Basic statistics of the Russian Federation
The Russian economy is recovering from the severe 2008/9 recession, but has not yet reached pre-crisis peak activity levels. Inflation is high, although again on a declining path, not least because of the excellent harvest this year. Trend growth of around 4% is not fully exploiting opportunities provided by Russia’s rich endowment of natural resources and the high skill level of its population. This OECD Economic Survey makes recommendations for a well balanced combination of further strengthened macroeconomic policy settings, decisive improvements in the business environment, including determined efforts to reduce corruption and strengthen the rule of law, and increasing energy efficiency. Such a combination could generate synergies which will help to accelerate overall convergence and improve living standards for the Russian population.
Assessment and recommendations
In recent years Russian top policy-makers have increasingly emphasised that joining the ranks of the most advanced market-oriented countries requires modernisation of the economy. There is a broad consensus that it will not be possible in the long run to rely on continuous improvements in the terms of trade and the mobilisation of idle resources to sustain rapid economic growth. Increases in output will need increasingly to come from making better use of the available factors of production as well as new ways of producing goods and services. This means creating an environment in which innovation and investment, including in human capital, can flourish, something which will require further reforms in many areas. The current initiative to modernise the Russian economy marks a break with the past, with the approach being to achieve modernisation by making it attractive to live, study, work and innovate in Russia, with the development of democracy, including stronger participation of civil society, and a cleaner environment.
Modernisation of the Russian economy
By OECD standards Russia’s economy is overall still relatively backward, exhibiting low productivity and per capita incomes, high inflation, extreme inequality, poor outcomes as regards health and the environment and low access to and use of information and communication technologies. Across a range of macroeconomic and social indicators there has been clear improvement in recent years, however, and in general, Russia is already within the range of OECD countries, not an outlier. Moreover, in some respects Russia exhibits relative strengths, such as its negative net public debt and high tertiary education enrolment rates. As regards structural policies, progress towards OECD standards and practices can generally be discerned, although gaps remain large in some areas, and the government’s priorities for modernising the economy are for the most part well placed. The main potential pitfall in the drive for modernisation is overemphasising high-tech activities and especially in using public resources to encourage them. Modernisation should be a broad agenda linking many areas: better education, health, public administration and environmental policies are all part of creating a favourable climate for innovation, and a better business climate is also vital.
Improving the business climate
Although improving the business environment in Russia has been a major priority of public policy in recent years, numerous indicators suggest that it remains poor in international comparison, with no clear overall trend. Russia’s poor business climate is hindering the modernisation and diversification of the economy through several channels including weaker competition, slower financial development and lower foreign investment and trade than otherwise. Achieving a decisive improvement in the business climate will require a range of actions to combat corruption, strengthen the rule of law, reduce the role of the state in the economy, lighten administrative burdens on firms, enforce competition law and liberalise the regimes for trade and investment.
Strengthening the fiscal framework to enhance resilience to external shocks and safeguard sustainability
Since the beginning of the transition process, Russia has progressively built modern fiscal institutions and fundamentally reformed its tax system and fiscal framework. Moreover, fiscal outcomes improved markedly in the past dozen years, reflecting rising oil prices, strong output growth and a commitment to restrain spending of windfall gains, supported by an institutional mechanism to manage resource wealth. The government paid off most of its debt and accumulated assets in two oil funds, which financed the large fiscal stimulus during the global crisis. However, fiscal policy has not sufficiently insulated the economy from oil price fluctuations. The surge in expenditure during the boom preceding the crisis, coupled with the fiscal stimulus during the crisis, left Russia with a large non-oil deficit, making it vulnerable to a sharp fall in oil prices. Moreover, the large non-oil deficit implies suboptimal saving from oil revenues and puts upward pressure on the real exchange rate, hindering diversification of the economy. There is therefore a need for mediumterm consolidation, even though the budget will record a small surplus this year, with only moderate deficits foreseen over the next three years. To reduce the procyclical bias of fiscal policy that is re-emerging in the current high-oil-price environment, and to assist in the consolidation of the budget position, the non-oil deficit target in the Budget Code that was suspended during the crisis should be restored and complemented with binding ceilings on the annual growth in expenditures. Long-term fiscal pressures arising from demographic trends should be addressed in the first instance by equalising the pensionable ages for men and women and gradually raising the pensionable age in line with gains in longevity.
Moving to a new framework for monetary policy
Consumer price inflation has been on a long downtrend since 1998, but Russia still experiences inflation rates that are well above those in advanced countries and relatively high among middle-income economies. The monetary policy framework in place until the onset of the global crisis combined inflation objectives with an aim of limiting real appreciation of the rouble, and the tension between these goals in an environment of large current account surpluses and occasionally strong private capital inflows resulted in a persistent tendency to exceed the inflation target. Since the global crisis, a new framework has emerged, featuring more exchange rate flexibility and increased emphasis on the CBR’s policy rates. Communication of policy decisions has also improved. The CBR should build on recent achievements to move in the direction of a flexible inflation-targeting regime. Such a move would involve spelling out price stability as the primary objective of monetary policy, streamlining the unusually high number of CBR credit instruments, and further limiting foreign exchange interventions. Another important area for improvement is monetary policy transparency, where Russia still shows up poorly in international comparisons.
Increasing energy efficiency as a means to achieve greener growth
Although energy use has declined substantially in absolute terms since the Soviet era, Russia still has one of the most energy-intensive economies in the world. The high degree of energy intensity, combined with relatively carbon-intensive energy use, results in Russia accounting for a disproportionately large share of global carbon emissions: it is the sixth largest economy in the world in PPP terms but the fourth largest emitter of greenhouse gases. Moreover, low energy efficiency contributes to poor air quality, and Russia has one of the highest rates of premature mortality attributable to air pollution in the world. The scope for profitable energy efficiency investment in Russia is huge, and indeed a good deal is already happening, but a number of constraints and market failures make this process slower than optimal. This means that improving energy efficiency should be a top priority for government policy in Russia. Ambitious official targets for energy efficiency gains have been established, but so far the policy measures identified appear insufficient to meet them. The clearest imperative is to remove government interventions that result in below-market prices and to introduce new policy instruments to ensure that negative externalities associated with fossil fuel combustion are reflected in prices. The installation of meters for energy use should also be speeded up, and there is scope for greater sophistication in tariff structures to allow marginal costs to be better reflected in prices facing consumers. A number of other complementary measures may be warranted, but should be subject to careful cost-benefit analysis.
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