Russia

Russia – visible disparities in regional growth

Wednesday, April 3rd, 2019

Many countries in the world are characterized by regional production and growth disparities, both when it comes to advanced and to emerging market countries. Sometimes regional growth statistics may be characterized by good quality, sometimes the quality of officially calculated growth numbers seems to be less illuminating. Regional disparities can also mean different conditions for (foreign) corporate investors what concerns demand and size of the market (for sales), wage levels (for production costs) and educational quality (for access to human resources, better innovation and research and, thus, corporate development).

Regional developments in China and Russia

In China, for example, the addition of all provincial growth results mostly shows higher accumulated economic growth rates than the corresponding weighted numbers for China as a whole. The reason for this discrepancy is frequently explained by better possibilities for the professional promotion of provincial political leaders when good economic results can be shown for the own geographical area of responsibility. Obviously, the central political leadership tries now to change this approach (somewhat), for example by considering environmental improvements as well. However, more exact results in this specific approach still seem to be unknown – at least to me.

Recently, I found very interesting results for the economic performance of Russian regions, published by BOFIT (The Bank of Finland Institute for Countries in Transition) https://www.bofit.fi/en/monitoring/weekly/2019/vw201913_1/ and originated at the Russian Federal State Statistics Service (Rosstat). The graph published in the link above shows clearly the outstanding positive role of Moscow, the Moscow and the Central region, also compared to St. Petersburg and to the North-West region and even more clearly compared to the Volga and Ural regions. Despite visible improvements in manufacturing production and investments, retail sales still remain sluggish almost over the whole country after the sharp drop in 2015 – with the Moscow region giving a brighter picture also here.

One can also single out by these statistics that the above-mentioned regions counted in 2018 for 81 percent of all Russian manufacturing production and for 70 percent of all fixed investments and retail sales – which certainly can give some guidance for (foreign) corporate planning.

It could be added that BOFIT publishes a lot of interesting news and research, particularly on China and Russia. I never omit their BOFIT Weekly and their other publications. https://www.bofit.fi/en/monitoring/weekly/

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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Russia’s Economic Growth will be much Slower in the Future

Wednesday, April 1st, 2015

During the boom years between 2000 and 2008, Russian GDP grew by almost 7.5% per annum. This boom was caused by two interlinked factors: The global economy was growing at a very rapid pace, and the price of crude oil rose throughout the period. When the financial crisis hit major parts of the world, Russia’s economy was badly affected along with everybody else, but subsequently Russian growth has been slower than before the crisis. In addition, Russian GDP growth has decelerated almost continuously from 2011 onwards. (Figure 1)

Figure 1 Russia’s GDP growth

Source: Rosstat and own calculations

There was no obvious single reason for this slowdown, but some important factors should be noted. First, Russia’s working-age population had started to decrease, which automatically slows down GDP growth, ceteris paribus. Second, Russia’s fixed capital investment remained low, between 21% and 22% of GDP after the global financial crisis. While this would not be problematic for a country like, say, Germany, Russia’s investment ratio remained much below rapidly growing emerging market countries. Third, growth in productivity had become much slower already before the global financial crisis (Voskoboynikov and Solanko, 2014). Last, the price of oil remained high, but it did not increase as it did between 2000 and 2008.

Deryugina and Ponomarenko (2014) use a large Bayesian VAR model to assess the relative importance of various macroeconomic factors in explaining the evolution of Russia’s GDP. They find that the oil price together with demand from the EU are enough to forecast and explain most of the short-run movements in Russian GDP. Rautava (2013) notes a similar dependence on the price of oil. Even more interestingly, he notes that Russia’s trend growth halved to approximately 2% after the global financial crisis.

Role of oil

It is difficult to overstate the importance of energy prices for the Russian economy. Crude oil, oil products and natural gas brought 70% of Russia’s export revenue in 2014, and the energy sector provides the Russian Federation with more than 50% of its tax intake. Figure 2 illustrates the tight connection between the price of oil and Russia’s exchange rate.

Even after the introduction of sanctions in July, the Russian currency and financial markets remained relatively calm, but the rouble started its steep depreciation when the price of oil plummeted. Connection works in the other direction as well, of course. When the price of oil stabilized and recovered somewhat in February and March, 2015, the rouble reacted in the same direction as well.

Long-run growth slower than before

Unfortunately, Russia’s long-run growth prospects are not very rosy either, especially in comparison to the development in the recent years. We know very well about the evolution of the working-age population during the next 20 years, as almost all people coming into working-age have already been born. According to the UN prediction, Russia’s working-age population will decline from 90.7 million in 2015 to 78.7 million in 2035, which translates into -0.7% change annually on average.

Figure 2 Price of crude oil and the rouble

Even if one assumes that the capital stock will grow somewhat – say by 0.3% per annum, which is higher than recently – for the next twenty years, and total factor productivity also rises at a relatively rapid – but decelerating – pace, Russia’s GDP growth will be below 2% for the next twenty years (Table 1). This is clearly below what Russians have become used to in recent years. Also, Russia’s share of global GDP continues to decline. Moreover, Russia’s growth needs to be driven by total factor productivity. Voskoboynikov and Solanko (2014) estimate that it grew by 2.5% per annum between 1995 and 2008. Therefore, keeping Russia’s growth relatively fast at higher income levels might be difficult.

Table 1 Baseline scenario for Russian growth

 

 

References

Deryugina, Elena and Alexey Ponomarenko (2014). A large Bayesian vector autoregression model for Russia. BOFIT Discussion Paper 22/2014.

Rautava, Jouko (2013) Oil Prices, Excess Uncertainty and Trend Growth – A Forecasting Model for Russia’s Economy. Focus on European Economic Integration. Q4/13, Oesterreichische Nationalbank.

Voskoboynikov, Ilya and Laura Solanko (2014). When high growth is not enough: Rethinking Russia’s pre-crisis economic performance. BOFIT Policy Brief 6/2014.

 

 

 

 

 

 

 

 

Iikka Korhonen
Head of Bofit (Institute for Economies in Transition) at the Bank of Finland

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How fast can Russia grow in the future?

Wednesday, October 2nd, 2013

Boom and bust

During the boom years of 2000-2007 Russian economy grew on average by more than 7% p.a. While the global economy also expanded vigorously, Russia’s growth was boosted further by ever-higher oil prices and productivity improvements especially in the services sector.
Russia’s rapid GDP growth meant that Russians’ average standard of living also increased during this time, and by 2008 per capita GDP (at purchasing power parities) was 34% of the corresponding level in the US from 21% in 2000. Partly this rapid growth was a rebound from the economic crisis of 1998, but growth was also helped by restructuring of the economy towards services, which were very much underdeveloped during the Soviet times and early years of the economic and political transition. Moreover, productivity growth in the services was also fast, especially in the high-skill sectors such as financial intermediation and business services, which is natural given the relatively low starting level.

However, growth during the boom years was not only driven by productivity improvements. According to a recent Discussion Paper published by the Bank of Finland Institute for Economies in Transition (Marcel P. Timmer and Ilya B. Voskoboynikov: Is mining fuelling long-run growth in Russia? Industry productivity growth trends since 1995, BOFIT DP 19/2013, http://www.suomenpankki.fi/bofit/tutkimus/tutkimusjulkaisut/dp/Pages/dp1913.aspx) growth in the capital input has also accounted substantially to the growth in value-added. Moreover, growth in labor input has accounted for almost equally large share of value-added growth. At the same time many sectors where productivity growth has been very low, such as mining, have been able to increase their share of the economy, as they have been able to attract more capital and labour.

Lower growth in the future
In 2009 Russian economy suffered from the global financial crisis, but its post-crisis growth has been clearly slower than many expected, even though the price of oil soon returned to over $100 per barrel. While the average GDP growth between 2010 and 2012 was 4%, growth continued to decelerate. In late 2012 and early 2013 quarter-on-quarter growth was practically non-existent. While the slowdown in growth has partially been cyclical, it is also a sign of clearly lower growth in the potential output.
First, working-age population is already declining, and at the same time unemployment is very low. Officially the unemployment rate is around 5%, which in practice means full employment. Unless retirement age is increased soon, labor supply continues to decline, which will have a negative effect on future growth.

Second, investments are also declining. Between 2010 and 2012 the average share of gross fixed capital formation in GDP was 21.8%. This is below the average investment ratio of other middle-income countries (see Figure 1), many of which are currently growing faster. Moreover, during the first half of 2013 investments actually declined year-on-year, and especially large energy as well as infrastructure companies cut back their investments. At the same time capacity utilization rates are even higher than during the boom years of 2006 and 2007 (Figure 2). This tells us that Russian companies do not view their future prospects favorably, and the large capital outflows basically tell the same story. During the past quarters net capital outflows have averaged some 2.5% of GDP.

Figure 1 Share of fixed capital investments in GDP and per capita GDP (middle and high-income countries
(Click the image to zoom in)
Source: World Bank World Development Indicators database

It is noteworthy that even relatively high oil prices have not been enough to boost Russia’s growth in the recent quarters. It seems that the uncertain global environment and Russia’s own well-known problems with business environment are hindering investments. It is especially noteworthy that Russian companies and investors are deeming investments into Russia lacking when taking into account the expected profits and perceived risks.
The aforementioned factors have led many analysts inside Russia and outside it to drastically reduce their estimates of Russia’s long-term growth potential. Many of the estimates seem to cluster between 2.5% and 3% p.a. While this is still quite respectable in comparison to many EU countries, it will mean substantially slower increase in incomes and delayed convergence with the OECD countries. Also, slower growth may at some point be in conflict with the many fiscal responsibilities of the public sector.

Figure 2 Capacity utilization rates in manufacturing industry
(Click the image to zoom in)
Source: Rosstat

 

 

 

 

 

 

Iikka Korhonen
Head of Bofit (Institute for Economies in Transition) at the Bank of Finland

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