kahkonen (Director of the Macroeconomics and Fiscal Management Global Practice), Norbert Wunner and Kaspar Richter from the European Commission and the IMF team for Russia, led by mission chief Antonio Spilimbergo. TABLE OF CONTENT ABBREVIatIONS AND ACRONYMS ............................................................................................................................ i EXecUTIVE SUMMARY ............................................................................................................................................... iii I. Recent EconoMIC DEVeloPMENTS .................................................................................................................... 1 1.1 Growth - An Economy on the Threshold of Recession ....................................................................................... 2 1.2 Labor Market – Still In A Tight Spot .................................................................................................................... 7 1.3 Monetary Policy and the Financial Sector – The Elusive Inflation Target ........................................................... 9 1.4 Balance of Payments – The Big Flight ................................................................................................................. 12 1.5 The Government Budget – Currency Depreciation and Oil Windfall Mask Medium-Term Challenges .............. 17 II. OUtlooK ................................................................................................................................................................. 21 2.1 Growth Outlook – Stagnation In The Face of Policy Uncertainty ........................................................................ 22 Baseline Scenario Projections .......................................................................................................................... 23 Alternative Scenario Projections ...................................................................................................................... 27 2.2 Development and Policy Challenges .................................................................................................................. 30 Poverty and Shared Prosperity Risks ............................................................................................................... 30 Policy Risks ...................................................................................................................................................... 31 III. PatHS to DIVERSIFIED DEVeloPMENT IN RUSSIA ........................................................................................... 37 3.1 Introduction ........................................................................................................................................................ 38 3.2 Increasing Potential Output ............................................................................................................................... 40 3.3 Russia’s Current Asset Base: Abundant Natural Resources, Good Human Capital, Improving Infrastructure, But Weak Institutions ......................................................................................................................................... 42 Natural Resources ........................................................................................................................................... 42 Physical Capital ................................................................................................................................................ 43 Human Capital ................................................................................................................................................ 44 Institutions: Three essential functions of government .................................................................................... 46 3.4 Rebalancing Russia’s Asset Portfolio With Transparent Rules, Better Public Investment And Competition ....... 50 3.5 References .......................................................................................................................................................... 53 ANNEX: Main indicators ............................................................................................................................................... 54 LIST OF FIGURES Figure 1: Global GDP growth, y-o-y, percent ............................................................................................................. 2 Figure 2: Composition of GDP growth, y-o-y and q-o-q sa, percent .......................................................................... 2 Figure 3: GDP growth, y-o-y and q-o-q sa, percent ................................................................................................... 3 Figure 4: Global industrial production and trade growth ......................................................................................... 4 Figure 5: Bond spreads ............................................................................................................................................. 4 Figure 6: Oil prices and OECD inventories ................................................................................................................. 4 Figure 7: Crude oil output shares, 2000 and 2013, mb/d ......................................................................................... 4 Figure 8: Stock market prices and trade volumes ..................................................................................................... 5 Figure 9: Exchange rate dynamics, Euro-Dollar basket ............................................................................................. 5 Figure 10: Non-tradable sector growth, y-o-y ............................................................................................................. 6 Figure 11: Tradable sector growth, y-o-y .................................................................................................................... 6 Figure 12: Beveridge curve ......................................................................................................................................... 7 Figure 13: Number of employed and economically active population, million people .............................................. 7 Figure 14: Productivity per worker by sectors, 2008Q1 = 100 percent ....................................................................... 8 Figure 15: Gap between real wages and productivity growth by sectors, 2008Q1 = 100 percent ............................. 8 Figure 16: Contribution to real income growth (all population), y-o-y, percent ......................................................... 8 Figure 17: Households’ real wages dynamics, y-o-y, growth, percent ........................................................................ 8 Figure 18: CBR’s key policy rate .................................................................................................................................. 9 Figure 19: CPI inflation by components, y-o-y ............................................................................................................ 9 Figure 20: The Ruble exchange rate and its bilateral band ......................................................................................... 10 Figure 21: NPLs as a share of total credit, y-o-y, percent ............................................................................................ 12 Figure 22: Credit growth, y-o-y, percent ..................................................................................................................... 12 Figure 23: Current account balance, percent of GDP .................................................................................................
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