The presentation was given by Birgit Hansl, lead economist and coordinator of the World Bank for Economic Policy in Russia, Alvaro Gonzalez, lead economist in the Department of Development for the Private and Financial Sector, and Sergei Ulatov, a senior economist in the Department of Economics and Politics.
The report focused on three main issues: the current state of the Russian economy in the context of recent trends in the global economy, prospects for growth and development of the Russian economy, as well as a special investigation of volatility in Russia’s industrial production. The starting point of the presentation was a discussion of the current slowing of economic growth in Russia. The World Bank’s forecast for GDP growth in 2013 is 1.8%. The modesty of this result is explained by the current halt in growth and the prospect of a negative growth rate at the end of the year. These figures instill apprehension with respect to the following years. Despite the fact that after the crisis Russia’s recovery rate was one of the leaders among developing countries, the recent trend has changed its direction. There were several reasons for this. The reduction appeared to stem from a decline in both domestic and external demand. The fall in global demand for energy, combined with declining oil prices has had a significant influence on the formation of the GDP. An internal drop in demand is explained by a simultaneous decline in the volumes of expenditures on investment and consumption.
These trends again force us to discuss the need for structural reforms. Despite the fact that economic stimulus will be achieved by an increase in demand from the governmental sector, it should be noted that this measurement is short term and cannot guarantee long-term, stable growth.
Ms. Hansl noted that the economic slowdown affects many areas of the economy’s functioning, and has had an adverse influence through a variety of different channels, such as revenue budgets and reduced production falling at different levels. If we compare the figures from the first half of 2012 and 2013, the revenue of the Federal Budget fell from 21.8% of the GDP to 19.8% of the GDP, and the Consolidated Budget fell from 38.5% to 36.4%. In combination with a slight reduction in spending, such dynamics threaten the stability and balance of the budget. At the same time, despite the fact that that the total reserve funds remained at 10% of the GDP, the assets of the National Welfare Fund are directed toward the reduction of available funds there.
At first, the forecasted economic growth in Russia of 3.1% in 2014 seems to be a fair result. However, one must consider the future prospects and risks associated with both external and internal factors. One indicator of a developing risk, which was particularly stressed by Hansl, is the growing outflow of capital, without which it is impossible to achieve necessary levels of investment. There are also growing risks associated with the dynamics of exchange rates, for which the Central Bank must constantly intervene in the currency market. A high level of public debt, coupled with stagnation in saving rates has made the existing situation unsustainable. One of the limiting factors is low unemployment (around 5%). Despite the fact that high employment rates are a desired outcome of most policies, during the downturn it is not possible to stimulate output, thereby utilizing increased employment. The economy is operating at nearly full capacity.
In speaking about achieving output potential during a time of low economic growth, the experts stressed the need for reform, which would be aimed at removing structural restraints. Or, in other words, aimed at the diversification of the economy. If we consider the structure, for example, of exports after 2000, these were dominated by oil and natural gas. The growth of these export items in the 2000s was in the double digits, and in 2010 accounted for 69% of the value of Russia’s total exports. This picture remains the same today. On the basis of this data we can speak about the economy of the Russian Federation as non-diversified, and therefore susceptible to the risks of unstable economic growth.
The main hypothesis for why in Russia only a small part of sectors are developing, according the speakers, is the relatively high volatility of production volumes, particularly in the manufacturing sector. In conditions of high volatility, SMEs find it harder to remain in the market as there are often times of recession in the Russian economy. Mr. Gonzalez, under whose guidance the study of the Russian Federation’s volatility was conducted, also pointed out the high concentration of production: 25% of all industrial enterprises accounted for 80% of production. High concentration can increase the volatility of a country’s GDP as the economy depends on a small number of firms. A small number of changes in the global economy (fluctuations in the price of oil, for example) constantly affect the Russian economy as a whole. Volatility, as has been mentioned, forces new developing enterprises to leave the market, which further increases production concentration. As a result the Russian economy is characterized as a “vicious circle” outlined by Gonzalez: concentration increases volatility, which leads to even greater concentration, which maintains or even increases volatility, etc. In this case, the current structure of the economy is preserved over time.
Russia is dominated by large enterprises that have long been on the market. If we evaluate their effectiveness in comparison with the developing countries of Europe and Central Asia (ECA), we find that the older the business in Russia, then the lower the employment and lower the generated revenue in relation to the ECA countries. According to Gonzalez, it is said that (on average) with age the growth of enterprises in Russia is slowing and, given high concentration, resources are allocated inefficiently in the Russian economy.
The result of these negative factors—concentration, volatility, and inefficient allocation of resources—is a high probability of a prolonged and deep recession. For example, the portion of recessions in the history of the Russian economy of four years or longer is 35%. This is more than in China (where the figure is less than 5%), India, Brazil, and an average of the OECD countries (10%).
Summing up his part of the report, Gonzalez identified three main negative features of the formation of the structure of the Russian economy. First, it is that older companies have a higher chance of “survival” during a recession than younger ones. Second, in sectors with low levels of competition the probability of withdrawal from the market is lower than in high-competition sectors. And third, inefficient (large) companies “survive” even in the face of economic downturns and crises. Such are the trends of development in national industrial enterprises.
Based on the aforementioned, the experts from the World Bank identified an important aim for future economic reform in Russia: in economic policy, especially during times of recession, Russian authorities should pay more attention to young and innovative firms in order to ensure long-term, stable economic growth in Russia. The cultivation of policies to improve the efficiency and mobility of labor, human capital investment, and the stimulation of competition should also be primary objectives, which will help overcome existing barriers to growth.
Russia_Economic_Report_No_30_Part_123_Oct_3_2013_Eng.pdf
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