The Long Journey to Recovery Russia Economic Report April 216 Edition No. 35
1 2 3 The anticipated recovery was delayed and the economy adjusted through a sharp income drop. The government s policy response has thus far facilitated economic adjustment. Opportunities arose to improve the competitiveness of the non-resource sector. 4 The Long Journey to Recovery Outlook risks are tilted to the downside and adjustment challenges are shifting. The adjustment to the severe global oil-price shock and the economic sanctions caused an estimated 1 percent drop in gross domestic income, which sapped consumer demand and discouraged investment. A second oil-price shock in August 215 delayed the anticipated economic recovery and real GDP contracted by an estimated 3.7 percent in 215. External balances adjusted smoothly, helped by the central bank s adherence to the free float. Due to the flexible exchange rate, the fiscal impact of the adjustment was less severe for Russia than it was for other oil exporters, though a fiscal consolidation plan remained necessary. Leveraging emerging opportunities to develop a broader and more sophisticated product and export mix will require a substantial increase in private investment. The current perhaps temporary price advantage generated by the depreciation may be not be sufficient to attract investors unless it is accompanied by sustained improvements in Russia s investment climate. The World Bank s current baseline scenario anticipates a further contraction of 1.9 percent in 216 with poverty increasing to 14.3 percent before growth is expected to resume at 1.1 percent in 217. The economy faces an uncertain global recovery, and the focus of its adjustment challenges is shifting to fiscal and financial sector restructuring.
Recent Economic Developments: Russia searched for a way out of the recession GDP Growth, y-o-y and q-o-q sa, Percent 5 3 1 1.2 1.5 1.2.8.1.5.4.1 (.6) -1-3.8.6.2.2.3.5 (.7) (1.2) (1.3) (.6) (.7) -5 GDP growth, y-o-y GDP growth, q-o-q, sa
Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 A sharp drop in gross domestic income weakened consumer demand and investment 15 1 5-5 -1-15 -2 Demand Composition of GDP Growth, y-o-y, Percent -25 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth
Policies were supportive: the free float allowed Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 external balances to adjust smoothly The Real Effective Exchange Rate, the Oil Price (Brent) and Imports, December 213=1 12 11 1 9 8 7 6 5 4 3 Import of goods, Dec 13 = 1, SA Brent price, Dec 13 = 1 REER, Dec 13 = 1
1.1.214 6.2.214 6.3.214 4.4.214 6.5.214 4.6.214 4.7.214 1.8.214 29.8.214 26.9.214 24.1.214 25.11.214 23.12.214 29.1.215 27.2.215 28.3.215 25.4.215 28.5.215 26.6.215 24.7.215 21.8.215 18.9.215 16.1.215 14.11.215 12.12.215 19.1.216 and helped Russia to protect precious foreign exchange and fiscal reserves... Exchange-Rate Dynamics in Russia, Kazakhstan and Azerbaijan, (214 = 1) 12 1 8 6 4 2 12 1 8 6 4 2 USD/RUB USD/AZN USD/KZT
while creating opportunities for Russia s tradeable sector Growth in Tradables, y-o-y, Percent Investment Growth by Sector, 215, y-o-y, Percent 1 5-5 2 15 1 5-5 -1-15 -2-16.3-11.8-11.7-1.9-9.5-3.4 2.9 3.4 1.7 12.2 14. -1 212 213 214 215 Agriculture Mineral extraction Manufacturing
yet leveraging emerging opportunities for the non-resource sector appears to be difficult Composition of Nonfuel Exports, 214 Nonfuel Exports by Destination, 214 Machinery & Transportation 15% Miscellaneous 12% Food & Agriculture 14% Minerals (excl. mineral fuels) 3% noncu-cis 11% Rest of Europe, incl. Turkey 9% Belarus 6% China 7% Chemicals 19% Rest of Asia 11% EU28 3% Metals 29% Wood 8% ROW 6% NorthAmerica 4% MENA 7% Kazakhstan 9%
and will require an increase in investment and improvements in business conditions. Destination of Nonfuel Exports by Type, 214 Miscellaneous Machinery & Transportation Metals Wood Chemicals Minerals (excl. mineral fuels) Food & Agriculture Belarus China EU28 Kazakhstan MENA NorthAmerica ROW Rest of Asia Rest of Europe noncu-cis % 2% 4% 6% 8% 1%
Growth and Poverty Outlook: An uncertain path ahead Real GDP Growth Projection, y-o-y, Percent 4 3 2 1-1 -2 3.4 1.3.7 -.7-1.9 1.7 2. 1.1.5 2. 1.8 1.7-3 -2.5-4 -5-3.7 212 213 214 215 216 217 218 Lower-bound scenario Upper-bound scenario Baseline scenario Early sanctions lift scenario
An alternative baseline reflects the upside potential of an earlier end to sanctions Growth Composition With and Without Economic Sanctions in 217 3 2 1-1 1.1-1.8.1.9.1 1.1 1.8 1.2 1.1 -.5 3 2 1-1 1.1-1.8 2. 1.7. 1.5 1.4.5.8 -.5-2 -3-1.2-1.9-2 -3-1.2-1.9-4 216 217 218-4 216 217 218 Consumption Investment Net exports GDP growth Consumption Investment Net exports GDP growth
The recession is reversing achievements in poverty reduction Poverty Rate Projections, Percent 16 15 15.2 14.7 15.2 14.8.424.422 14 13 12 13.3 13.4 13 12.5 12.7 13.4 14.2 14.2 13.6 13.4 13.5 12.6.42.418.416.414 11 1 11.2 1.7 1.8 26 27 28 29 21 211 212 213 214 215 216 217 218.412.41 Poverty rate, % Baseline scenario Lower bound scenario Upper-bound scenario Early sanctions lift scenario Gini (rhs)
Risk are tilted to the downside and adjustment challenges are shifting Policy space for fiscal adjustment has narrowed as fiscal buffers declined, requiring a strategic expenditure restructuring and less reliance on oil revenues. Financial sector stability will be essential to the recovery of private investment, yet financial stability in the near term will be tested by a number of factors. Economy-wide investment constraints include administrative barriers, high transportation and logistics costs, and unequal access to factors of production and markets.
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Policy uncertainty is the biggest obstacle to investment and consumption decisions Business Confidence Surveys in Key Constraints to Manufacturing, Manufacturing Rosstat Business Survey, Percent 1 4 3 Weak domestic demand -1 2-2 1-3 High tax level -4-1 -5 High policy uncertainty -2-6 -7-3 High interest rates -8-4 -9-5 Lack of financial resources 1 2 3 4 5 6 Rosstat Business Confidence (LHS) PMI (RHS) Jan-Mar, 216 Jan-Mar, 215
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EXTRA SLIDES
Baseline Scenario Projections Main economic indicators 213 214 215 216 217 218 Oil price (US$ per barrel, WB average) 14. 97.6 51.9 37. 48. 51.4 GDP growth, percent 1.3.7-3.7-1.9 1.1 1.8 Consumption growth, percent 3.1 1.4-7.9-2.5.1 1.5 Gross capital formation growth, percent -7.3-6.1-18.3-6.4 6.4 8. General government balance, percent of GDP -1.2-1.1-3.5-4.6-2.3-2.2 Current account (US$ billions) 34.8 58.3 69.5 41.3 36.3 18.4 Current account, percent of GDP 1.6 2.8 5.2 3.5 2.4 1. Capital and financial account (US$ billions) -56.9-173.8-72.9-41.2-36.4-18.4 Capital and financial account, percent of GDP -2.5-8.5-5.5-3.5-2.4-1. CPI inflation (average) 6.8 7.8 15.5 7.6 4.8 4.
Lower-bound Oil Price Scenario Main economic indicators 213 214 215 216 217 218 Oil price (US$ per barrel, WB average) 14. 97.6 51.9 3. 4. 45. GDP growth, percent 1.3.7-3.7-2.5.5 2. Consumption growth, percent 3.1 1.4-7.9-3.6-1. 1. Gross capital formation growth, percent -7.3-6.1-18.3-9.7 3.4 7.9 General government balance, percent of GDP -1.2-1.1-3.5-5.6-3.6-2.7 Current account (US$ billions) 34.8 58.3 69.5 5.4 45.7 28.8 Current account, percent of GDP 1.6 2.8 5.2 4.6 3.2 1.7 Capital and financial account (US$ billions) -56.9-173.8-72.9-5.5-45.6-28.8 Capital and financial account, percent of GDP -2.5-8.5-5.5-4.6-3.2-1.7 CPI inflation (average) 6.8 7.8 15.5 8.5 6. 5.
Upper-bound Oil Price Scenario Main economic indicators 213 214 215 216 217 218 Oil price (US$ per barrel, WB average) 14. 97.6 51.9 5. 53. 55. GDP growth, percent 1.3.7-3.7 -.7 1.7 2. Consumption growth, percent 3.1 1.4-7.9-1.2.8 1.7 Gross capital formation growth, percent -7.3-6.1-18.3-2.1 8.6 1.1 General government balance, percent of GDP -1.2-1.1-3.5-3.9 -.9 -.9 Current account (US$ billions) 34.8 58.3 69.5 49.8 35.4 18.4 Current account, percent of GDP 1.6 2.8 5.2 3.5 2.1 1. Capital and financial account (US$ billions) -56.9-173.8-72.9-5. -35.3-18.5 Capital and financial account, percent of GDP -2.5-8.5-5.5-3.5-2.1-1. CPI inflation (average) 6.8 7.8 15.5 7. 4.5 4.
Central Bank addressed successfully Russia s CPI inflation Components, y-o-y, Percent 25 2 15 1 5 a difficult policy tradeoff Key Policy Rates, Percent 18 16 14 12 1 8 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Core inflation CPI inflation Food inflation Non-food inflation Services inflation Sep-213 Mar-213 Apr-214 Jul-214 Nov-214 Dec-214 Feb-215 Mar-215 May-215 Jun-215 Aug-215 Sep-215 Dec-215 Jan-215 Mar-16 6 4
A fiscal consolidation plan was announced which focuses on expenditure reduction Federal Budget Revenues and Budget Balances, Percent of GDP Federal Primary Budget Expenditures, Percent of GDP 25 2 15 5.9.6 4.1-5.9-4.1.8 -.1 -.5 -.4-2.4 1 5 25 2 15 17.6 18. 24.4 21.4 19.1 2.2 19.6 18.5 18.8 1 5-6.4-13.5-12.7-9.6-5 -1.4-1.3-1.9-9.7-1 1 5 27 28 29 21 211 212 213 214* 215* Non-oil revenues, percent of GDP Oil revenues, percent of GDP Non-oil balance, percent of GDP (RHS) Total balance, percent of GDP (RHS) -15 Note: *Due to methodological changes in nominal GDP, figures for 214 and 215 are not comparable with those shaded for 213 and earlier. 27 28 29 21 211 Social policy (inc. transfers to Pension Fund) 212 213 National economy 214* 215* National defense National security State administration Intergovernmental transfers Education Health & sports Other Federal budget primary expenditures
21Q1 21Q2 21Q3 21Q4 211Q1 211Q2 211Q3 211Q4 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 Global oil prices and all commodity-price indices are expected to decline in 216 Global Crude Oil Supply Growth, mb/d Global Demand Growth, mb/d 5 4 3 2 1 Thousand mb/d Iran Libya Syria Yemen United States Net Changes mb/d, 4 growth year over year 2 OECD China Other Non-OECD -1-2 -2-3 -4