RER32 Powerpoint Eng

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Policy Uncertainty Clouds Medium-Term Prospects

Russia Economic Report

September 2014 | Edition No. 32


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Russia Economic Report No. 32

1. Recent EconomicDevelopments

2. Outlook and Risks

3. Paths to Diversified

Development inRussia


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Seasonally adjusted growth for the first two quarters was near zero. Structural impediments slowed economic expansion even before the impact of

increased policy uncertainty amid increased geopolitical tensions. The economy needed to internalize several rounds of sanctions,countersanctions and measures to stabilize the economy: this meant operating

in an environment of higher risk, which depressed domestic demand.

Russias economy is

stagnating and

uncertainty is impactinginvestor and consumer

decisions

There are substantial

risks to Russiasmedium-term outlook

Macroeconomic stability prevails and Russia remains in possession of largebuffers to uphold stability in the near future.

It is now policy uncertainty about the economic course the country will takethat is casting the longest shadow on Russias medium-term prospects.

Our baseline projection is one of near stagnation with growth of 0.5 percent in2014, 0.3 percent in 2015, and 0.4 percent and 2016.

Economic recovery will

need a predictable

policy environment and

a new model ofdiversified development

The stabilization effort should go hand in hand with renewed focus onimproving the economys microeconomic fundamentals.

A more balanced portfolio of national assets will help overcome structural

constraints to growth. Stabilization, transparent rules, better quality of public investment, and

competition should be the reform priorities for the next decade.

1

2

3

Prospects for future

poverty reduction and

shared prosperity are

limited

Restrained investment makes it less likely that well-paying jobs will be created,which could counterbalance the slowdown in income growth.

Unless addressed, high inflation will hurt consumption growth, dimming thelikelihood for further poverty reduction.

4

Main messages


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Russias Quarterly GrowthGDP growth, y-o-y and q-o-q sa, percent

1.0

1.0

1.4

1.3

0.8 0.7

0.4 0.0

0.4

0.3 0.3 0.4 0.10.2

-1

0

1

2

3

4

5

6

GDP growth, y-o-y GDP growth, q-o-q, sa


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Russias Growth OutlookGDP growth, percent, y-o-y

-2

-1

0

1

2

3

2012 2013 2014 2015 2016

Pessimistic scenario Optimistic scenario

Low risk scenario (March 2014) High risk scenario (March 2014)

Baseline scenario


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Russias current asset base: abundant natural resources, good

human capital, improving infrastructure, but weak institutions

Russias asset portfolio is heavy on natural resources: distribution of wealth

by assets, 2005, in percent.

43

24

33

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AUS AZE CAN KAZ MYS NLD NOR RUS SAU TKM UKR ARE USA UZB VEN

Natural cap ital Produced capital Intangib les


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Development ChallengesPoverty and Shared Prosperity

0.410

0.412

0.414

0.416

0.418

0.420

0.422

0.424

10

11

12

13

14

15

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poverty rate, % Baseline scenarioOptimistic scenario Pessimistic scenarioGini (rhs)


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Recent Economic Developments:

An Economy on the Threshold of Recession


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Weak Domestic DemandGrowth composition, percent, y-o-y

-23

-15

-7

1

9

17

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

Q313

Q413

Q114

Q214

Consumption GFCF Change in stock

Export Import Discrepancy

GDP growth

Note: Q2 2014: World Bank estimate


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Increasing Borrowing Cost Depress Investment

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

16.09.20

14

22.07.20

14

27.05.20

14

01.04.20

14

04.02.20

14

19.11.20

13

24.09.20

13

30.07.20

13

04.06.20

13

09.04.20

13

12.02.20

13

04.12.20

12

09.10.20

12

14.08.20

12

19.06.20

12

24.04.20

12

28.02.20

12

20.12.20

11

25.10.20

11

30.08.20

11

05.07.20

11

10.05.20

11

15.03.20

11

11.01.20

11

Central Banks Key Policy Rate (percent) and Russias CDS spreads (bps) for 5 year bonds

140

160

180

200

220

240

260

280

300


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Depreciation and Inflation Dampen Consumption

0.0225

0.023

0.0235

0.024

0.0245

0.025

0.0255

0.026

0.0265

0

2

4

6

8

10

12

2011 2012 2013 2014

Food Non-Food Services CPI

Exchange rate dynamics (Euro-Dollar basket) and Russias CPI inflation by components


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Consumption Held Back by Stagnating Real Wages

Real wage growth, percent, y-o-y

-10

-5

0

5

10

15

2009 2010 2011 2012 2013 2014

non-Market non-Tradables

Tradables Total


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and by Households Debt ObligationsNon-performing Loans as a share of total credit, y-o-y, percent

5

6

7

8

9

10

2010 2011 2012 2013 2014Nonperforming Loans:Total Loans

Loan Loss Provisions:Total Loans

Nonperforming HH Loans: Total HH Loans


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Output Growth by Sectors

Non-tradable and tradable sector growth, y-o-y

-6

-1

4

9

14

2013 Q1 2014 Q2 2014

Electricity, gas, and water Construction

Retail trade Transport Financial services Real estate

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

2013 Q1 2014 Q2 2014

Agriculture Mineral extraction Manufacturing


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Limited Import Substitution Potential

Capacity utilization rate in manufacturing in percent and unit labor cost (2005=100)

40

45

50

55

60

65

70

Electronic and Optical Equip Food

Transport Vehicles Machinery & Equip

Textile & Clothing Manufacturing

100

120

140

160

180200

220

240

260

280

300


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World Bank Outlook for Russia:

Stagnation in the Face of Policy Uncertainty


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Russias Growth OutlookGDP growth, percent, y-o-y

-2

-1

0

1

2

3

2012 2013 2014 2015 2016

Pessimistic scenario Optimistic scenario

Low risk scenario (March 2014) High risk scenario (March 2014)

Baseline scenario


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Benchmarking Russias GrowthGlobal GDP growth, percent, y-o-y

-12

-8

-4

0

4

8

12

Russia OECD HIEU Emerging Other Emerging


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Subdued Global Growth Outlook

Global real GDP growth, percent, y-o-y

2009 2010 2011 2012 2013 2014f 2015f 2016f

World -1.9 4.3 3.1 2.5 2.4 2.6 3.2 3.4

High Income -3.6 3.0 1.8 1.5 1.2 1.8 2.4 2.5

Developing Countries 3.0 7.8 6.3 4.8 4.8 4.5 5.0 5.3

Euro Area -4.4 1.9 1.6 -0.6 -0.4 0.9 1.4 1.8

Russia -7.8 4.5 4.3 3.4 1.3 0.5 0.3 0.4


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Development ChallengesPoverty and Shared prosperity

0.410

0.412

0.414

0.416

0.418

0.420

0.422

0.424

10

11

12

13

14

15

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poverty rate, % Baseline scenarioOptimistic scenario Pessimistic scenarioGini (rhs)


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Policy Risks

The stalling of structural reformsrepresents a down-side risk to Russias

medium- and long-term outlook.

Structural constraints in the economycould diminish the effectiveness of

the Central Banks disinflation policy.

In the current environment of elevatedinflation risk, it will be particularly

important to adhere to fiscal prudency.


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Special Focus NotePaths to Diversified Development in Russia


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Russia reached its potential output

Russias potential growth (in percent) may be slowing.

0

1

2

3

4

5

6

7

2009 2010 2011 2012 2013

RussiaBRICS Average (excluding Russia)EU11 Average (excluding Croatia, Latvia and Luthuania)Resource Rich* Average


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How to reverse the slowdown in potential output?In the boom years growth became gradually less driven by productivity increases.

Total factor productivity growth growth slowed as productivity gains from first generation

reforms wore off

-15

-10

-5

0

5

10

15

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Percent

Total Factor Productivity

Capital

Labor

GDP Growth


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The National Asset Approach

Assets can be classified into three categories: natural resources, built capital, and national institutions.

Natural resources - minerals, arable land, and forests - are largely endowed, but technological progress and better

management can radically alter their economic value.Built capital - physical and human capital, in the form of adequate infrastructure and a healthy and skilled labor force.

National institutions - the regulations and mechanisms that a country has put in place to manage resource rents,

deliver public services - such as roads, security, health care, and education - and regulate private enterprise.

Three ways to integrate and grow: export product share, by factor intensity


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Russias current asset base: abundant natural resources, good

human capital, improving infrastructure, but weak institutions

Russias asset portfolio is heavy on natural resources: distribution of wealth

by assets, 2005, in percent.

43

24

33

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AUS AZE CAN KAZ MYS NLD NOR RUS SAU TKM UKR ARE USA UZB VEN

Natural capital Produced capital Intangibles


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Abundant natural resourcesRussia is one of the richest countries in the world in subsoil wealth:Subsoil

natural resource wealth per capita, 2005, in constant 2005 US$.

118,111

99,706

86,620

32,468

24,238

24,090

20,328

20,268

12,644

10,102

9,563

9,194

7,061

5,365

3,940

3,478

1,970

982

United Arab Emirates (3)

Norway (4)

Saudi Arabia (6)

Turkmenistan (12)

Russian Federation (13)

Venezuela, RB (14)

Australia (15)

Kazakhstan (16)

Canada (19)

Malaysia (22)

Chile (23)

Azerbaijan (24)

Netherlands (26)

Uzbekistan (28)

Nigeria (30)

United States (33)

Ukraine (44)

Botswana (55)


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Improving infrastructure

0

5

10

15

20

25

30

35

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Russia

BRICS Average (excluding Russia)EU11 Average

Resource Rich* Average3

3

4

4

5

5

6Russia

BRICS Average (excluding Russia)

Investment rates have improved but remain lower than comparators: Grosscapital formation, percent of GDP

Quality of infrastructure has been improving: Global Competitiveness Index:Quality of infrastructure, score 1 (low) to 7 (high)


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Good Human Capital

NORAUS USA

NLDCAN

CHI UAE

RUS

SAU

MYSKAZVEN

UKR AZE

TKMUZB

BWA

NIGy = 7E-06x + 0.6294

R = 0.7405

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0 10,000 20,000 30,000 40,000 50,000

HDIValue,

2012

GDP per capita, PPP (constant 2005 international $), 2012

2.0

2.5

3.0

3.5

4.0

4.5

Russia

BRICS Average (excluding Russia)

EU11 AverageResource Rich* Average

The quality of human capital is higher than predicted by income by capita.

But there is a mismatch between education achievements and employer perception of

the quality of education: Global Competitiveness Index: Quality of education, score 1(low) to 7 (high)

k f l l


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But Weak Institutions for Managing Volatility,

Providing Public Services and Regulating Enterprises

The quality of institutions lags in several dimensions:

World Governance Indicators, 1996-2012 average

Average of

Governance

Indicators

Government

Effectiveness

Control of

Corruption

Political

Stability

and

Absence of

Violence

Regulatory

Quality Rule of Law

Voice and

Accountability

Netherlands 1.71 1.89 2.15 1.11 1.79 1.75 1.58

Norway 1.71 1.92 2.12 1.29 1.39 1.91 1.6

Canada 1.62 1.87 2.04 1.01 1.59 1.73 1.5

Australia 1.59 1.75 1.98 0.98 1.63 1.75 1.45

United States 1.32 1.64 1.51 0.44 1.54 1.55 1.22

Chile 1.15 1.21 1.43 0.56 1.48 1.25 0.98

Botswana 0.7 0.54 0.89 0.97 0.61 0.61 0.58

United Arab Emirates 0.49 0.85 0.84 0.86 0.66 0.54 -0.81

Malaysia 0.36 1.06 0.27 0.2 0.53 0.5 -0.39

Saudi Arabia -0.36 -0.2 -0.23 -0.29 0.03 0.16 -1.62

Ukraine -0.58 -0.68 -0.92 -0.21 -0.53 -0.85 -0.27Kazakhstan -0.63 -0.6 -0.98 0.16 -0.4 -0.89 -1.06

Russian Federation -0.73 -0.47 -0.93 -1.05 -0.33 -0.89 -0.7

Azerbaijan -0.88 -0.8 -1.08 -0.79 -0.59 -0.88 -1.13

Venezuela, RB -1.02 -0.98 -1.01 -1.12 -1.07 -1.33 -0.62

Nigeria -1.14 -1.02 -1.11 -1.73 -0.89 -1.24 -0.84

Turkmenistan -1.32 -1.47 -1.25 0.15 -1.99 -1.42 -1.94

Uzbekistan -1.34 -1 -1.07 -1.16 -1.66 -1.27 -1.91

W k I tit ti


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Weak Institutions

for regulating enterprises

The regulatory environment is highly restrictive of competition: Product marketregulation, OECD Product Market Regulation Index

1.52

-0.5

0.5

1.5

2.5

3.5

4.5

Product Market Regulation (PMR) State Control Barriers to Enterpreneurship Barriers to Trade and Investment

Russia 2008 OECD Average 2008 OECD Average 2013

b l i i A f li


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Rebalancing Russias Asset Portfolio: Transparent

Rules, Better Public Investment and Competition

More transparent rules for investorswould enhance the contribution of

natural resources to Russias growth.

Better prioritization of expenditures

and focus on results will strengthenthe quality of public service provision.

Increased private participation couldimprove the quantity and quality of

the delivery of public services.

Effective competition policy willincrease the productivity of the

business sector.32


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Thank you!

For more information about the World Bank and its

activities in the Russian Federation, please visit:

http://www.worldbank.org/en/country/russia

If you would like to be access our Russia Economic Reports,

please visit:

www.worldbank.org/eca/rer

For questions and comments relating to this publication,

please contact [email protected].
http://www.worldbank.org/en/country/russiahttp://www.worldbank.org/eca/rermailto:[email protected]:[email protected]://www.worldbank.org/eca/rerhttp://www.worldbank.org/en/country/russiahttp://www.worldbank.org/en/country/russia


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EXTRA SLIDES


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Baseline Scenario Projections

Main economic indicators2012 2013 2014 2015 2016

GDP growth (%) 3.4 1.3 0.5 0.3 0.4

Consumption growth, percent 6.8 3.5 2.1 0.5 0.6

Gross capital formation growth, percent 0.6 -6.0 -8.1 0.3 1.0

General government balance (percent ofGDP)

0.4 -1.3 -1.1 -2.1 -1.0

Current account (US$ billions) 71.3 34.1 62.8 57.9 54.3

percent of GDP 3.6 1.6 3.1 2.8 2.5

Capital account (US$ billions) -32.3 -62.2 -113.0 -60.1 -55.6

percent of GDP -1.6 -3.0 -5.6 -2.9 -2.6Oil price assumption (US$ per barrel) 105.0 104.0 102.9 99.5 100.1

Gross Domestic Product (mp), bln Rub 62218.4 66755.3 71785.3 76320.7 81223.6

CPI inflation 5.1 6.8 8.0 7.0 5.0


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Optimistic Scenario Projections

Main economic indicators

2012 2013 2014 2015 2016

GDP growth (%) 3.4 1.3 0.5 0.9 1.3

Consumption growth, percent 6.8 3.5 2.2 0.9 1.5

Gross capital formation growth, percent0.6 -6.0 -8.1 1.5 2.5

General government balance (percent of GDP) 0.4 -1.3 -1.1 -2.3 -1.2


percent of GDP 3.6 1.6 3.1 2.0 1.3


percent of GDP -1.6 -3.0 -5.6 -2.1 -1.1

Oil price assumption (US$ per barrel) 105.0 104.0 102.9 99.5 100.1


CPI inflation 5.1 6.8 8.0 6.0 5.0


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Pessimistic Scenario Projections

Main economic indicators

` 2012 2013 2014 2015 2016

GDP growth (%) 3.4 1.3 0.4 -0.9 -0.4

Consumption growth, percent 6.8 3.5 2.0 -0.3 -0.3

Gross capital formation growth, percent0.6 -6.0 -8.5 -4.3 -1.2

General government balance (percent of GDP) 0.4 -1.3 -0.7 -2.8 -1.2


percent of GDP 3.6 1.6 3.6 4.5 4.3


percent of GDP -1.6 -3.0 -6.6 -4.5 -4.3Oil price assumption (US$ per barrel) 105.0 104.0 102.9 99.5 100.1


CPI inflation 5.1 6.8 8.0 10.0 8.0


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Fiscal Impact: Balances under Pressure

-15

-10

-5

0

5

10

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014

Non-oil revenues, percent of GDP Oil revenues, percent of GDP

Non-oil balance, percent of GDP Total balance, percent of GDP

Federal budget revenue and balance, 2007-2014, percent of GDP

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