Russian economy outgrows projections

Russia’s economy expanded 2.3 per cent last year, growing more quickly than the government and the IMF had predicted, according to state statistics.

It has outpaced the growth rates of the EU, the US and the individual economies of France, UK and Italy for FY 2018-19. 

Background 

Russia has an upper-middle income mixed and transition economy with state ownership in strategic areas of the economy. Market reforms in the 1990s privatized much of Russian industry and agriculture, with notable exceptions to this privatization occurring in the energy and defence-related sectors.

Russia is considered an "energy superpower". It has the world's largest proven natural gas reserves and is the largest exporter of natural gas. It is also the second-largest exporter of petroleum.

The economic development of the country has been uneven geographically with the Moscow region contributing a very large share of the country's GDP. There has been a substantial rise in wealth inequality in Russia since 1990 (far more than China and other Eastern European countries).  

Russia's vast geography is an important determinant of its economic activity, with some sources estimating that Russia contains over 30 per cent of the world's natural resources. The World Bank estimates the total value of Russia's natural resources at $75 trillion US dollars. Russia relies on energy revenues to drive most of its growth. Russia has an abundance of oil, natural gas and precious metals, which make up a major share of Russia's exports. As of 2012, the oil-and-gas sector accounted for 16% of GDP, 52% of federal budget revenues and over 70% of total exports.

Analysis 

Russia’s growth rate accelerated from 1.6 per cent in 2017 and exceeded the economy ministry’s prediction of 1.8 per cent as well as the International Monetary Fund’s forecast of 1.7 per cent.

The country’s economy only returned to growth in 2017 after two years of recession in 2015 and 2016. Russia’s Rosstat statistics agency said that GDP last year was 103.6 trillion rubles ($1.578 trillion, €1.38 trillion), with growth in sectors such as hotels and restaurants boosted by hosting the World Cup.

The economy ministry had initially predicted 2.1 per cent growth before revising this down to 1.8 per cent, taking into account the impact of U.S. sanctions on the ruble. Strong growth in the construction sector of 5.3 per cent was one of the factors that pushed the year’s figures higher than expected.

This was due to large construction projects such as oil and gas facilities and Novatek’s new liquefied natural gas plant in the north of Siberia, the economy ministry said. Novatek is one of Russia’s largest natural gas producers.

The latest figures show that Russia “has made significant upwards revisions” to its quarterly growth figures for the first half of last year, said the London-based Capital Economics research group.

It said the figures suggest that Russia’s growth has already peaked and “will average two per cent over 2019 and 1.3 per cent in 2020.”

While Russia has turned the corner after the worst recession during Vladimir Putin’s time in power since 2000, the figures are still much lower than the economic goals declared by the Kremlin.

In 2018, Putin said he wanted his latest four-year term as president from 2018 to 2024 to see four-per cent annual growth. During his election campaign for a fourth term last year, Putin said he wanted to halve the number of people living in poverty and increase GDP per head by 50 per cent by 2025, which would require four-per cent annual growth.

Russia’s central bank has predicted annual growth of between 1.5 and two per cent for the period between 2018 and 2020, calling for structural reforms to diversify the economy.

Assessment 

Our assessment is that the greater than expected growth rate of the Russian economy is a good sign for Moscow, which has been under western sanctions since 2017. We believe that this will be beneficial for President Putin who has been repeatedly criticised for not helping a failing economy since 2015.