81688
The World Bank in the Russian Federation
RUSSIA ECONOMIC REPORT
No.30 | September 2013
Structural Challenges To Growth Become Binding
Russia Economic Report
Structural Challenges To Growth Become Binding
I. Recent Economic Developments
II. Economic Outlook
III. In Focus: Volatility in Russia - Obstacle to Firm Survival and Diversification in Manufacturing
This report is produced twice a year by World Bank economists of the Europe and Central Asia Region Poverty Reduction and
Economic Management Department. The team was led by Birgit Hansl (Lead Economist and Country Sector Coordinator for
Economic Policy in Russia, bhansl@worldbank.org) and consisted of the following members: Sergei Ulatov (Senior Economist),
Stepan Titov (Senior Economist), Olga Emelyanova (Research Analyst), Mikhail Matytsin (Consultant), John Pollner (Lead
Financial Officer), Lawrence Kay (Сonsultant), Tehmina Khan (Economist), John Baffes (Senior Agricultural Economist) and
Irina Rostovtseva (Team Assistant). Alvaro Gonzales (Lead Economist), together with Leonardo Iacovone (Senior Economist)
and Hari Subhash (Consultant) authored the focus note on volatility, firm survival and diversification in manufacturing. Peer
reviewers were Wolfgang Fengler (Lead Economist), Raju Singh (Lead Economist) and Denis Medvedev (Senior Economist). The
report was edited by Christopher Pala (Сonsultant), and the graphic design was provided by Robert Waiharo (Сonsultant). We
are grateful for advice from discussions with Michal Rutkowski (Country Director for Russia), Roumeen Islam (Acting Director
for Poverty Reduction and Economic Management in the Europe and Central Asia Region), Carolina Sanchez (Sector Manager
for Russia, Ukraine, Belarus, and Moldova), Lada Strelkova (Country Program Coordinator for Russia), Zeljko Bogetic (Lead
Economist in the Europe and Central Asia Region) and the IMF team for Russia, led by mission chief Antonio Spilimbergo.
TABLE OF CONTENT
Abbreviations and Acronyms .................................................................................................... i
Executive Summary ....................................................................................................................... iii
I. Recent Economic Developments ........................................................................................... 1
1.1 Global Trends — Uncertainty and Volatility Prevailing .............................................................. 2
1.2 Growth — Moderation to a New Trajectory .............................................................................. 3
1.3 Labor Market — Widening Productivity Gap ............................................................................. 8
1.4 Balance of Payment — Deteriorates as Exports Weaken ........................................................... 11
1.5 Monetary Policy and Financial Sector — Increased Currency and Credit Risks ......................... 15
1.6 Government Budget — Consolidation as Fiscal Revenues Plummet ......................................... 17
II. Economic Outlook .................................................................................................................... 21
2.1 Global outlook ........................................................................................................................... 22
2.2 The outlook for Russia ............................................................................................................... 23
2.3 Risks to the outlook ................................................................................................................... 26
Part III. Volatility in Russia: Obstacle to Firm Survival and ........................................ 27
Diversification in Manufacturing
3.1 Introduction ............................................................................................................................... 28
3.2 Comparative analysis of the concentration of Russian industrial production ............................ 29
and its potential consequences
3.3 Volatility of Russia’s sector-level output relative to other economies ....................................... 32
3.4 The nature of volatility compared with other economies ......................................................... 33
3.5 Determinants for firm survival in Russia .................................................................................... 35
3.6 Conclusion .................................................................................................................................. 37
ANNEX: Main indicators ................................................................................................................ 38
LIST OF Figures
Figure 1: Global industrial production and trade ................................................................................. 2
Figure 2: Gross capital flows to developing and emerging countries .................................................. 3
Figure 3: Oil prices and OECD inventories ........................................................................................... 3
Figure 4: World GDP growth, y-o-y, percent ........................................................................................ 4
Figure 5: Year-on-year growth composition, percent .......................................................................... 4
Figure 6: Manufacturing and business surveys .................................................................................... 5
Figure 7: Consumption and consumer confidence .............................................................................. 5
Figure 8: Tradable sector growth, percent, y-o-y ................................................................................ 6
Figure 9: Non-tradable sector growth, percent, y-o-y ......................................................................... 6
Figure 10: Unemployment rate and capacity utilization, 6 months moving average ............................ 7
Figure 11: Quarterly year-on-year growth composition, percent .......................................................... 7
Figure 12: GDP growth composition, percent, y-o-y .............................................................................. 7
Figure 13: Beveridge curve, percent ...................................................................................................... 8
Figure 14: Number of employed and economically active population, million people ......................... 8
Figure 15: Gap between real wages and productivity growth by sectors, y-o-y .................................... 9
Figure 16: Contribution to income growth, percent, y-o-y .................................................................... 9
Figure 17: Real income dynamics, y-o-y growth .................................................................................... 10
Figure 18: Gap between real wages and productivity growth by sectors, y-o-y growth ....................... 10
Figure 19: Share of employment in the public sector ........................................................................... 10
Figure 20: Trade balance and oil prices ................................................................................................. 11
Figure 21: Gap between real wages and productivity growth by sectors, y-o-y ................................... 12
Figure 22: Current account balance, percent of GDP ............................................................................ 12
Figure 23: Current account financing, percent of GDP .......................................................................... 12
Figure 24: CPI inflation by component, percent, yoy ............................................................................ 15
Figure 25: Interest rates, percent .......................................................................................................... 15
Figure 26: Exchange rate and its bilateral band ..................................................................................... 16
Figure 27: Credit growth, percent, yoy .................................................................................................. 17
Figure 28: Non-performing loans and loan loss provisions, percent of total loans ............................... 17
Figure 29: Reserve and National Welfare Funds in 2008-2030, percent of GDP ................................... 20
Figure 30: Growth of world oil demand by quarter 2003-2014 change, y-o-y ...................................... 22
Figure 31: Demand sources of growth by quarter 2008-2013, percent change, y-o-y .......................... 24
Figure 32: Projected Sources of Growth by Quarter 2008-2013, percent change, y-o-y ....................... 24
Figure 33: Poverty rate forecast ............................................................................................................ 25
Figure 34: Petroleum and gas increasingly dominate Russia’s exports ................................................. 28
Figure 35: The Russian economy is dominated by larger firms ............................................................ 30
Figure 36: Older firms in Russia employ fewer workers and earn less sales revenue than.................... 31
similar firms in other economies
Figure 37: The annual growth in output of Russian sectors exhibit relatively higher variances ............ 32
—more volatility
Figure 38: The average slump in Russia is deeper than in other economies ......................................... 34
Figure 39: The average slumps last longer in Russia .............................................................................. 35
Figure 40: A greater proportion of slumps last longer in Russia (years) ................................................ 35
LIST OF Tables
Table 1: Poverty rates in Russia, percent ............................................................................................ 11
Table 2: Balance of payments, 2007–2013, US$ billions .................................................................... 13
Table 3: Net capital flows, 2007–2013, US$ billions ........................................................................... 13
Table 4: Russia’s external debt, US$ billions ...................................................................................... 13
Table 5: Projected debt payments in 2013-2014, principal + interest ................................................ 14
Table 6: Export of goods, percent ...................................................................................................... 14
Table 7: Federal budget 2011-2013, percent of GDP ......................................................................... 18
Table 8: Consolidated budget and consolidated sub-national budget in 2012-2013, percent of GDP ..... 18
Table 9: Medium-term projections and long-term government budget forecast for ......................... 19
2014-2016 and up to 2030, percent of GDP
Table 10: Global growth assumptions – real gdp growth, percent ..................................................... 22
Table 11: Main economic indicators, baseline projection, percent ...................................................... 24
Table 12: ANOVA partial sum of squares ............................................................................................. 33
LIST OF Boxes
Box 1: Russian business and consumer confidence surveys ............................................................ 5
Box 2: Growth trends in the first two month of Q3 2013 ................................................................ 6
Box 3: Is Russia reaching its current growth potential? ................................................................... 7
Box 4: Cross-country comparison of public sector employment ..................................................... 11
Box 5: Russia-Ukraine trade relations .............................................................................................. 14
Box 6: Recent trends in credit growth and market access ............................................................... 17
Box 7: The new medium-term budget policy document ................................................................. 19
ABBREVIATIONS AND ACRONYMS
CBR Central Bank of Russia
CI Confidence Interval
CIS Commonwealth of Independent States
CPI Consumer Price Index
EBRD European Bank for Reconstruction and Development
ECA Europe and Central Asia
EU European Union
FDI Foreign Direct Investment
GDP Gross Domestic Product
NPL Non-Performing Loan
OECD Organization for Economic Cooperation and Development
PMI Purchasing Managers Index
RBC Rosstat’s Business Confidence
RCC Rosstat’s Consumer Confidence
SAAR Seasonally Adjusted Average
SMEs Small and Medium-Size Enterprises
UNIDO United Nations Industrial Development Organization
US United States
Russia Ecomomic Report | Edition No. 30 i
EXECUTIVE SUMMARY
R ussia’s economy lost steam in 2013. Growth
slowed to 1.4 percent in the first half (H1) of
2013, compared to 4.5 percent in H1 2012. This
Russia experienced greater capital outflows
since May. Exchange-rate volatility increased
in June, forcing the Central Bank of Russia to
report examines in its first part several aspects gradually raise the bilateral currency corridor
of the economic slowdown. It shows that the up and considerably scale up its interventions.
slowdown was largely the result of weaker With respect to the likely impact of a withdrawal
demand, which was due to a combination of of quantitative easing policies, we expect the
external and domestic factors, some of which resulting adjustments in capital flows to be
are cyclical and others structural. A large part of temporary, though they might expose domestic
the cyclical component is related to Russia’s high vulnerabilities during the transition period.
dependence on oil and gas exports and with it, Although access to the capital market could be
its exposure to commodity-price volatility. The somewhat restricted, we do not expect that
structural challenges to the Russian economy Russian banks and/or private companies would
and its growth, such as non-competitive sectors face major limitations.
and markets, are another important factor to
consider in the economic slowdown. In fact, Domestic demand continues to be subdued.
structural issues recently moved to the forefront Both investment and consumption trends
of policy discussions as the economy seems to disappointed in H1 2013. Investment activities
operate close to its current capacity limit. This had weakened during the 2008-2009 crisis and
has important implications for our outlook, only exceeded these pre-crisis levels in 2012. They
which is presented in part two of the report. The tapered sharply as large infrastructure projects
special focus note in part three of this report for the Winter Olympic Games in Sochi and the
discusses the link between growth patterns Northern Stream pipeline neared completion.
in Russia, firm survival and diversification in During the first quarter (Q1) 2013, the decline
manufacturing and will also highlight the impact in investment demand was the main cause for
of limited competition as a structural constraint. growth deceleration. Added to this, we observed
slower growth in consumption. Consumption,
Russia’s external demand remained weak. Oil the main growth driver in the past, expanded at
prices retreated and stabilized below US$ 100/ a much slower pace than a year ago, despite low
bbl during the second quarter of 2013, while unemployment levels and increases in wages
global trade lost momentum in recent months. and credit. Some of the slowdown in consumer
The current account deteriorated as the trade demand can be attributed to the higher burden
surplus melted. Lower oil revenues to the federal of interest payments for households as a result
budget increased fiscal pressures, invigorating of the recent credit boom, along with stubbornly
the domestic discussion on the fiscal buffer, in high inflation in the first half of 2013. It also
particular the optimal size of the Reserve Fund reflects a lack of confidence rooted in lingering
and prudent investment options for the National uncertainty on how the global economy and
Welfare Fund. In addition, in anticipation of specifically, the Russian economy will play out.
the scaling back of the US monetary stimulus, While investors were already in a wait-and-see
Russia Ecomomic Report | Edition No. 30 iii
Executive Summary
mode for a while, consumers now appear to structural challenges are becoming now binding
have joined them and the players in the Russian constraints for its growth and would need to be
economy are sitting on the fence. addressed to lift the economy’s growth potential.
Russia’s output gap is nearly closed. Despite the The World Bank’s outlook for Russia changed.
recent economic slowdown, capacity utilization These factors together led to downward
stood in H1 2013 near 80 percent. This is close revision of our growth projection for Russia to
to the level observed when the economy was 1.8 percent in 2013. Nevertheless, in 2014, we
expanding rapidly in the pre-crisis period at 8 project the Russian economy to accelerate to
percent annually. At the same time, the labor 3.1 percent growth. Global recovery could result
market remains tight, with unemployment in an increase in Russian exports starting in Q4
hovering around 5.5 percent. Weaker growth 2013, while the World Bank projects oil prices
potential is also reflected in the sector to remain stable. Next year’s growth prospects
composition of growth. In H1 2013, growth in will largely depend on the recovery in Russia’s
major non-tradable sectors such as construction, most important economic partner, the Euro
financial services, transport and communication Area, and the increased investment activities
slowed dramatically. In the past years, strong associated with the recently announced large
growth in these sectors compensated for the state investment projects to be financed off-
gradually deteriorating industrial performance budget. This moderately positive outlook is in
and the manufacturing of tradables in particular, our view subject to downside risks. Russian
but is does not so anymore. This would suggest exports could remain depressed if the recovery
that the recent growth model, which was largely in global demand is further delayed. The
based on growth in consumption and in non- tapering of quantitative easing policies, notably
tradables, has reached its limits. It would also in the US, could temporarily negatively impact
imply that policies to stimulate the economy Russia’s economy through lower oil prices,
would need to be reviewed and, perhaps, restricted access to international capital markets
incorporate acknowledgement that an annual and capital outflows. We also note higher
growth rate of 6-7 percent is not feasible under vulnerability to increasing risks in regard to the
current conditions. In our view, a lower growth quality of the credit portfolio given continuously
trajectory is more likely in the absence of more high credit growth.
substantial reforms. That means for Russia
iv Russia Ecomomic Report | Edition No. 30
PART ONE
Recent Economic Developments
T he global economy is moving into a new phase marked by stronger activity in high-income economies
and a gradual adjustment to tighter financial conditions in developing and emerging economies.
The Russian economy decelerated to an estimated 1.4 percent in H1 2013 from 4.5 percent in H1
2012 due to a slowdown in consumption, stalled investment demand and a continuing weak external
environment. Nevertheless, the economy appears to grow close to its capacity, constrained by feeble
investment activities and a tight labor market. As a result of the economic slowdown during H1
2013, the labor market relaxed slightly. Growth in real wages decelerated, but continued to outpace
productivity growth. Poverty rates stopped their recent decline as income dynamics became less
favorable. The weaker export performance in H1 2013 reflects a subdued global economic activity
that brought about sluggish external demand and a deteriorating current account. Capital outflows
increased since May as a result of some reallocation of global assets portfolios away from emerging
economies, in anticipation of the scaling back of the US monetary stimulus. Inflation moderated
towards the end of Q2 2013 largely due to slower-rising food prices. Starting in June, exchange-
rate volatility intensified markedly and the Ruble came under increasing pressure. The rate of credit
growth remains high and risks involving market access and portfolio quality are on the rise. Fiscal
policy switched from expansionary to consolidation mode as lower oil prices cut revenues in early
2013. Yet, fiscal buffers remained well below pre-crisis levels while sub-national fiscal trends exert
increasing pressure on the consolidated budget.
Recent Economic Developments
1.1 Global Trends — Uncertainty and Volatility Prevail
The global economy is moving into a new phase marked by stronger activity in high-income economies
and a gradual adjustment to tighter financial conditions in developing and emerging economies.
T he global economy is continuing to
recover, led by strengthening high-income
economies. Growth in the US has firmed since
pace of about 1 percent in the second quarter
after expanding at a 10 percent rate in the first
quarter, led by sharp contraction of over 11
the start of the year, in line with business and percent in developing and emerging countries’
consumer confidence. The US economy grew exports (mostly China). However, high-income
faster than the anticipated 2.5 percent (q/q countries’ trade registered increased imports
saar) in the second quarter. Growth remained and exports (by around 3.5 percent annualized),
robust at 2.6 percent in Japan, supported and a further recovery should help support
by aggressive monetary easing. Growth also improving developing and emerging countries’
turned positive in the Euro Area, led by strong exports (Figure 1).
growth in France and Germany, with more
recent activity and sentiment data pointing to Figure 1: Global industrial production and trade
stabilization in the troubled periphery of the 30
3m/3m saar
Euro Area economies. However, tight credit 25
remains a drag while unemployment rates are 20
uncomfortably high and investment and output 15
levels are well below their pre-crisis levels. 10
Percent
5
Growth in developing and emerging countries
0
has slowed, but is still expanding at a reasonable -5
pace. Barring disappointing outturns in India, -10
Mexico and Thailand in the second quarter, -15
2
3
1
1
2
12
13
11
1
2
r-1
r-1
r-1
t-1
t-1
l-1
l-1
n-
n-
n-
developing and emerging countries are mostly
Ap
Oc
Ap
Ap
Oc
Ju
Ju
Ja
Ja
Ja
Developing and Emerging Industrial Production High Income Imports
growing at a satisfactory pace, in line with their Developing and Emerging Country Exports High Income Industrial Production
potential. Growth has actually strengthened in Source: Datastream and World Bank prospects
several major economies, including South Africa,
Malaysia, and the Philippines. China’s growth Financial conditions tightened since May
also stabilized in the second quarter, following in developing and emerging economies
several relatively weak quarters, with recent in anticipation of the scaling back of the
industrial production data showing activity rates US monetary stimulus, in turn triggering a
firming to 7.0 percent annualized in the three reallocation of global asset portfolios away from
months to July. Timelier business-sentiment emerging economies and towards high-income
data from August indicate expanding output in ones. Developing and emerging-country stock
developing and emerging countries during the markets have lost about 7 percent since mid-May,
course of the third quarter. while sovereign bond yields and Credit Default
Swaps spreads have increased about 146 and 60
Global trade, which has lost momentum in basis points respectively over the same period.
recent months, shows signs of rebounding. Currencies have also come under pressure,
Global exports contracted at an annualized although losses on a trade-weighted basis have
2 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
been less severe, while gross capital flows, which rocky relationship between Belarus and Russia,
had dropped in June, partially recovered in July high refinery runs in the US and better-than-
(Figure 2). expected news on global demand pushed oil
above US$105/bbl in July (up 5.5 percent from
After reaching a high of US$108/barrel (bbl) June) and US$108/bbl in August and early
in February, oil prices retreated and stabilized September. Brent retreated slightly in mid-
below US$ 100/bbl during the second quarter September as an agreement regarding Syria’s
(Figure 3). However, geopolitical concerns in chemical weapons program is gradually gaining
Egypt and Syria, supply disruptions in Libya, a traction.1
Figure 2: Gross capital flows to developing
and emerging countries Figure 3: Oil prices and OECD inventories
140 Oil price, World Bank 2,900
70
average (left axis)
60 120
2,800
50
100
US$ billion
40
US$ per bbl
Million bbl
80 2,700
30
20 60
2,600
10 OECD oil inventories
40 (right axis)
0
20 2,500
12
2
12
2
12
2
13
3
13
3
-1
l-1
-1
-1
l-1
n-
-
p-
n-
-
ar
ay
v
ar
ay
Ju
Ju
No
Ja
Se
Ja
07
07
08
09
09
10
11
11
12
13
M
M
M
M
n-
p-
-
n-
p-
-
n-
p-
-
n-
ay
ay
ay
Syndicated Bank Lending Bond Issuance Equity Issuance
Ja
Se
Ja
Se
Ja
Se
Ja
M
M
M
Source: Datastream and World Bank Prospects Source: Datastream and World Bank Prospects
1.2 Growth — Moderation to a New Trajectory
The Russian economy decelerated to an estimated 1.4 percent in H1 2013 from 4.5 percent in H1
2012 due to a slowdown in consumption, stalled investment demand and a continuing weak external
environment. Nevertheless, the economy appears to be growing close to its capacity, constrained by
feeble investment activities and a tight labor market.
E conomic growth slowed significantly during
the first half of 2013, standing still slightly
above growth in other high-income economies
persistent growth decline. Russia’s 2013 first
quarter growth slowed to 1.6 percent from 4.8
percent in the same period a year ago, and in
and EU emerging ones (Figure 4). But while Q2 2013, growth further declined to 1.2 percent
these appear to be in a recovery mode, this is (Figure 5). In Russia, the slowdown came as a
not yet the case for Russia. Also, Russia’s growth result of weaker demand due to combination of
path started to divert significantly from that of external and domestic factors, some of which
other emerging economies in mid-2012, with are cyclical and some are of structural nature.
their gap continuing to increase due to Russia’s A large part of the cyclical component is related
1
The Brent-WTI spread, which exceeded US$ 20/bbl earlier in the year, kept shrinking throughout the summer to reach almost US$ 2/bbl in early August, following
a rally in WTI prices (a reflection of sharp increases in US refining runs and a decline in crude stocks, especially in the Midwest). Yet, the spread was back up to US$
7/bbl by early September. During July-August Urals traded at a US$ 0.65/bbl discount over Brent. Typically, when oil from the Urals is in surplus it will trade at a
discount. When exports to the Mediterranean are low, then it will trade closer to parity with Brent.
Russia Ecomomic Report | Edition No. 30 3
Recent Economic Developments
Figure 4: World GDP growth, y-o-y, percent Weakness in domestic demand was reflected
12
in subdued investment and consumption
activities. Consumption, the main growth driver
8
in the past, expanded at a much slower pace
4 than a year ago. Official statistics on contribution
0
to aggregate growth during Q1 2013 exhibit a
significant decrease from all demand components
-4
of GDP: consumption, investment and net
-8 export, compared to the same period in 2012
-12
(Figure 11). The lower growth in Q1 2013 can
Q2 07 Q2 08 Q2 09 Q2 10 Q2 11 Q2 12 Q2 13
partly be attributed to a base effect of last year’s
Russia EU Emerging OECD HI Other Emerging fast growth. What is most noteworthy is that
Source: OECD despite record low unemployment, continuing
Note: Emerging EU economies include the six central European
countries that are member both of the EU and the OECD: Czech credit and real-wages growth, consumption
Republic, Estonia, Hungary, Poland, Slovak Republic, and Slovenia.
Other emerging economies include seven countries: Brazil, China, grew slower at 4.4 percent in Q1 2013 compared
India, Indonesia, Mexico, South Africa and Turkey. with 6.5 percent a year ago. Its contribution
Figure 5: Year-on-year growth composition, percent
to aggregate growth fell to 3.4 percent from
4.8 percent (Figure 11). The contribution of
17
consumption to growth leveled out in H2 2012
9 and Q1 2013. Although the demand composition
1
of GDP growth is not yet available for Q2 2013,
high-frequency indicators suggest that domestic
-7 demand remained weak and below last year’s
-15
average. We believe this also reflects pessimistic
consumer sentiment related to high global
-23
and domestic uncertainty about future growth
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
prospects (Box 1).
Consumption GFCF Change in stock GDP growth
Export Import Stat error
Investment activities dropped sharply as
Source: Rosstat and World Bank staff estimates
a result of the near completion of large
to Russia’s high dependence on oil and gas infrastructure projects. During Q1 2013, the
exports and with it its exposure to commodity decline in investment demand was the main
price volatility. Structural challenges to the cause for economic slowdown. Investment
Russian economy and its growth, such as non- demand essentially stalled with fixed-capital
competitive sectors and markets, have recently investment edging up by just 0.1 percent in Q1
come to the forefront of policy discussions as the 2013, compared to a 15.5 percent growth in the
economy seems to operate close to its current same period last year. Thus, its contribution to
capacity limit. Our special focus note links the aggregate growth fell to zero in Q1 2013 from
discussion of growth patterns in this section 2.1 percent in Q1 2012 (Figure 11). Companies
to firm-level analysis, on firm survival and also continued inventory destocking which
diversification in manufacturing. It will highlight almost doubled investment’s demand negative
limited competition as a structural constraint. contribution to growth. The observed slowdown
4 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
Box 1 Russian business and consumer confidence surveys
Business and consumer surveys are traditionally used as predictors of short-term dynamics of high frequency
indicators. There are two main indicators of Russian business activity in the manufacturing sector: the Purchasing
Manufacturing Index (PMI) conducted by Markit Economics and HSBC and the Rosstat’s Business Confidence
(RBC) survey. On the consumption side, there is the Rosstat’s Consumer Confidence (RCC) survey. These indicators
should be used carefully, considering their specific features. For Russia, we observed:
• The PMI is a relatively good predictor of direction of change in manufacturing growth, but not of its level as it
appears to be biased upwards
• The RBC indicator predicts the level of manufacturing growth well, but does not reflect all fluctuations
• In recent months, both indexes demonstrated the increased volatility of industrial production growth rates
• The RCC is downward-biased to consumption dynamics, despite becoming more optimistic after the 2008
crisis, making it overall a weak consumption predictor.
Figure 6: Manufacturing and business surveys Figure 7: Consumption and consumer confidence
3 54
20 5
53
2 0
52 15
1 -5
51
10 -10
0 50
-15
-1 49 5
-20
48
-2 0 -25
47
-3 -30
46 -5
-35
-4 45
Jan-12 Jul-12 Jan-13 Jul-13 -10 -40
2000 2002 2004 2006 2008 2010 2012
Manufacturing, m-o-m, seasoanlly adjusted PMI (right axis)
Business Confidence (Rosstat)
Consumption growth, y-o-y Consumer Confidence (RHS)
Source: Rosstat, Haver Analytics and World Bank staff estimates Source: Rosstat and World Bank staff estimates
in investment activities could be partly explained contributions of the GDP’s demand components
by the ending of large infrastructure projects could be overestimated.
for the Winter Olympic Games in Sochi and the
Northern Stream pipeline and partly by skeptical Recent consumer and business confidence
business sentiments (Box 1), which lowered indexes point to deteriorating sentiment. While
investment demand. investors were already for some time in a wait-
and-see mode, consumers now appear to have
Meanwhile, external demand remained joined them and the Russian economy is sitting
sluggish. Trade in global markets did not provide on the fence. According to Rosstat, consumers’
the expected relief while oil prices retreated, confidence deteriorated in H1 2013 relative
stabilizing below US$ 100/bbl during the second to the same period of 2012, yet the index
quarter of 2013. Weak export performance remained stable in the first two quarters of the
was an important factor for lower growth in Q1 year (Figure 7). PMIs moved quite erratically and
2013. Its contribution to aggregate growth fell remained below their levels of last year, while
to just 0.2 percent in Q1 2013 from 2.5 percent the Producers’ confidence index by Rosstat
in Q1 2012 (Figure 11). We note, however, that deteriorated, based on seasonally adjusted
first estimates of GDP in Q1 2013 incorporate a trends (Figure 6). The deterioration is especially
relatively large discrepancy (about 1 percentage visible in the manufacturing sectors, which
point). This implies that the reported relative reflects current sluggish output dynamics for
Russia Ecomomic Report | Edition No. 30 5
Recent Economic Developments
Box 2 Growth trends in the first two month of Q3 2013
High-frequency indicators for the first two months of Q3 2013 point to still-weak industrial performance while
retail and construction picked up. Aggregate industrial production contracted by 0.3 percent in July-August (simple
average, y-o-y) after being almost flat in June. As a result, cumulative industrial growth for the first eight months
of 2013 fell to zero, compared to a 3.1 percent in the same period of 2012. Apart for the negative impact of the
calendar factor (August 2013 had one working day less than August 2012) the observed contraction was driven
largely by manufacturing industries (negative 0.9 percent, y-o-y), and, in particular, machine building (negative
8.2 percent), transport (negative 5.6 percent) and metal production (negative 3.2 percent). Yet, economic activity
in some of services sub-sectors displayed some improvements in July-August. Construction grew at 1.5 percent
(y-o-y) compared with a decline of 1.9 percent in the first half of the year (Figure 9). Retail trade also reported
higher growth of 4.2 percent in July-August (y-o-y) compared to 3.8 percent in the first half of the year but still
remains considerably below the last year average of 6.3 percent. Investment activity, however, displayed rather
uneven dynamics, growing 2.5 percent in July and contracting 3.9 percent in August.
Figure 8: Tradable sector growth, percent, y-o-y Figure 9: Non-tradable sector growth, percent, y-o-y
6
6
5
5
4 4
3 3
2 2
1 1
0 0
-1 Jan-June 2013 Jul-Aug 2013 -1
Jan-Jun 2013 Jul-Aug 2013
-2 -2
Electricity, gas, and water Construction
Agriculture and forestry Mineral extrac tion Manufacturing Retail trade Transport
Source: Rosstat and World Bank staff estimates Source: Rosstat and World Bank staff estimates
that sector. Recent readings of both indices show be running very close to its maximum capacity.
no improvement, which we interpret as lack of This has implications for the efficacy of growth-
confidence rooted in lingering uncertainty where supporting policies.
the global economy and specifically, the Russian
economy will come out. Weaker growth potential is also reflected in the
sector composition of growth. We observe that in
Capacity utilization remains near the upper H1 2013, growth in non-tradable sectors slowed
limit, indicating that the economy is close to dramatically. In the past years, strong growth in
its current growth potential (Box 3). Despite the non-tradable sectors compensated for the
the observed broad-based slowdown in the gradually deteriorating industrial performance,
economy, most recent estimates show that and the manufacturing of tradables in particular.
capacity utilization remained in H1 2013 close In H1 2013, growth in major non-tradable
to 80 percent (Figure 10). That is comparable sectors such as construction, financial services,
with rates observed in 2006 and 2007, when the transport and communication slowed. Trade
economy was expanding at 8 percent annually. A performance (retail and wholesale, 20 percent of
similar level of capacity utilization was registered value of total value added) has been especially
in H1 2012, when the economy grew at 4.5 disappointing, with the value added in the
percent. Given the still-tight labor market and sector increasing only 1.5 percent in Q1 2013,
the depressed investment activities of the last compared to 8.4 percent in Q1 2013. As a result,
4 quarters, it appears that the economy could the aggregate contribution of non-tradable
6 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
Box 3 Is Russia reaching its current growth potential?
Key indicators that could Figure 10: Unemployment rate and capacity utilization, 6 months moving average
confirm if the Russian economy
is operating near its potential 12 40
are the unemployment rate and 11
50
capacity utilization. Capacity
10
utilization returned to pre-crisis
60
level and stabilized there, while 9
the unemployment rate is now 8 70
significantly below the level from
5 years ago. This can partly be 7
80
attributed to changes in Russia’s 6
demographics as the working age 90
population started to decline, 5
translating into a shrinking labor 4 100
force. Under these conditions 2001 2003 2005 2007 2009 2011 2013
the labor market adjusted in Unemployment rate Capacity (right axis, reversed order)
Russia and the unemployment
rate decreased. Source: Rosstat, Russian Economic Barometer and World Bank staff estimates
sectors fell to an estimated 1.7 percent in Q1 Considering these observations, overcoming
2013 from 3.6 percent in Q1 2012 (Figure 12). At structural challenges to the Russian economy
the same time, industries involved in extraction would need to constitute an important aspect
and manufacturing2 either contracted by 4.9 of future growth-stimulating policies. For
percent in Q1 2012 (y-o-y), compared to a 1.5 Russia, this would require a shift from the growth
percent growth in Q1 2012, or slowed to 1.3 model followed in the past, which focused at
percent from 6.2 percent. As a result, aggregate stimulating domestic demand. As structural
contribution of tradable sectors contracted to challenges become binding, constraints such
an estimated 0.3 percent in Q1 2013 from 1.2 as non-competitive sectors and markets, would
percent in Q1 2012. This report’s special focus need to be addressed to lift Russia’s growth
note on firm survival and diversification in potential. This will be also highlighted in the
manufacturing investigates obstacles to growth special focus note of this report.
in this tradable sub-sector.
Figure 11: Quarterly year-on-year growth
composition, percent Figure 12: GDP growth composition, percent, y-o-y
10 5
8
6 4
4
3
2
0 2
-2
Q1 2012 Q1 2013 1
Discrepancy 0.0 1.0
Import -2.7 -1.1
0
Export 1.5 0.2
Change in stock -1.0 -1.9
GFCF 2.1 0.0 -1 H1 2012 H1 2013
Consumption 4.8 3.4
GDP growth 4.8 1.6 Tradable Non-tradable Public sector
Source: Rosstat and World Bank staff estimates Source: Rosstat and World Bank staff estimates
2
Extraction industries account for 10.9 percent in total value added and manufacturing 15.2 percent.
Russia Ecomomic Report | Edition No. 30 7
Recent Economic Developments
1.3 Labor Market – A Widening Productivity Gap
As a result of the economic slowdown during H1 2013, the labor market relaxed slightly. Growth in
real wages decelerated, but continued to outpace productivity growth. Poverty rates stopped their
recent decline as income dynamics became less favorable.
T he demand for labor stabilized, reflecting
the slowdown in the real sector (Figure 13).
The vacancy rate3 in H1 2013 was essentially the
As the labor market softened, household-
income and expenditure dynamics decelerated.
Income dynamics were weaker, despite wages
same as in H2 2012 when seasonally adjusted. continuing to be the main driver of disposable
Labor-market supply is now less of a binding income growth in H1 2013 (Figure 16), because
constraint than at end of 2012. The seasonally other income sources, such as pensions (and
adjusted unemployment rate averaged 5.6 other transfers), dividends and entrepreneurial
percent in May-August 2013, compared with income either stagnated or decelerated (Figure
5.3 percent in H2 2012. Since the beginning 17). Wage growth in the non-market (i.e., public)
of 2013, the market also saw a decline in the sector continues to be faster than in the private
number of employed and economically active sector, contributing to its already higher share
people (in seasonally adjusted terms) with in total wage growth (Figure 16). An important
some minor pick-up in July-August (Figure factor for recent household consumption
14). Unemployment dynamics across different growth was the high average growth of stock
population groups (male and female, urban (35-40 percent, y-o-y) in consumer and other
and rural) were homogenous. Trends at the household credits, despite some slow-down
regional level, although unequal, reflect national since mid-2012. This credit expansion resulted
dynamics (Figure 15). The average number of in an increase in total household indebtedness
hours worked remains high, though dropping to 25 percent of total disposable income in
slightly from 38.2 hours per week in Q1 2013 to the first 5 months of 2013, from 17 percent in
38.0 in Q2 2013. 2011 and 19 percent in 2012. This increasing
Figure 14: Number of employed and economically active
Figure 13: Beveridge curve, percent population, million people
3.2 77
2Q 13 76
4Q 12 75
Vacancy rate (percent)
3Q 12 74
2.7
73
4Q 11
72
71
2.2 4Q 10 4Q 09 70
69
68
1.7 67
5.0 6.0 7.0 8.0 9.0 2010 2011 2012 2013 Aug
Unemployment rate (percent) Employment Activity, SA Activity Employment, SA
Source: Rosstat and World Bank staff estimates Source: Rosstat and World Bank staff estimates
3
Definition: Number of vacancies as a share of total number of jobs.
8 Russia Ecomomic Report | Edition No. 30
Figure 15: Gap between real wages and productivity growth by sectors, y-o-y
1 Yaroslavl 7 Tula 13 Chuvashia 21 Volgograd 27 North Ossetia
2 Kaluga 8 Nizhniy Novgorod 14, 16 Tatarstan 22 Kalmykia 28 Chechnya
3 Vladimir 9 Ryazan 15 Penza 23 Adygea 29 Ingushethia
4 Ivanovo 10 Mari El 17 Ulyanovsk 24 Stavropol
5 Perm 11 Udmurtia 18 Saratov 25 Karachaevo-Cherkessia
6 Moscow-city 12 Mordovia 19, 20 Samara 26 Kabardino-Balkaria
1.3,1.4
4.3,5.2
Recent Economic Developments
5.2,5.9
5.9,6.7
6.7,8.2
8.2,45.5
No Data
Russia Ecomomic Report | Edition No. 30
9
Source: Rosstat and World Bank staff estimates
Recent Economic Developments
Figure 16: Contribution to income growth, percent, y-o-y The gap between productivity and wages
12 continued to grow (Figure 18). Productivity (per
10
8
worker and per hour) started to decline in early
6 2013, as employment growth outpaced GDP
4
2 growth. Public sector employment especially is
0 back at record level, constituting 24.5 percent of
-2
-4 all employment (Box 4).4 At the same time, real-
-6
wage growth in the public (or non-market) sector
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
remained high. Real wage growth accelerated in
2009 2010 2011 2012 2013 the non-tradables sector.
Others Business and property Total
Public wages and transfers Market wages Poverty trends were recently flat and
Source: Rosstat and World Bank staff estimates accompanied by level-inequality dynamics.
Note: Data on contribution to income growth for Q2 2013 is not
available. The World Bank estimates that poverty in Russia
remained almost flat during 2012 at 11-11.5
debt burden puts pressure on consumption, as percent, with seasonal adjustment. According to
interest payments have now reached 5 percent, Rosstat data, all quintile groups had almost the
a significant share of the average household’s same rate of income growth in 2012. Rosstat also
income (footnote 10). The weak consumption reported a slight increase in the poverty rate in
trend observed in the previous section is directly Q1 2013 (Table 1), perhaps due to continuously
correlated to the increase in households’ debt high food inflation of 13.8 percent compared
burden, rather than an increase in savings: the to 13.5 year ago. However, due to the strong
net savings rate did not grow in the past months, seasonality of poverty and incomes dynamics we
fluctuating marginally around 15-16 percent. would refrain from putting much emphasis on
developments within a year and focus on multi-
annual data.
Figure 18: Gap between real wages and productivity
Figure 17: Real income dynamics, y-o-y growth growth by sectors, y-o-y growth
14
12
10 Non-market
8
6
4 Overall
2
0
-2 Tradables
-4
-6
Non-tradables
Feb
Mar
Apr
May
Nov
Dec
Jan
Jun
Jul
Aug
Sep
Oct
Mar
Apr
May
Jan
Feb
Jun
Jul
Feb
Mar
Apr
May
Aug
Sep
Oct
Nov
Dec
Jan
Jun
Jul
2011 2012 2013 -4 0 4 8 12 16 20
Wages Pensions Disp income Q3 2012 Q4 2012 Q1 2013 Q2 2013
Source: Rosstat and World Bank staff estimates Source: Rosstat and World Bank staff estimates
4
Such a high share of public sector employment (i.e., public administration and defense, health, social services and education) was only seen in 2009 when it reached
a comparable high level of 25.5 percent.
10 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
Table 1: Poverty rates in Russia, percent
2012
Period 2010 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013
(average)
Poverty rate, percent 12.5 12.7 11 13.5 11.5 11.6 8.8 13.8
Source: Rosstat, World Bank staff estimates
Box 4 Cross-country comparison of public sector employment
In Russia the average total share of Figure 19: Share of employment in the public sector
employment in the public (or non-
market) sector during 2008-2010 was 30
Norway
higher compared to other developed
Share of employment in education
25
countries and emerging countries5,
and health (percent)
such as Brazil, South Korea, Turkey, 20 USA
France
or the Ukraine. Among the emerging Russia
countries, the only exception is 15
China, which has a very high share of China
employment in public administration 10
Brazil
and defense. Compared to developed 5 Indonesia
countries Russia has a higher-than-
average share of employment in 0
public administration and defense 0 5 10 15
and education, but a lower share in Share of employment in public administration and defense (percent)
health and social services. Developed Emerging
Source: ILO and World Bank staff estimates
1.4 Balance of Payments — Deterioration as Exports Weaken
The weaker export performance in H1 2013 reflects subdued global economic activity that brought
about sluggish external demand and a deteriorating current account. Capital outflows increased
since May as a result of some reallocation of global assets portfolios away from emerging economies,
in anticipation of the scaling back of the US monetary stimulus.
T he current account deteriorated as the trade
surplus melted. The current account surplus
decreased to US$32 billion in the first half of 2013,
140
130
Figure 20: Trade balance and oil prices
60
from US$55.5 billion in the same period last year. 120 50
110
Falling exports and lower resources prices were
100 40
the main cause for the decline of trade surplus to 90
US$91.6 billion (9.1 percent of GDP) in H1 2013, 80 30
from US$108.3 billion (11.5 percent of GDP) in 70
H1 2012 (Figure 20, Figure 21). The weakening 60 20
50
of the current account is also attributed to a
40 10
deteriorated balance of services, in which the Q1 -07 Q3 -08 Q1 -10 Q3 -11 Q1 -13
deficit increased to US$23.4 billion in H1 2013 Crude oil, Brent, US$/b (le ft axis) Trade balance, bln US$ (right axis)
from US$18.5 billion in H1 2012. In spite of a still- Source: CBR; and World Bank staff estimates
substantial current-account surplus, the non-oil
5
Emerging countries are defined following the IMF definition of July 2012. They include: Argentina, Brazil, Bulgaria, Chile, China, Estonia, Hungary, India, Indonesia,
Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, Venezuela.
Russia Ecomomic Report | Edition No. 30 11
Recent Economic Developments
Figure 21: Gap between real wages and productivity
growth by sectors, y-o-y
estimates, the deficit amounted to US$21.7
billion, or 2.2 percent of GDP in the first half
60
of 2013, compared to US$22.32 billion, or
50
2.4 percent of GDP in the first half of 2012
40 (Figure 23).
30
20
Russia’s external liabilities increased in H1
2013 with state-owned or state-controlled non-
10
financial corporations and banks continuing
0 to increase their borrowing abroad in spite
-10 of volatile global market conditions. Russia’s
Jun -10 Dec-10 Jun -11 Dec-11 Jun -12 Dec-12 Jun -13
external debt increased to US$704 billion (33.2
Exports Imports
percent of GDP) by end June 2013 from US$638
Source: Rosstat and World Bank staff estimates
billion (31.7 percent of GDP) at end December
deficit of the current account reached US$134.7 2012 (Table 4). The increase was driven by the
billion, or 13.4 percent of GDP in the first half corporate sector, with the exposure of non-
of 2013, compared to US$119 billion, or 12.6 financial corporations increasing most (by
percent in the same period last year (Table 2). US$52 billion) while the external debt of the
banking sector increased by just US$9 billion. It
The capital account improved marginally but it is important to note that in H1 2013, most of the
experienced volatility due to some erratic investors’ new external debt was accumulated by state or
behavior in anticipation of the winding up of quasi-state companies and banks. The exposure
quantitative easing in the US. While capital outflows of private-sector firms remained practically
increased since the Fed’s May announcement, unchanged, and it decreased for private-sector
overall, net capital outflows from the private sector banks. There are large external debt payments by
declined marginally during the first half of 2013, the corporate sector coming due in the second
compared to the same period a year ago, totaling half of 2013. CBR projected bank’s external debt
US$38.4 billion in H1 2013 and US$40.1 billion in H1 payments in H1 2013 of about US$ 29 billion and
2012 (Table 3). The financial account remained those of non-financial corporations at almost
practically unchanged. According to preliminary US$62 billion, with US$52 due in the last quarter
Figure 22: Current account balance, percent of GDP Figure 23: Current account financing, percent of GDP
13 5
0
6
-5
-1
-10
2012Q4
2013Q1
2012Q3
2011Q4
2012Q1
2012Q2
2011Q2
2011Q3
2010Q4
2011Q1
2010Q3
2010Q1
2010Q2
-15
-8
2007 2009 2011 2012 Q2 2012 Q4 2013 Q2
Goods Transfers Investment income Net FDI Net portfolio Current account financing
Remittances Services Current account balance Net other flows and errors Change in reserves
Source: CBR, Rosstat, World Bank staff calculations Source: CBR, Rosstat, World Bank staff calculations
12 Russia Ecomomic Report | Edition No. 30
Table 2: Balance of payments, 2007–2013, US$ billions
Q1 Q2 Q3 Q4 Q1 Q2 H1 H1
2007 2008 2009 2010 2011 2012
2012 2012 2012 2012 2013* 2013* 2012 2013*
Current account balance 72.2 103.9 50.4 67.5 97.3 71.4 39.5 16.0 5.9 10.0 25.1 6.9 55.5 32.0
Trade balance 123.4 177.6 113.2 147.0 196.9 192.3 59.0 49.3 38.5 45.5 48.7 42.9 108.3 91.6
Non-oil current account balance -146.4 -206.2 -140.3 -186.6 -244.5 -265.8 -51.6 -67.4 -74.5 -72.3 -60.4 -74.3 -119.0 -134.7
Capital and financial account 86.4 -139.8 -40.6 -21.6 -72.5 -31.2 -28.8 1.7 -4.3 0.1 -14.0 -7.8 -27.0 -21.8
Errors and omissions -9.7 -3.1 -6.4 -9.1 -12.1 -10.2 -6.1 -2.8 -0.1 -1.2 -6.2 -3.6 -8.9 -9.8
Recent Economic Developments
Change in reserves (- = increase) -148.9 38.9 -3.4 -36.8 -12.6 -30.0 -4.6 -15.0 -1.5 -8.9 -4.9 4.4 -19.6 -0.5
Memo: average oil price (Brent, US$/barrel) 72.5 96.9 61.5 79.7 111.1 112.0 118.7 108.7 109.9 110.5 112.9 103.0 113.7 108.0
Source: CBR. * - Preliminary estimates
Table 3: Net Capital flows, 2007–2013, US$ billions
2007 2008 2009 2010 2011 2012 Q1 Q2 Q3 Q4 Q1 Q2 H1 H1
2012 2012 2012 2012 2013* 2013* 2012 2013*
Total net capital inflows to the
87.8 -133.6 -57.5 -30.8 -84.8 -53.8 -34.7 -5.4 -7.9 -5.9 -28.4 -10 -40.1 -38.4
private sector
Net capital inflows to the banking
45.8 -55.2 -32.2 15.9 -23.9 18.5 -9.7 11.6 7.7 8.9 -17.2 -2.2 1.9 -19.4
sector
Net capital inflows to the non-
42 -78.3 -25.3 -46.7 -60.9 -72.3 -24.9 -17.0 -15.6 -14.8 -11.2 -7.7 -41.9 -18.9
banking sector
Source: CBR * Preliminary estimates
Table 4: Russia’s external debt, US$ billions
1-Jan-10 1-Jul-10 1-Jan-11 1-Jul-11 1-Oct-11 1-Jan-12 1-Apr-12 1-Jul-12 1-Oct-12 1-Jan-13 1-Apr-13 1-Jul-13
Total debt 467.2 457.4 488.9 538.9 527.8 541.9 561.7 574.8 600.6 637.8 691.1 703.9
Corporate 421.3 410.1 442.4 491.0 482.6 492.6 509.1 517.1 538.8 567.8 614.1 628.4
Banks 127.2 122.1 144.2 159.0 157.3 162.8 169.2 175.4 189.9 201.6 205.8 210.7
of which Private Banks 77.0 71.4 80.8 89.1 86.8 89.5 90.6 78.7 84.1 86.2 81.0 n/a
Non-financial corporations 294.1 287.9 298.2 332.0 325.3 329.8 339.8 341.7 348.9 366.2 408.3 417.7
Russia Ecomomic Report | Edition No. 30
of which Private Non-fin. 208.9 204.1 208.3 236.3 228.9 227.8 236.0 234.2 237.7 252.6 255.1 n/a
Corporations
13
Source: CBR, World Bank staff calculations
Recent Economic Developments
of the year (Table 5). Although access to the share of external liabilities is held by state
capital market could be somewhat restricted for or quasi-state companies and banks, which
emerging economies because of the reevaluation have implicit Government guarantee that the
of risks associated with potential tapering of the market takes into account. Considering these
quantitative easing, it is not expected that banks observations, overcoming structural challenges
and/or private companies will face restrictions to the Russian economy and its growth would
with rolling over their external liabilities. To a need to constitute an important aspect of
large extent, this is due to the fact that a large growth-stimulating policies.
Table 5: Projected debt payments in 2013-2014, principal + interest
Q2 2013 Q3 2013 Q4 2013 2014
Government 7.9 2.0 1.1 12.1
Banks 18.8 11.9 17.2 47.8
Other sectors 28.5 26.6 35.2 91.7
Total 55.2 40.6 53.5 151.6
Source: CBR, World Bank staff calculations
Box 5 Russia-Ukraine trade relations
On August 14, 2013, Russian customs started in an unannounced unilateral move to apply stricter rules for
checking of Ukrainian goods. This caused substantial delays for many Ukrainian exporting companies. On August
20, Russian customs switched back to regular checking procedures of imports from the Ukraine.
According to Russian officials, customs used the more strict procedures so it could estimate what changes in
customs procedures Russia would need to introduce if the Ukraine signed the Agreement of Association with the
EU at the end of November, 2013. Russia says that if the Ukraine signs the Agreement of Association, it will be
ineligible to join the Eurasian Customs Union and Common Economic Space. In order to the prevent transshipment
of goods from the EU through the Ukraine, Russian authorities plan to introduce stricter customs procedures
when these goods enter Russia. In addition, if the Ukraine signs EU agreement, Russia will introduce import
tariffs for goods. The Ukraine has declared its interest in signing a customs agreement with Russia that would
not contradict the Agreement of Association with the EU. The two countries are in the process of negotiating
conditions for their future trade cooperation.
Since September 2012, Russia and the Ukraine have been acting under the CIS free-trade zone agreement, with
tariff-free access to markets (with a small number of exceptions) and simplified customs checks. Russia is a key
trade partner for the Ukraine. In 2012, the Ukrainian exports to Russia comprised US$18 billion, 23.7 percent
of total Ukrainian exports. It exported mainly ferrous metals, railcars, nuclear equipment and food
products (Table 6). Export of Russia to the Ukraine totaled US$27.2 billion or just 4.9 percent of Russia export,
with fuel products (mainly gas) comprising more than 60 percent of the total. The integration links that existed
between Russian and Ukrainian companies during Soviet times are much weaker now. It appears that for Russia,
the majority of the imports from the Ukraine could be easily sourced elsewhere, except for nuclear parts. The
immediate economic impact of worsening trade relations with the Ukraine would be quite limited for Russia.
Table 6: Export of goods, percent
Ukrainian export of goods to Russia, by main Russian export of goods to Ukraine, by main
components, percent components, percent
Ferrous metals and metal goods 19.6 Mineral fuel products 63.8
Railcars 14.8 Nuclear reactors, boilers, etc. 4.7
Nuclear reactors, boilers, etc. 12.8 Non-organic chemical products 3.9
Food and agricultural raw materials 11.6 Ferrous metals 3.8
Electric machines and equipment 6.7
Mineral fuel products 4.9
Non-organic chemical products 4.3
Source: Customs statistics
14 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
1.5 Monetary Policy and Financial Sector — Increased Currency and Credit Risks
Inflation moderated towards the end of Q2 2013 largely due to slower-rising food prices. Starting in
June, exchange-rate volatility intensified markedly and the Ruble came under increasing pressure.
The rate of credit growth remains high and risks involving market access and portfolio quality are on
the rise.
I nflation pressures subsided by mid-year. The
consumer price index (CPI) had been stubbornly
high during most of H1 2013, staying above 7
(Figure 25). The policy also appears consistent
with the remaining challenge for the CBR: to
anchor the expected rising inflation in Q3 due to
percent during the first five months of 2013 due seasonal increases in administrated utility prices.
to higher-than-expected prices on food (8.7
percent) and services (8.0 percent). Headline Exchange-rate volatility increased in June-
CPI inflation started to retreat only in June and August 2013, forcing CBR to gradually move the
leveled out by August at 6.5 percent (Figure bilateral currency corridor up (Figure 26) and
24). This slightly exceeds the end-year inflation to considerably scale up its interventions. The
range targeted by CBR (5 to 6 percent), while increased pressure on the Ruble was triggered
core inflation, which excludes food and gasoline, by a sharp seasonal deterioration of the current
remained in the targeted range at 5.5 percent in account and sizable capital outflows. However,
August. In June, lower inflation risk and sluggish at present quantitative easing tapering effects
economic performance raised speculative talk appear to be limited. CBR sold US$2.7 billion
of monetary loosening. However, the central in June and US$4.2 billion in July to support
bank resisted growing public and political the Ruble. In June-August 2013, the Russian
pressures to change its main policy rates. This currency depreciated by 4.6 percent against
signaled to market participants that it remains the US$ and 5.4 percent against the bilateral
fully committed to inflation targeting, even if on currency basket (compared with a depreciation
balance, risks have switched from inflation to of 3.8 and 3.7 percent, respectively, in the first
growth. CBR’s policy choice is reasonable in an five months of 2013). However, according to
economy where the labor market remains tight the CBR, only US$1.6 billion were untargeted
and inflation still exceeds money-market rates interventions, which the regulator uses to
Figure 24: CPI inflation by component, percent, y-o-y Figure 25: Interest rates, percent
16 9
14 8
12 7
10 6
8 5
6 4
4 3
2 2
0 Jan-11 Jul-11 Jan-12 Jul-12 Dec-12 Jul-13
2007 2008 2009 2010 2011 2012 2013 Mosprime, 1 day REPO, 1 day Policy rate
Food Non-Food Services CPI Overnight deposit rate Min REPO rate REPO rate, fixed
Source: Rosstat and World Bank staff estimates Source: CBR and World Bank staff estimates
Russia Ecomomic Report | Edition No. 30 15
Recent Economic Developments
Figure 26: Exchange rate and its bilateral band large firms currently are parking more assets
abroad. This is a rational approach to investing,
45
albeit one that is detrimental to Russia. In any
42 case, large Russian firms often issue debt abroad
39 as the financing costs (net of exchange-rate risks)
36
are usually lower than at home. Future tapering
of quantitative easing could lessen demand for
33
such debt but does not, as yet, appear to have
30 done so in recent months.
27
2010 2011 2012 2013
Credit expansion slowed, but risks of
Rb/USD Rb/Eur Basket
Lower bound Upper bound maintaining credit quality and access to markets
increased (Box 6). Credit growth to households
Source: CBR, World Bank staff calculations
slowed for seven consecutive months to 33.8
smooth excessive volatility of the exchange percent in July 2013 from a peak of 42.7 percent
rate not related to fundamental changes in the in October 2012. Yet, the stock of private credit
balance of payment.6 Compared to US$13 billion increased to 44.7 percent of GDP at the end
in 2011 and US$25 billion in 2010, the amount of July 2013, compared to 44.2 percent at the
of untargeted interventions this year is rather end of December 2012.7 There are also some
limited, which indicates that the CBR remains concerns about links between the banks and
fully committed to transitioning to a flexible state-owned enterprises, and about the stock of
exchange-rate management. refinanced and restructured loans in the system.
Non-performing loans (NPLs) correspond to 6.3
In Russia, greater capital outflows since May percent of loans in the banking system, around
appear to have been caused by a reallocation of the same level as in the previous year. Continued
financial assets triggered by expected narrowing high growth in lending may lead to more NPLs,
yield differentials with the advanced economies, which could also, in time, induce a reduction in
supported by a perception that the new Governor bank lending.8 The effect of this, coupled with
of CBR will take a dovish stance towards interest a possible decline in funding to banks, would
rates. The equity and bond markets have been restrict access to credit, especially for SMEs.
volatile and, while lower bond rates may lead to In the event of less access to foreign funding,
capital gains, these might also presage a future for example as an effect of quantitative easing
of lower yields once positions are unwound. tapering, it is likely that CBR and Government
However, given that a higher interest rate funds would act as a stop-gap replacement.9 This
environment would be more beneficial for the might soften the impact but nevertheless stress
policy framework, sharp changes in the bond the system and restrict normal credit. However,
market are likely to be short-lived. It is likely that structural reforms would be much healthier for
6
One of the sources for speculative attack on the Ruble in June appeared to be an announcement by the Ministry of Finance of the potential purchase of foreign
exchange on the market to replenish the Reserve fund. Initially the amount was estimated at around Rub150 billion (USD 4.5 billion) and later reduced to Rub 30-
50 billion. Recently, the Ministry of Finance has indicated that the amount could be even lower due to lower-than-projected revenue collection. Thus, even if the
Ministry of Finance makes trial purchases of US$ on the market, it is unlikely to add significantly to market volatility.
7
Mortgage interest rates were higher by around 0.5 percent in July 2013, y-o-y. The volume of new mortgage loans increased by 24.8 percent over the same period,
although that rate was down from the 52.6 percent rise in the previous 12 months. The distribution of maturities has remained roughly the same.
8
Household credit growth picked up last year from a very low base and compared to other eastern European countries the level of household debt is still low. In
addition, the depth of financial intermediation is still very low in Russia with only about 25 percent of the population currently using formal financial services.
Nevertheless, we expect relatively fast credit growth in the medium term which could increase credit risks. Currently, these risks appear to be contained and the CBR
does not see any systemic risk according to the results of their stress testing.
9
In July Moody’s lowered the ratings of long-term senior debt and deposits for four major state banks, including Sberbank and VTB, by one notch. Lower capacity
of the state to step in with systemic support in case of a crisis was the main reason for the downgrade. Such capacity has been negatively affected by growing
contingent liabilities associated with the financing of state corporations and regions, as well as with lower levels of the Reserve and National Welfare Funds,
standing now at 8.5 percent of GDP compared to 16.1 percent before the 2008 crisis.
16 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
the financial system than back-stop financing while taking a conservative stance against easy
from the state. Hence, a prudent policy would loan re-scheduling. Such an approach would
be to increase banks’ capital levels (an initiative develop a capital cushion that would soften
already being undertaken by CBR) and implement the impact of any future international funding
higher provisioning against potential loan losses problems.
Box 6 Recent trends in credit growth and market access
The rate of credit growth is high, and capital adequacy ratios of 13.5 percent, while meeting regulatory
requirements, are not enviable and below the region’s average. In the 12 months to July 2013, the volume of
new ruble loans increased by 12.9 percent, on top of a 42.6 percent rise between 2010 and 2011. Moreover,
new foreign exchange loans increased by 52.0 percent from January-July 2013, after a small contractions in the
previous two years. This suggests that it is more cost-effective for banks to seek funding abroad at lower rates
than to attract domestic deposits. These funds are then lent to bank customers. Consistent with this, new bond
issuance by banks is rising. There is a similar pattern in new lending to small- and medium-sized firms (SMEs),
where new loans in rubles increased by 12.9 percent versus by 26.1 percent in foreign currencies. This likely
reflects opportunistic interest-rate pricing and may lead to higher eliminate by effective rates if, as expected, the
ruble depreciates. However, interest rates on loans to SMEs of one-year-or-higher maturity have been falling, a
likely consequence of using foreign exchange loans that carry the risk of a rise in effective rates. Foreign-exchange
loans account for only 10 percent of all new lending, although the share is growing. This suggests that banks
currently do have appropriate access to foreign exchange and concern over such access is not the cause of current
capital outflows.
Figure 28: Non-performing loans and loan loss provisions,
Figure 27: Credit growth, percent, y-o-y percent of total loans
60
10
50 9
40 8
30 7
Percent of total loans
20 6
10 5
4
0
3
-10
2
-20
1
Jun -13
Jun -12
Jun -11
Jun -10
Jun -09
Jun -08
Sep -12
Sep -11
Sep -10
Sep -09
Sep -08
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Dec -12
Dec -11
Dec -10
Dec -09
Dec -08
Dec -07
0
2007 2008 2009 2010 2011 2012 2013
Non-financial Organisations Households Non-performing Loans: Total Loans Loan Loss Provisions: Total Loans
Source: CBR, World Bank staff calculations Source: CBR, World Bank staff calculations
1.6 Government Budget – Consolidation as Fiscal Revenues Plummet
Fiscal policy switched from expansionary to consolidation mode as lower oil prices cut revenues in
early 2013. Yet, fiscal buffers remained well below pre-crisis levels while su-bnational fiscal trends
exert increasing pressure on the consolidated budget.
T he Federal Government exercised higher
control over budget spending during the first
seven months of 2013. Over this time period, oil
expenditures were reduced from 20.9 percent
to 19.1 percent of GDP. The non-oil fiscal deficit
dropped to 9.2 percent of GDP as compared
revenue declined from 11.2 percent of GDP to 9.8 with 10.4 percent in January-July 2012 (Table 7).
percent. To compensate for this decline, federal While 2012 ended with a marginal federal budget
Russia Ecomomic Report | Edition No. 30 17
Recent Economic Developments
Table 7: Federal Budget 2011-2013, percent of GDP
2011 2012 Jan-Aug Jan-Jul 2013 2013
2012 2013
Actual Actual Actual Actual Budget law Estimate
Expenditures 20.1 20.6 20.9 19.1 20.1 19.8
Revenues 20.9 20.5 21.8 19.8 19.3 19.3
Balance 0.8 -0.1 0.9 0.6 -0.8 -0.5
Oil Revenues 10.4 10.3 11.2 9.8 8.9 9.0
Non-Oil Balance -9.6 -10.4 -10.4 -9.2 -9.7 -9.6
Urals oil price, US$/barrel 109.3 110.4 110.4 106.8 97.0 105.0
Source: Ministry of Finance, Economic Expert Group, World Bank staff calculations
deficit of 0.1 percent of GDP, during January-July national public finance situation. Consolidated
2012 it was still in surplus at 0.9 percent of GDP. budget revenues declined as a result of lower
Preliminary numbers for January-July 2013 show sub-national revenues (Table 8). The main reason
that the fiscal outturn during the same period was lower corporate profits due to the economic
this year worsened moderately by 0.3 percent slowdown, especially in manufacturing. This cut
of GDP, but remained in surplus at 0.6 percent corporate profit tax proceeds at sub-national
of GDP. Despite the global oil price moderation level from 3.9 percent of GDP in H1 2012 to 2.6
in H1 2013, the average oil price during January- percent of GDP in H1 2013. Total sub-national
July 2013 remained above the prices envisaged revenues decreased by 1.7 percent of GDP in H1
in the 2013-2015 budget law (US$97 per barrel 2013 as compared to H1 2012, while sub-national
for 2013). Most recently10, the Ministry of budget expenditure declined only moderately by
Finance forecast in its new medium-term budget 0.3 percent of GDP over the same period, turning
document of July 2013 (Box 5) a lower federal a sizable surplus of the sub-national budget into
budget deficit for the year end of 0.5 percent of a zero budget balance. Consolidated budget
GDP, while the 2013 Budget Law projected 0.8 revenues dropped in H1 2013 from 38.5 percent
percent of GDP. of GDP to 36.4 percent in H1 2012. But contrary
to the situation at the federal level, this decline
Increased fiscal pressures on the consolidated was not accompanied by an adjustment on the
budget primarily originate from a weaker sub- expenditure side. Consolidated expenditures
Table 8: Consolidated budget and consolidated sub-national budget in 2012-2013, percent of GDP
2012 2012 H1 2013 H1 2013
Actual Actual Actual Estimate
Consolidated budget
Expenditures 36.6 34.6 34.7 37.6
Revenues 37.0 38.5 36.4 36.9
Balance 0.4 4.0 1.7 -0.7
Consolidated sub-national budget
Expenditures 13.3 12.1 11.8 13.0
Revenues 12.9 13.5 11.8 12.7
Balance -0.4 1.4 0.0 -0.3
Source: Ministry of Finance, World Bank staff calculations
10
In its new medium term budget document of July 2013.
18 Russia Ecomomic Report | Edition No. 30
Recent Economic Developments
Box 7 The new medium-term budget policy document
Key directions of the budget policy for 2014 and for the planning period of 2015 and 2016 was published by the
Ministry of Finance in July. The document contains a preliminary, medium-term budget forecast and, for the
first time, preliminary long-term budget parameters for the years 2020, 2025, and 2030. Overall, a gradual fiscal
consolidation is envisaged, with the key assumption that a reduction in the non-oil federal budget deficit will
occur over time: decreasing from 9.6 percent of GDP in 2013 to 7.8 percent of GDP in 2016, and to 6.0 percent of
GDP in 2030. The consolidated budget deficit is expected to shrink from 0.7 percent of GDP in 2013 to 0.5 percent
in 2016, with revenues and expenditures declining by 2.5 percent of GDP and 2.7 percent of GDP respectively
(Table 9).
By 2020, the consolidated budget deficit is projected to be executed with a moderate deficit (0.1 percent of
GDP). In 2025 a balanced budget is forecast and for the outer year of the projection, 2030, a 0.3 percent deficit
is foreseen. A more prominent principle of the new framework is to increase the sustainability of the federal
budget by decreasing its dependence on external factors in the long run. Notably, it also envisions that for new
expenditure commitments, efficiency analyses are performed and program-budgeting principles are applied by
2016 for about 90 percent of all federal budget expenditures. Planned measures to reduce budgetary dependence
on external factors include: (i) the adherence to the recently installed fiscal rule, (ii) a gradual reduction in the
non-oil budget deficit during 2014-2016, (iii) capping Federal debt (to not more than 20 percent of GDP), and (iv)
continuing to accumulate extra oil revenues in the Reserve Fund.
Table 9: Medium-term projections for 2014-2016 and long-term government budget forecast
for 2020, 2025 and 2030, percent of GDP
Estimate Preliminary draft budget Preliminary forecast
2013 2014 2015 2016 2020 2025 2030
Consolidated budget
Expenditures 37.6 35.8 35.4 34.9 34.7 33.6 33.0
Revenues 36.9 35.1 34.9 34.4 34.6 33.6 32.7
Balance -0.7 -0.7 -0.5 -0.5 -0.1 0.0 -0.3
Federal budget
Expenditures 19.8 18.7 18.6 18.0 17.0 15.7 14.5
Revenues 19.3 18.2 18.0 17.4 16.6 15.4 14.2
Balance -0.5 -0.5 -0.6 -0.6 -0.4 -0.3 -0.3
Non-Oil Balance -9.6 -8.5 -8.4 -7.8 -7.8 -7.0 -6.0
Urals crude oil price, US$/barrel 105.0 101.0 100.0 100.0 n/a n/a n/a
Source: Ministry of Finance
stayed almost at the 2012 level, 34.7 percent of are quite modest. According to preliminary
GDP. As a result, the consolidated budget balance projections, the Reserve Fund, which was
deteriorated during the first half of 2013 by 2.3 replenished in early 2013 to about 4 percent of
percent of GDP compared to previous year, from GDP, is expected to increase to about 4.4 percent
4.0 percent of GDP to 1.7 percent of GDP. of GDP by 2016. The NWF (currently at about
4.3 percent of GDP) is forecasted to decline to
No significant changes to Russia’s fiscal buffers about 3.2 percent of GDP by 2016 (Figure 29).
are being planned. Both the Reserve Fund and The possibility that the NWF could invest up to
the National Welfare Fund (NWF) are projected 450 billion rubles into domestic stock and bonds
to remain well below 2009 pre-crisis levels (of associated with new priority infrastructure
9.8 percent of GDP and 6.3 percent of GDP, projects is being publicly discussed. Such projects
respectively) and their new medium-term targets include the construction of a high-speed railroad
Russia Ecomomic Report | Edition No. 30 19
Recent Economic Developments
Figure 29: Reserve and National Welfare Funds
in 2008-2030, percent of GDP
between Moscow and Kazan, a new Central Ring
Road in Moscow and upgrades to the Trans-
18
Siberian railway. As a result of this strategy,
16
14
by 2016 about 29 percent of NWF would be
12
invested into domestic assets. In the long run,
10 both funds together are projected to reach 9.8
8 percent of GDP in 2020 and 9.9 percent of GDP in
6 2030. Thus there is an implicit assumption that
4 the Reserve Fund could reach its target level of
2 7.0 percent of GDP in the long run.
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2020 2025 2030
Reserve National Wealth NWF+RW
Source: CBR and World Bank staff estimates
20 Russia Ecomomic Report | Edition No. 30
PART TWO
Economic Outlook
T he World Bank expects global growth to gradually recover and oil prices to stabilize at current
levels. Although risks to the global outlook are less pronounced and more balanced compared to
a year ago, new risks are gaining prominence. For 2013, we lowered our May projection of Russia’s
GDP growth to 1.8 percent from 2.3 percent. Economic activity is expected to remain fragile in Q3
2013, with the overdue global recovery delaying the earlier projected increases in Russian exports
towards the end of 2013. In Q4, we expect the economy to regain some dynamism as investment
activities start to pick up. For the remaining two quarters of this year, we also expect positive effects
from agriculture. The World Bank projection for Russia’s growth in 2014 is positive at 3.1 percent,
but with downside risks. We project a moderate uptick in growth as the pace of expansion will be, in
our view, fundamentally held back by the economy operating near its current capacity. Next year’s
growth prospects will largely depend on an increase in external demand and the recovery of Russia’s
most important economic partners in the Euro Area. Domestic demand is expected to accelerate
somewhat, if Government’s recently announced investment projects (to be financed off-budget) will
commence. Risks to the outlook refer largely to external factors and a lower-than-expected recovery
in domestic demand.
Economic Outlook
2.1 Global Outlook
G lobal GDP is projected to expand by 2.4
percent in 2013 and 3.2 percent in 2014
(Table 10). Growth in high-income countries is
Global oil demand is expected to rise in 2014
by 1.1 mb/d, up from an increase of 0.9 mb/d
in 2013, with consumption likely to exceed 92
assumed to remain relatively weak at 1.3 percent mb/d in 2014, according to the August update
in 2013, but is projected to reach 2.1 percent in of the International Energy Agency (IEA). As in
2014. The US economy in particular is expected the recent past, all of the growth in demand
to gather momentum, buoyed by improving will originate in non-OECD countries. Most of it
conditions in the labor market and in domestic is expected to come from China, which for the
demand, with growth projected at 2.8 percent in past decade has increased its consumption at
2014, up from 1.8 percent this year. Developing almost 0.5 mb/d a year (Figure 30). Demand by
and emerging-country growth projections are OECD economies contracted (albeit marginally)
broadly in line with underlying potential. Growth during Q2 2013 (by 0.11 percent), for a fourth
here is expected to accelerate to 5.5 percent in consecutive quarter, with IEA expectations of
2014 from 4.9 percent this year, supported by a further contraction in the next 2 quarters as well.
gradual recovery in external demand from high- Figure 30: Growth of world oil demand by quarter 2003-2014,
percent change, y-o-y
income economies.
4
Improving growth prospects in high-income
economies increase the likelihood that 2
quantitative easing policies, notably in the
mb/d, y/y
US, will be withdrawn soon. The adjustment in 0
capital flows should prove temporary. However,
recent volatility in developing country financial
-2
markets and sustained pressure on some
currencies, indicate the potential for domestic
-4
vulnerabilities to be exposed during the 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14
Non-OECD, ex China China OECD
transition period.
Source: World Bank; IEA
Table 10: Global growth assumptions, real GDP growth, percent
2008 2009 2010 2011 2012 2013f 2014f
World 1.4 -2.2 3.9 2.8 2.5 2.4 3.2
High Income 0.1 -3.5 2.8 1.7 1.6 1.3 2.1
Developing Countries 5.8 1.9 7.3 5.9 4.8 4.9 5.5
Euro Area 0.3 -4.3 1.9 1.5 -0.6 -0.5 0.9
Source: World Bank Global Economic Prospects Group staff estimates
22 Russia Ecomomic Report | Edition No. 30
Economic Outlook
OPEC oil supply is expected to decline and non- The World Bank expects oil prices to average
OPEC oil production to increase. Most of the US$ 105/bbl in 2013 and to decline marginally
non-OPEC growth comes from unconventional in 2014. At the moment, most of the risks
production in the United States, which in 2013 are on the upside, especially if the conflict in
will exceed 10 mb/d and is expected to reach the Middle East spills over to key producing
around 11 mb/d in 2014. Altogether non-OPEC countries, or if there is an unexpected disruption
oil production is projected to each almost 56 in the Strait of Hormuz. Over the longer term,
mb/d in 2014. OPEC supplies, on the contrary, oil prices are expected to increase moderately
are expected to decline slightly, from 31.3 in nominal terms but fall slightly in real terms
mb/d in 2012 to 30.5 mb/d in 2013. The key due to growing supplies of unconventional
concern appears to be Libya, where civil unrest oil combined with efficiency gains and (to a
cut exports to their lowest level since the 2011 limited extent) substitutions away from oil. The
civil war. During July and August, Libya lost 0.5 assumption behind such projections reflect the
mb/d, with more losses expected in September. high upper-cost of developing additional oil
In Iraq, pipeline damaged by attacks dragged the capacity, notably from the oil sands in Canada,
country’s output below 3 mb/d for the first time currently assessed by the industry at about
in six months, while exports are expected to drop US$80/bbl in 2013 constant terms. OPEC, which
to 0.5 mb/d in September. Events in Syria have is expected to limit supplies in order to sustain
been drawing much attention recently and may prices, may also decline to let prices rise too high
have been responsible for the uptick in oil prices. for fear of speeding up technological innovations
Although Syria is not a key player either on the that eventually could reduce demand and prices.
demand or the supply side, there are concerns
that the conflict may spill over to key producing
countries and the likelihood of disruption of oil
supplies from the Gulf.
2.2 The Outlook for Russia
F or 2013, we lowered our May projection of
Russia’s GDP growth to 1.8 percent from 2.3
percent (Table 11). Specifically, we revised down
with limited growth potential for the remainder
of the year. In Q4, we expect the economy to
regain some dynamism as investment activities
our previous Q3 projection (from 2.5 to 1.5 start to pick up. Additionally, a low base for Q4
percent), but kept our Q4 projection of 2.6 percent 2012 will contribute to higher growth in that
(Figure 32). According to our baseline scenario, quarter in 2013. For the remaining two quarters
economic activity is expected to remain fragile in of this year, we also expect positive effects from
Q3 2013. This reflects the following trends. First, agriculture, which is projected to benefit from a
in respect to external demand, we expect that good harvest and a large positive base effect due
the overdue global recovery will delay the earlier to last year’s drought.
projected increases in Russian exports towards
the end of 2013, as compared to our earlier In 2014, the World Bank projects the Russian
forecast. Second, on the domestic demand side, economy to accelerate to 3.1 percent growth.
we expect consumption to remain sluggish, The revision reflects a positive outlook, but with
Russia Ecomomic Report | Edition No. 30 23
Economic Outlook
Table 11: Main economic indicators, baseline projection, percent
2012 2013 2014
GDP growth (percent) 3.5 1.8 3.1
Consolidated government balance (percent) 0.4 0.2 1.9
Current account (US$ billions) 74.8 60.5 39.4
Percentage of GDP 3.7 2.9 1.8
Capital account (US$ billions) -41.0 -62.9 -50.0
Percentage of GDP -1.8 -3.0 -2.3
Oil price assumption (US$ per barrel) 105.0 105.0 104.0
Source: Rosstat and World Bank staff estimates
Figure 31: Demand sources of growth by quarter 2008-2013, percent change, y-o-y
15
10
5
0
2008 Q1
2008 Q2
2008 Q3
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
-5
-10
-15
-20
Net exports Investments Consumption Growth
Source: Rosstat and World Bank staff estimates
Figure 32: Projected sources of growth by quarter 2008-2013, revision from our previous forecast of 3.6 for
percent change, y-o-y
in 2014. The World Bank projects a moderate
5
uptick in growth as the pace of expansion will
4
be, in our view, fundamentally held back by
2.6
3 the economy operating near its capacity. Next
2 1.6 1.8 year’s growth prospects will largely depend on
1.2
1 an increase in external demand and the recovery
0
of Russia's most important economic partners in
the Euro Area. Domestic demand is expected to
-1
accelerate somewhat, if Government’s recently
-2
announced investment projects (to be financed
-3 2013 Q1 2013 Q2 2013 Q3 2013 Q4 off-budget) will commence. In addition, we
Consumption Investment Net Exports Growth
foresee some growth in private consumption,
Source: CBR and World Bank staff estimates
but at a moderate pace, as we expect lower
higher downward risks. Also, compared to the growth in disposable income and weak consumer
World Bank’s growth projection published in the confidence. Wages in the public sector, which
June edition of the World Bank Global Economic were the main contributor to disposable income
Prospects, this still represents a slight downward growth in the recent past, are not expected to
24 Russia Ecomomic Report | Edition No. 30
Economic Outlook
increase given projected oil-price trends and slightly to about US$63 billion (3.0 percent
Government’s consolidation commitments made of GDP) in 2013. Volatility of capital flows is
in the current medium-term budget framework. likely to remain high and might even increase
towards the end of the year amidst heightened
Given the current monetary stance, we expect uncertainty regarding an impact of the potential
inflation pressure to subside toward year-end. quantitative easing withdrawal on the capital
A good agricultural harvest and stricter control market, especially in emerging markets. This
for administrated prices will help to bring could create additional pressure on the Ruble,
CPI inflation down in the remainder of 2013. given the projected deterioration in the current-
Provided the CBR keeps its monetary stance account balance. In 2014, the capital account is
unchanged, the World Bank expects with high projected to improve to US$50 billion as capital
probability that CBR will meet its target of 5 to 6 returns to emerging markets. The CBR appears
percent CPI inflation. With modest potential for to have sufficient resources and an effective mix
growth, we anticipate that a tight labor market is of instruments to fight off potential speculative
likely to continue exerting some upward pressure attacks while continuing the transition to flexible
on prices this year and next, suggesting that the exchange-rate management.
CBR has limited room for monetary loosening
if it wants to stimulate economic growth. Such The World Bank projects a modest reduction
a loose-money policy would probably have in poverty in 2013 and 2014. The share of the
a marginal impact on growth, but it could population with incomes below the national
undermine the quality and credibility of the CBR poverty line is estimated to drop from 11.0
and limit its recent success in anchoring inflation percent in 2012 to 10.9 percent in 2013 (Figure
expectations. 33). Due to the moderate pace of the expansion
of the economy, poverty reduction is estimated
We expect the Balance of Payments position to slow down despite low unemployment. For
to weaken slightly in 2013 and 2014. Given the 2014, we project a poverty rate of 10.7 percent.
stable outlook for oil prices, the current-account This would translate into a decline in the number
surplus is expected to decline to US$63 billion of poor people from 15.6 million in 2012 to 15.2
in 2013 and further to US$39 billion 2014. The million in 2014.
capital account deficit is projected to deteriorate
Figure 33: Poverty rate forecast
25
21.6
18.8 19
20 18.4 17.9
17.7
15 15.5 15.5
15.2 15.2
13.3 13.4
13 12.5
10 12.7
11.0 10.9 10.7
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Million people Gini (RHS) Poverty rate Funds coefficient
Source: CBR and World Bank staff estimates
Russia Ecomomic Report | Edition No. 30 25
Economic Outlook
2.3 Risks to the Outlook
A lthough risks to the global outlook are
less pronounced and more balanced
compared to a year ago, new risks are
The World Bank sees mostly downside risks
to the baseline scenario for Russia, the first
major risk being related to external factors.
gaining prominence. Continued balance-sheet Russian exports could remain depressed if the
adjustments in the Euro Area, the potential recovery in global demand is further delayed.
for higher market-driven interest rates and The tapering of quantitative easing policies,
rising debt ceiling-related uncertainty in the notably in the US, could temporarily negatively
US could all set back private spending and impact Russia’s economy through lower oil
confidence, although these risks are offset prices, restricted access to international capital
by the possibility of stronger growth should markets and capital outflows.
confidence improve more quickly than
anticipated. Other risks include rising geo- Second, there is a risk that the main drivers of
political and commodity risks stemming from consumption could weaken. If Government’s
events in the Middle East. Furthermore, while recently announced investment projects will
a progressive decline in China’s unusually not come through or will be delayed, labor-
high investment rate is expected over the market relaxation is likely to continue and
medium-term, a disorderly unwinding could we would expect private-sector wages to
have significant consequences, particularly for decelerate. As mentioned, the public sector,
developing-country and emerging commodity which was the main contributor to disposable
exporters. Finally, when quantitative easing income growth in the recent past, is unlikely
policies are withdrawn, rising interest rates to expand further. We also note higher
should increase debt-servicing costs and raise vulnerability to increasing risks in regard to
the cost of capital in developing and emerging the quality of the credit portfolio given the
economies. Risks also grow if the adjustment continuously high credit growth, which could
to these rates is too abrupt or they expose dampen domestic demand.
domestic vulnerabilities in developing and
emerging economies with large external
funding needs and difficult domestic policy
and growth environments.
26 Russia Ecomomic Report | Edition No. 30
PART THREE
VOLATILITY IN RUSSIA: OBSTACLE TO
FIRM SURVIVAL AND DIVERSIFICATION
IN MANUFACTURING
11
T he need for economic diversification receives a great deal of attention in Russia. This note looks
at a way to improve it that is essential, but largely ignored: how to help diversifying firms better
survive economic cycles. By definition, economic diversification means doing new things in new
sectors and/or in new markets. The fate of emerging firms, therefore, should be of great concern
to policy makers. This note indicates that the ups and downs—the volatility—of Russian economic
growth are key to that fate. Volatility of manufacturing growth is higher in Russia than in comparable
economies because its slumps are both longer and deeper. They go beyond the cleansing effects
of eliminating the least efficient firms; relatively efficient ones get swept away as well. In fact, an
incumbency advantage improves a firm’s chances of weathering the ups and downs of the economy,
regardless of its relative efficiency. Finally, firms in sectors where competition is less intense are less
likely to exit the market, regardless of their relative efficiency. Two policy conclusions emerge from
these findings. First, strengthening competition and other factors that support the survival of new,
emerging and efficient firms will promote economic diversification. Second, efforts to help small and
medium enterprises may be better spent on removing the obstacles that young, infant firms face as
they attempt to enter, survive and grow.
11
This special focus note on diversification is part of a larger research agenda on diversification currently followed by the European and Central Asia region of the
World Bank. Its main messages and material are aligned with other forthcoming regional reports. This specific note is based on material from the World Bank
Policy Research Working Paper No. 6605, September, 2013, Russian volatility :Obstacle to firm survival and diversification,
Volatility in Russia
3.1 Introduction
R ussia is much less diversified today than it
was during the Soviet Era (EBRD, 2012).12
Post-2000 economic growth in Russia has
This note looks at the role of growth volatility
as a possible explanation. It examines the role
of surges and slumps in manufacturing output
been reliant on natural resources, especially and its microeconomic implications in the
hydrocarbons, and this is a trend that is likely to dynamics of emergence and sustainability of
persist. Exports data tell the same story: Figure 34 nascent economic activities. The dynamics of
highlights the increasing reliance on natural gas the industrial output of the economy as whole,
and petroleum exports. The oil-and-gas sector between 1993 and 2009, are the focus of this
has experienced double-digit annual export study.
growth in the last decade and accounted for
nearly 69 percent of the value of Russia’s exports Volatility in Russian manufacturing output goes
in 2010. Such strength originating from so few beyond the ups and downs of regular business
sectors may already be a risk in the economy. cycles.13 This note examines the downturns that
magnify and accelerate the cleansing effects to
Figure 34: Petroleum and gas increasingly dominate Russia’s exports
the economy in forcing inefficient firms to exit,
100
90
as well as the upturns that set the foundations of
Percent value of all exports per year
80 Other Exports economic diversification by giving new economic
70 activities the opportunity to emerge.
60
Gas
50
Finding evidence that businesses are created
40
in times of economic expansion is important
30
Petroleum
20 because much of the policy debate about
10 diversification is based on the assertion that
0 few do emerge. Russia does not seem to produce
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
much beyond what it has produced in the
recent past. This claim is used to support direct
Source: United Nations, Comtrade, retrieved September 25, 2013
intervention to help new economic activities
The export story is repeated for the rest of the emerge. But one of this study’s hypotheses
economy; namely, while there is growth in the is that emergence may not be the problem;
Russian economy, there are concerns that it has rather, sustainability is. Therefore, improving
been limited to too few sectors. The economy sustainability may be the central economic
does not appear to be diversifying as expected issue for diversification: it means creating the
despite favorable economic conditions. Why? conditions that will let the efficient firms that
emerge in booms survive the downturns. One
way to improve their chances of survival is to
reduce volatility in economic output.
12
http://www.ebrd.com/downloads/research/economics/publications/specials/diversifying-russia.pdf
13
Nickell, S., D. Nicolitsas and M. Patterson (2001) “Does doing badly encourage management Innovation?”, Oxford Bulletin of Economics and Statistics, Department
of Economics, University of Oxford, vol. 63(1), pages 5-28, February.
28 Russia Ecomomic Report | Edition No. 30
Volatility in Russia
3.2 Comparative Analysis of the Concentration of Russian Industrial Production
and Its Potential Consequences
T here are high levels of concentration of
output in a few manufacturing sector in
Russia.14 The bottom quartile of sectors, ranked
In turn, volatility may exacerbate the
concentration of economic output. This study
also suggests that volatility in growth may
in order of their size in terms of operating increase the likelihood of (premature) exit
revenue, contribute 0.6 percent of the total of new, emerging firms. This means that the
manufacturing output in Russia. In comparison, structural change that new, emerging firms bring
the top quartile contributes 80 percent.15 is stunted by high levels of economic volatility.
As a result, the economy can experiences a
The concentration of output within sector vicious cycle of comparatively higher “premature
(between firms) in Russia is even more death” of new firms due to economic volatility,
noteworthy. The average share of output for the and increased volatility driven by an economic
bottom quartile of firms (in terms of operating structure that remains undiversified or even
revenue) in a manufacturing sector16 is 0.06 more concentrated as a result of the high exit
percent. The share of the top quartile is 94.7 rate of new firms.
percent.17
The reinforcing dynamics between volatility
These relatively high levels of output and concentration of output is also a possible
concentrated in either a few sectors or in a explanation of Russia’s relatively larger
handful of firms may lead to more volatility. manufacturing firms. As the four graphs in Figure
High economic concentration makes an economy 35 indicate, the average Russian manufacturing
vulnerable to the fate of fewer economic events, firm, whether measured by annual operating
such as changes in the price of the most prevalent revenue or by its labor force, is larger than the
commodity sold or goods produced. For example, average manufacturing firm in the rest of world
some highly concentrated economies expand or in Russia’s closest neighboring economies
and contract in response to rises and dips in the in Europe and Central Asia18.19 A relatively high
price of the output that dominates total national mortality rate of young Russian firms likely
economic output. In addition, these types of explains the size distribution, since it eliminates
economies are more likely to produce spillover smaller firms from the average-size estimation
volatility from dominant fluctuating sectors to (the left-hand side tail of the distribution). Young
other sectors that are not directly affected by firms tend to be small. In Russia, those younger
external events. Evidence shown here supports and smaller manufacturing firms tend to have a
this characterization of growth volatility in high mortality rate (not unusual in any economy)
Russia. irrespective of their level of efficiency (a relatively
14
The characteristics of the dataset used for the descriptive statistics presented here are further explained in the Annex of the World Bank Policy Research Working
Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival and diversification.
15
See Annex of the World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival and diversification).for a yearly
breakdown.
16
When referring to sectors, these are defined by 4-digit NACE 1.1. The higher the digit, the more disagregated the sector data will be.
17
See Table in the Annex of World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival and diversification.
18
The 28 economies included in the Europe and Central Asia (ECA) region (in alphabetical order): Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina,
Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland,
Romania, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Ukraine, Uzbekistan. Turkmenistan is not included.
19
This size comparison controls for differences in the composition of manufacturing sectors across these economies.
Russia Ecomomic Report | Edition No. 30 29
Volatility in Russia
less common finding). This is a cause for concern. (location, sector and economic activity, for
In addition, as discussed later in more detail, this example), firms of the same age across different
relatively high mortality rate is associated with economies should employ a similar number of
the deep and long downturns that characterize people and make about the same sales revenue
some cycles in the short history of the modern if economies are all equally efficient in allocating
Russian economy. resources to the most productive firms. If some
economies are not allocating the resources
Of equal concern is that the biggest firms that firms need to grow, they exhibit what is
(the right-hand side of the size distribution of known in economic terminology as allocative
manufacturing firms) do not grow to be as big in inefficiencies.
Russia as in other parts of the world. This finding
calls into question whether even efficient firms One way to determine the relative allocative
get the resources they require to grow in the efficiency of economies is to compare firm-size
Russian economy. In well-functioning economies, and age data across economies. As firms get
markets efficiently allocate resources to the older and grow, they employ more workers and
most productive firms irrespective of their size increase their sales revenue. For that reason,
and age (Hsieh and Klenow 2009).20 This implies there should be a positive relation between firm
that holding for all other explanatory factors size and age and this relation should demonstrate
Figure 35: The Russian economy is dominated by larger firms
Size distribution of firms based on labor force (log) Size distribution of firms based on labor force (log)
Russia vs. Rest of ECA Russia vs. Rest of the World
.3 Rest of the World
.25
Density labor force (log)
Density labor force (log)
.2 Rest of ECA Russia Russia
.2
.15
.1 .1
.05
0 0
0 2 4 6 8 10 0 5 10
Distribution of observations Distribution of observations
Russia Rest of ECA Russia Rest of the World
Size distribution of firms based on sales revenue (log) Size distribution of firms based on sales revenue (log)
Russia vs. Rest of ECA Russia vs. Rest of the World
.2 .2
Russia
Density of sales revenue (log)
Russia
Density sales revenue (log)
.15 .15
.1 Rest of ECA
.1
Rest of the World
.05 .05
0 0
5 10 15 20 25 30 0 10 20 30 40
Distribution of observations Distribution of observations
Russia Rest of ECA Russia Rest of the World
Source: United Nations, Comtrade, retrieved June 12, 2012
20
Hsieh, Chaing-Tai, and Peter J. Klenow. “Misallocation and manufacturing TFP in China and India. “The Quarterly Journal of Economics: 124.4 (2009): 1404-447.
Print.
30 Russia Ecomomic Report | Edition No. 30
Volatility in Russia
a statistical regularity across economies (Figure different from each other. After a certain age,
3). The size of a manufacturing firm is measured the size of firms in Russia slows. Based on these
either by annual sales revenue or number of data, Russia is seems relatively less allocatively
employees. Indeed, the space between the efficient than many of the economies to which it
two forty-five degree line in Figure 36, indicates was compared.
that firm growth is relatively stunted in Russia
compared to other economies. If all firms grew in At this point, findings on the relatively lower
size at about the same rate in Russia as in other levels of allocative efficiency in the Russian
economies, the lines in this figure would be on economy are indicative, not conclusive, but
top of each other. They are not; the size-age nonetheless important. They point to an
line trajectories cross and separate at a certain additional factor that may hamper growth and
point. The Russian trajectory falls below that of diversification of the economy: that the staying
comparator economies. Moreover, the figure power of inefficient firms that are stunted in
indicates that the differences in trajectory are growth but do not exit the market may be a
statistically significant to a 95-percent confidence problem. In relation to how they affect the
interval. The grey shading around these lines entrance of new firms, these stunted firms
depicts that band of confidence. Where these that stay put hold on to productive resources
grey bands do not cross, the reader can conclude (labor and finance) that newer, possibly more
that the estimates are statistically significantly productive firms in emerging sectors could make
Figure 36: Older firms in Russia employ fewer workers and earn less sales revenue than similar firms in other economies
Age predicts size of labor force (log) Age predicts sales revenue (log)
Russia vs. Rest of the World Russia vs. Rest of the World
8 30
Actual sales revenue (log)
Actual size of labor (log)
Rest of the World Rest of the World
6 25
Russia
4 20 Russia
2 15
0 10
0 2 4 6 8 10 15 20 25 30
Linear prediction Linear prediction
95% CI Rest of the World Russia 95% CI Rest of the World Russia
Age predicts size of labor force (log) Age predicts sales revenue (log)
Russia vs. Rest of ECA Russia vs. Rest of ECA
Actual size of labor force (log)
8 25
Acutal sales revenue (log)
Rest of ECA
6 Rest of ECA
20
Russia Russia
4
15
2
0 10
0 2 4 6 8 10 15 20 25
Linear prediction Linear prediction
95% CI Rest of the World Russia 95% CI Rest of the World Russia
Source: United Nations, Comtrade, retrieved June 12, 2012
Russia Ecomomic Report | Edition No. 30 31
Volatility in Russia
use of to survive and grow. The staying power of escort them to the exits. Research is just starting
these stunted firms also calls into question how to provide support for the relationship between
fierce competition may be, since the forces of allocative efficiency, firm entry and competition
economic rivalry do not seem to be enough to in other economies.
3.3 Volatility of Russia’s Sector-Level Output Relative to Other Economies
T he first question to answer is whether Figure 37: The annual growth in output of Russian sectors exhibit
relatively higher variances—more volatility
Russia’s economy is more volatile than
Yearly growth of sector output (1993-2009)
others. The study does this by comparing year-
to-year changes in sector-level21 manufacturing OECD
output of the Russian economy, between 1993 Resource rich
and 2009, to that of other economies.22 To Brazil
determine if the Russian economy is relatively
Russia
more volatile than other economies, the variance
India
of the average sector-level growth rate across
China
several years is the statistic of import—a high
variance means high volatility. Korea
-1 -.5 0 .5 1
A box and whisker plot (Figure 37) allows
Source: United Nations, Comtrade, retrieved June 12, 2012
the reader to visually determine whether the
average annual manufacturing growth at the average annual industrial growth in Russia is
sector level in Russia indicates higher variances statistically larger than that of other economies,
across time than that of other economies. The meaning that Russian sector-level growth has
vertical line inside the grey box represents the higher variances and is more volatile.
median growth for each country between 1993
and 2009. The right and left boundaries of the Having established that the variance of average
grey rectangles represent the middle half of annual industrial growth for the period of
the data; they define the 25th percentile to the time examined here is higher than that of
75th percentile of annual rate of sector-level comparator economies, the question is whether
industrial output growth per economy or group this volatility is the result of fluctuations in
of economies. The lines or whiskers, outside of annual growth between sectors or between
these boxes, delineate the most extreme values. years. In other words, is the variance of annual
growth explained by fluctuations in the growth
As can be easily seen, both the grey rectangles of some sectors that in certain years grow fast
and the whiskers in the figure are markedly then slow or is it that all sectors, year by year,
more extended for Russia than for any other generally grow fast or slow?
comparator. This means that the variance of
21
For the sector analysis, a shortened panel that included the period between 1993 and 2009 was used. UNIDO data for Russia start in 1994. In addition, outlier
observations – identified as output growth outside 3 standard deviations above or below the mean growth rate for each sector in each country – were removed.
Doing this resulted in dropping about 45 percent of the observations in the dataset (See Annex of the World Bank Policy Research Working Paper No. 6605,
September, 2013, Russian volatility: Obstacle to firm survival and diversification for a detailed breakdown of the dataset pre and post sample selection).
22
For the sector-level comparative analysis across economies, the following groups of economies and countries are considered: Brazil, India and China, which along
with Russia comprise country grouping called BRICs; Australia, Canada, Chile, and New Zealand are high growth countries that like Russia have an abundance of
natural resources but, unlike Russia, have largely diversified economies and these are grouped together under Resource Rich Countries; and finally Korea and the set
of economies grouped under the Organization of Economic Cooperation and Development (OECD) are compared to Russia because of their relatively long periods
of steady and positive growth that serves as reference of long-term economic performance. Of course, there are overlaps between these groups and some of these
economies. For example, Australia, Canada, Chile, Korea and New Zealand are all members of the OECD.
32 Russia Ecomomic Report | Edition No. 30
Volatility in Russia
This is an important question because it may both across firms and sectors, contributes to
point to spillover or to macro-economic drivers volatility.
of volatility. In other words, if fluctuations are
explained by yearly or temporal fluctuations, The reader will note that the empirical results
where generally all sectors are in slumps or for the analysis of variances are presented for
surges at the same time, that may indicate that two separate periods: 1993 to 1999 and 2000 to
these industrial sectors are linked in such a way 2009. The first represents the period following
that they are all pulled down or up together or the economic collapse of the Soviet Union,
there are macroeconomic factors that affect between 1993 and 1999. The second covers
all of them. Alternatively, if a few sectors are the years of economic recovery where higher
continually in flux while others grow at a steady, growth (2000 to 2009) took hold. While these
even pace throughout the years, this suggests are two dramatically different periods in recent
that there are comparatively few spillovers and Russian economic history, the empirical results
relatively little linkage between sectors. on the possible explanation for the patterns
of economic output volatility are remarkably
The analysis of variances presented in the table similar. In both, the year-to-year fluctuations
below indicates that sector-level growth rates in in sector-level annual industrial output explain
Russia are highly correlated to each other, year more of the variation in growth rates than the
to year. This conclusion is based on the relatively composition of sectors that contribute to output
higher coefficient for the yearly variable as growth. This similarity in results demonstrates
compared to other economies and as compared the persistence in the nature and sources of
to the sector variable coefficient as well. These volatility of the Russian economy. While this
results imply that nearly the entire set of Russian temporal effect is seemingly less prominent in
industrial sectors experience fluctuations in the latter period, the data indicate that in Russia,
growth rates in tandem. This lends support to the changes in sectors output generally move in
spillover hypothesis; namely, that the relatively tandem across the years (Table 12).
high levels of concentration of economic output,
Table 12: ANOVA partial sum of squares
ANOVA for 1993-1999 ANOVA for 2000-2009
Russia Brazil India China Korea Russia Brazil India China Korea
Model 28.35 1.27 14.02 NA 29.24 16.32 4.96 6.68 3.86 7.88
Sector 4.72 0.21 8.15 NA 7.62 2.25 0.54 1.75 1.27 3.33
Year 23.63 1.05 5.86 NA 21.62 13.70 4.44 4.92 2.58 4.53
Residual 21.35 0.95 44.85 NA 37.80 23.15 3.99 25.12 2.54 16.31
Total 49.70 2.22 58.87 NA 67.03 39.47 8.95 31.80 6.40 24.19
Source: Author’s calculation from UNIDO 2011 Industrial Output Data (4-digit NACE)
3.4 The Nature of Volatility Compared With Other Economies
R ecent sector-level growth rates in Russia
exhibit more volatility than in other
economies. All volatility is made up of booms,
to here as slumps. These two can be examined
separately since they are quite different—surges
foster firm entry while slumps cause firm exits.
referred to here as surges, and busts, referred But before getting to the dynamics of firm
Russia Ecomomic Report | Edition No. 30 33
Volatility in Russia
entry and exit, the next task is to understand how often a particular negative growth rate
the characteristics of slumps and surges in the is recorded. The data lines record how often
Russian economy. a negative growth rate is recorded for all the
slumps that took place in these economies
Slumps and surges have two characteristics: between 1993 and 2009. The top of each hill
depth and endurance. In the case of slumps, marks the most common negative rate of growth
the depth is characterized by how much the registered in slumps for each economy.
economy shrinks. Similarly, to determine the
endurance of a slump, the task is to determine This graph confirms that for Russia—because
from beginning to end how long a slump lasted the top of the hill is to the right of all other
without being interrupted by at least one period comparator economies—the common slump is
of positive growth. With respect to the data, characterized by higher negative growth than
to ascertain the depth of slumps, one looks at that found in any of the economies to which it
period in which a slump takes place and one asks is compared.
how often these slumps are characterized by
rates of 0, -1, -2, or -3 percent average annual To compare and contrast differences in the
negative growth, for example. To get a picture of duration of slumps across economies, a
how long slumps last, one records how long (how survival analysis with simple comparisons of the
many years) each slump remained in negative proportion of slumps that lasted 1, 2, 3 or more
territory once the slump began. periods are used. The same time-series data of
sector-level output that were used to calculate
To illustrate the depth of Russian slumps and the volatility of output comparators are used
compare these to that of other economies, a to determine whether the length of slumps in
kernel density estimator23 is used. Figure 38 Russia differ significantly from those of other
is a kernel density plot where the horizontal economies. It was found that they do: they are
generally longer.
axis, from left to right, indicates progressively
deeper slumps (higher negative growth rates).
Figure 39, above, is a graphic depiction of how
The vertical axis, from bottom to top, records data answer the following question: given that
Figure 38: The average slump in Russia is deeper than a slump has started, what is the likelihood that it
in other economies
will last at least one year? Given that the slump
5 has lasted one year, what is the likelihood that
it will last an additional year? And so on. This
4
graphical depiction of the endurance of slumps
Density Function
3 (Figure 39) indicates that slumps are likely to last
longer in Russia than in other economies. This
2
conclusion is based on the fact that for slumps
1 of less than 6 years (the horizontal axis), the
probability (the vertical axis) of a slump persisting
0
for another period is higher in Russia (the step–
0 .2 .4 .6 .8 1
Depth like line is above that of the other economies)
OECD
India
Resource Rich
Brazil
Russia
Korea
China than in the comparator group.24 Finally, to check
Source: United Nations, Comtrade, retrieved June 12, 2012
23
Smoothing the duration of slumps data with a kernel density estimator can be more effective than using a histogram to identify features that might be obscured
by the choice of histogram bins or sampling variation.
24
Since these probabilities are estimates, a 95 percent confidence interval is also estimated to make sure that the probability estimates are indeed significantly
different across economies. The grey lines above and beyond Russia’s and the other economies’ step-like probability estimates delineate these confidence intervals.
Where these intervals do not overlap (up to 5 periods), the differences in probability that a slump will last longer in Russia than in other economies can be safely
assumed to be significant.
34 Russia Ecomomic Report | Edition No. 30
Volatility in Russia
Figure 40: Figure 7:A greater proportion of slumps
Figure 39: The average slumps last longer in Russia last longer in Russia (years)
Russia Vs. Comparator Countries 100
1 90
80
.75 70
Percent
60
Percent Survival
Russia 50
.5
40
30
.25 Comaparators 20
10
0 0
0 2 4 6 8 10
CD
ch
il
sia
a
na
a
az
di
re
Ri
i
s
OE
In
Ch
Br
Ko
Ru
Years elapsed
ce
ur
so
95% CI 95% CI
Re
Above
Data Source: Author’s calculation from UNIDO 2011 3 (4-digit
4 Data
Industrial Output 2 ISIC) 1
Source: United Nations, Comtrade, retrieved June 12, 2012 Source: United Nations, Comtrade, retrieved June 12, 2012
these results, a simple proportions analysis A similar analysis on the duration of economic
is provided. This analysis simply answers surges in Russia and comparator economies
the following question: for all of the slumps was performed as well. Interestingly, that
recorded during the period of these data, how analysis showed that Russia is no different in
many of them last 1, 2, 3, etc. periods? Figure terms of height or duration of surges than that
40 clearly indicates that a disproportionately of other economies. In sum, Russian slumps,
higher number of slumps are 4 or more years not Russian surges, distinguishes its growth
in duration. In sum, Russian slumps also last dynamics from other economies examined.
longer than those of comparable economies.25
3.5 Determinants for Firm Survival in Russia
T he comparative analysis of slumps and surges
using the UNIDO dataset indicate that the
Russian economy exhibits significantly deeper
focuses on identifying and describing the link
between firm exits and surges and slumps,
sector-level competition the role firm-level
and longer slumps than other economies. But productivity plays into firm mortality.
should these features of the Russian economy
be of concern? One answer is that these Given the pattern of deep and long slumps
macroeconomic features of the economy may discovered in the previous analysis, there is
have specific microeconomic consequences. particular emphasis on these results to identify
Slumps may slow or halt firm growth, may force and explain the implications of these slumps
the exit of relatively efficient, newer firms and on firm mortality. For that reason, only the
hinder the allocation of resources from less following findings, out of many, are highlighted
efficient firms to more efficient ones. To see and discussed here:26
if these concerns are warranted, this section
25
See Figure A2 in the Annex of the World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival and
diversification).
26
The econometric results are displayed in Tables A17, A18 and A19 of in the Annex of the World Bank Policy Research Working Paper No. 6605, September, 2013,
Russian volatility: Obstacle to firm survival and diversification.
Russia Ecomomic Report | Edition No. 30 35
Volatility in Russia
1. The more productive firms are less likely to exit surges, emerging and more-efficient firms enter
than the less productive ones. Productivity is to present new products to new markets, this
more of a factor in improved firm mortality helps economic diversification. However, issues
during surges than slumps; arise during the long and deep Russian economic
2. Older firms are relatively less likely to exit than slumps that were described in previous sections.
younger ones. The age of the firm is also more
of a factor in improved firm mortality during Slumps, however, temper this positive news.
surges than slumps; and Productivity is expected to be equally important
3. In sectors where competition is less intense, in the survival of firms during both slumps and
unproductive firms are less likely to exit than surges. However, the Russian data indicate that
in sectors where competition is more intense. this is not the case.29 Part of the explanation may
be that the dynamics of slumps are dissimilar
On average, a firm’s likelihood of surviving to those of surges. The empirical results may
the ups and downs of the Russian economy just be a reflection of that fact.30 Nevertheless,
improves if it’s more productive than others, while the dynamics may be different, in healthy,
holding for all other factors.27 The data however competitive economies, productivity is equally
also provide a slight nuance to this result. Being important to the survival of a firm in the ups
more productive improves the odds of survival and in the downs. In Russia, during the long
during surges than during slumps. This finding and deep slumps, other factors are important in
supports the conjecture that during a surge determining the survival of firm.
started by an expansion of demand for goods, the
intra-sectoral reallocation of resources between The age of the firm plays a more significant
firms will favor those that are more productive. To role during slumps than in surges. Older firms
respond to increased demand, firms expand the are less likely to exit the market.31 Regardless
purchase of their inputs to increase production. of their relative productivity, older, incumbent
Increased demand for inputs raises their prices. firms will remain in the market.32 This finding,
In this situation, the least productive firms, when coupled with the discovery that Russian
which by definition are already burdened with slumps are more frequent, longer and deeper,
higher costs of production, are unable to stay in raises the question of whether this premium
the market as higher input prices further raise on incumbency and age is an adaptation, albeit
their costs and these cannot be recovered with not a very healthy one, to the nature of Russian
higher prices. This forces uncompetitive firms to slumps. Incumbents are often not the champions
exit even during economic booms.28 This finding of change and innovation that form the basis of
is good news for the Russian economy. If during economic diversification.
27
See Tables A17, A18 and A19 in the Annex of World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival
and diversification where the variable ln(value added per worker) serves as a productivity measure. In all cases, the coefficient for this variable is negative and
statistically significant at the 99 percent level.
28
This is consistent with a heterogeneous firm-model of Melitz (2003).
29
The reader can see in Tables A17, A18 and A19, in the Annex of World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle
to firm survival and diversification, that the coefficient for the interaction term between productivity and slump or surge (surge/slump × ln(value added per worker)
is always negative and statistically significant at the 99 percent confidence level. Since a surge is coded as value=1, the coefficient of this interaction term indicates
that during surges, being more productive is more important than during slumps (coded as value=0). If productivity had been as equally important to firm survival
during slumps as in surges, the coefficient for this interaction would have been zero.
30
Unlike in surges, in slumps demand falls and so do prices; the most efficient firms can meet these prices cuts because they are lower-cost producers and so they
can survive the slump. During slumps, within-sector resource allocation may not be as important in survival as it is in surges. Through slumps, firms are releasing
resources as demand shrinks and this would likely force input prices to drop as well.
31
See Tables A17, A18 and A19 in the Annex of World Bank Policy Research Working Paper No. 6605, September, 2013, Russian volatility: Obstacle to firm survival and
diversification where the coefficient for the variable age, in all cases, is negative and statistically significant at the 99 percent level.
32
The reader will note that the coefficients for the size categories (small, medium and large) are statistically significant and negative. However, to determine the
complete effect of size on the likelihood of survival, the coefficients to all of the interaction terms with age must be considered. Once all coefficients are summed
for each size category, they add up to zero, indicating that while there are benefits to being small, medium or large in comparison to a microenterprise (the omitted
category absorbed by the constant), there is no statistical difference between being small, medium or large.
36 Russia Ecomomic Report | Edition No. 30
Volatility in Russia
The last finding also suggests that firms in less Based on the benchmark of health of Russian
competitive sectors are more likely to survive economic dynamics, namely, whether relatively
than would otherwise be the case. This result productive firms stay in the market and grow
reinforces the incumbency premium and has while inefficient ones exit, there is some room
implications for the allocative efficiency of for both optimism and for pessimism. Economic
the economy. The staying power of relatively surges reward productivity. On the other hand,
inefficient firms in uncompetitive sectors is a the staying power of inefficient, incumbent firms
problem. Indirectly, these incumbents affect in slumps hints at a problem.
the entrance of new firms by holding on to the
resources that young, possibly more productive
firms could employ to grow.
3.6 Conclusion
T his note has three main findings. First,
Russian manufacturing output growth is
characterized by a higher volatility than other
that exit the market are young. Possibly, in a
less volatile and more competitive economy,
these young firms would remain in the market,
comparator countries. Second, this volatility is grow and pave the way for the economic
mostly driven by more numerous, deeper and diversification so many Russian policymakers
longer slumps and is mostly associated with want. However, Russia, like most governments
aggregate slumps that have yearly effects. When around the world, is focused on SMEs (small and
the Russian economy slumps or surges, few medium enterprises) as a target for policy aid.
sectors can escape the gravity of the downward The findings here indicate that it may be time to
or upward pull. Third, while the economic surges change focus to seeing what ails YIFs (young and
increase the probability that productive firms infant firms) emerging in the Russian market.
remain in the market, the same is not true of
economic slumps—older firms, not necessarily The economic ramifications of these findings to
more productive ones, are more likely to survive the Russian economy are what matter. In that
the downturn. Furthermore, in sectors in which sense, the evidence presented indicates that
competition is less fierce, firms have a higher slumps affect the nature of firm mortality and
likelihood of weathering a slump. allocative efficiency. Russia’s policymakers may
want to worry more about the economic costs
The econometric results on the relationship of these sharp ups and downs of the economy.
between firm exit and competition have If Russia is going to rely on new firms doing new
important policy implications. First, at the things in new markets as a source of economic
microeconomic level, promoting competition diversification, there will be a need to address
would help addressing them. More specifically, volatility, competition and a too-heavy public
policymakers may want to provide new support policy and programmatic focus on small and
for emerging firms, rather than large ones, to medium-sized enterprises rather than on young,
address the fact that some of the efficient firms infant and productive firms.
Russia Ecomomic Report | Edition No. 30 37
38
Annex: Main indicators
2012 2012 2013
Output Indicators 2007 2008 2009 2010 2011 2012
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
GDP, % change, y-o-y 1/ 8.5 5.2 -7.8 4.5 4.3 - - 4.8 - - 4.5 - - 4.0 - - 3.4 3.4 - - 1.6 - - 1.4 - -
Industrial production, %
6.8 0.6 -9.3 8.2 4.7 3.8 6.5 2.0 1.3 3.7 1.9 3.4 2.1 2.0 1.8 1.9 1.4 2.6 -0.8 -2.1 2.6 2.3 -1.4 0.1 -0.7 0.1
change, y-o-y
Manufacturing, % change, y-o-y 10.5 0.5 -15.2 11.8 6.5 4.8 6.3 2.4 3.6 7.0 3.4 5.7 4.1 3.3 3.0 4.0 1.5 4.1 -0.3 -0.1 3.4 1.2 -4.4 -1.2 -1.5 -0.2
Russia Ecomomic Report | Edition No. 30
Extraction of mineral resources,
3.3 0.4 -0.6 3.6 1.9 1.4 3.7 0.8 1.2 -0.3 0.2 0.9 0.8 1.8 2.1 0.3 0.2 1.1 -1.2 -2.2 0.6 2.6 2.3 3.1 0.4 2.0
% change, y-o-y
Fixed capital investment, %
21.1 9.8 -16.2 6.0 8.3 16.6 16.3 16.6 8.5 13.7 9.2 9.5 7.8 -0.3 6.2 2.5 -0.4 6.7 1.1 0.3 -0.8 -0.7 0.4 -3.7 2.5 -3.9
change, y-o-y
Fiscal and Monetary Indicators
Federal government balance,
5.4 4.1 -5.9 -4.1 0.8 0.7 -2.4 -0.5 -0.4 0.6 1.0 0.9 1.4 1.5 1.5 1.4 -0.1 -0.1 -0.3 -1.8 -0.4 0.0 0.7 1.2 0.8 0.9
% GDP 1/
Consolidated budget balance,
6.1 4.8 -6.2 -3.6 1.6 10.6 2.7 4.0 3.6 4.7 4.1 4.3 4.2 3.6 3.6 3.2 0.4 0.4 6.4 1.0 2.0 2.0 2.2 1.7 2.0 -
% GDP 1/
M2, % change, p-o-p 2/ 51.3 27.2 -3.5 30.6 23.3 -3.5 0.7 0.8 0.8 0.8 1.3 -0.5 0.0 0.3 0.3 1.4 9.3 17.9 -2.4 1.6 1.1 1.4 0.9 1.5 0.8 -
Inflation (CPI), % change, p-o-p 11.9 13.3 8.8 8.8 6.1 0.5 0.4 0.5 0.4 0.2 0.4 0.5 0.6 0.7 0.6 0.5 0.4 5.1 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.5
GDP deflator 1/ 13.8 18.0 2.0 14.2 15.5 - - 10.5 - - 9.1 - - 8.8 - - 8.5 8.5 - - 6.9 - - 6.4 - -
Producer price index (PPI), %
25.1 -7.0 13.9 16.7 13.0 -0.2 1.1 2.2 0.7 -2.4 -0.8 -1.1 5.1 4.8 -1.6 -1.2 -1.1 6.8 -0.4 0.8 0.5 -1.2 -1.0 0.4 2.0 2.8
change, p-o-p
Nominal exchange rate, average,
25.6 24.8 31.7 30.4 29.4 31.5 29.9 29.4 29.5 30.7 32.9 32.5 32.0 31.5 31.1 31.4 30.8 31.1 30.3 30.2 30.8 31.3 31.2 32.3 32.7 33.0
Rb/USD
Reserve Fund, bln US$ e-o-p - 137.1 60.5 25.4 25.2 61.4 62.4 62.3 62.2 60.2 60.5 59.9 60.5 61.5 61.4 61.4 62.1 62.1 86.2 84.7 83.9 84.9 84.4 84.7 85.4 85.4
National Wealth Fund, bln
- 88.0 91.6 88.4 86.8 88.3 89.8 89.5 89.2 85.5 85.6 85.2 85.9 87.6 87.2 87.5 88.6 88.6 89.2 87.6 86.8 87.3 86.7 86.5 86.9 86.8
US$, e-o-p
Reserves (including gold) US$
478 427 439 479 499 505 514 513 524 510 514 511 515 530 527 528 538 538 532 526 528 533 518 514 513 -
billion, end-o-p
Annex
Annex: Main indicators
Balance of Payment Indicators
Annex
Trade Balance, billion US$
130.9 179.7 112.1 151.4 198.2 20.4 20.3 18.3 18.1 17.3 13.9 11.5 11.3 15.7 14.4 14.7 16.4 192.3 17.2 15.4 16.0 14.2 15.0 13.6 13.3 0.0
(monthly)
Share of energy resources in
61.5 65.9 62.8 63.5 65.5 - - 68.7 - - 65.0 - - 64.7 - - 64.3 65.7 - - 68.2 - - 66.0 - -
export of goods, %
Current Account, US$ billion 76.6 102.4 48.9 70.3 98.8 - - 39.5 - - 16.0 - - 5.9 - - 10.0 71.4 - - 25.1 - - 6.9 - -
Export of goods, US$ billion 354.4 471.6 304.0 400.1 522.0 39.5 45.0 46.7 44.9 45.5 40.8 41.2 41.2 43.1 46.5 45.3 48.3 528.0 38.9 42.0 44.6 44.0 41.4 41.6 43.5 0.0
Import of goods, US$ billion 223.5 291.9 191.9 248.7 323.8 19.1 24.7 28.4 26.8 28.2 27.0 29.7 29.9 27.4 32.2 30.6 31.9 335.7 21.7 26.5 28.6 29.8 26.4 27.9 30.1 0.0
Gross FDI, mln US$ 1/ 27,797 27,027 15,906 13,810 18,415 - - 3,863 - - 7,598 - - 11,333 - - 18,666 18,666 - - 6,384 - - 12,139 - -
Average export price of Russia's
64.4 91.2 56.2 74.6 103.9 102.5 108.1 112.7 111.7 106.6 94.5 93.6 100.4 104.3 104.6 103.2 101.1 103.6 102.8 105.3 102.9 97.6 94.4 95.5 - -
oil, US$/bbl
Financial Market Indicators
Average weighted lending rate
10.8 15.5 13.7 9.1 9.3 8.8 8.9 9.2 9.0 8.9 9.3 9.5 9.1 8.9 9.1 9.1 9.4 9.4 8.8 9.6 10.0 10.2 9.9 9.5 9.2
for enterprises, % 3/
CBR refinancing rate, %, end-o-p 10.0 13.0 8.8 7.8 8.3 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.25 8.25 8.25 8.25 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3
Real average rate for Ruble
-3.4 -6.8 -0.1 -6.5 -3.2 -1.5 0.8 0.2 1.3 4.8 3.6 3.9 1.7 -2.6 0.0 2.3 3.9 3.9 3.5 4.6 6.8 9.0 7.2 5.5 2.0
loans, % (deflated by PPI)
Stock market index (RTS, ruble
2,291 632 1,445 1,770 1,382 1,577 1,735 1,638 1,594 1,242 1,351 1,377 1,390 1,476 1,436 1,437 1,527 1,527 1,622 1,534 1,460 1,407 1,331 1,275 1,313 1,291
term, eop)
Enterprises Finances
Share of loss-making
23.4 25.2 30.1 27.8 28.1 34.0 33.2 35.0 32.9 31.4 31.0 29.3 28.2 28.3 27.0 26.3 25.9 25.9 34.9 34.3 36.5 34.8 33.5 32.3
companies 1/
Share of credits in capital
15.5 17.6 20.1 14.3 12.8 - - 13.4 - - 13.7 - - 13.8 - - 13.3 13.3 - - 17.1 - - 17.2 - -
investment 1/
Income, Poverty and Labor Market
Real disposable income, (1999
245.6 251.5 259.3 272.5 274.7 203.4 253.4 253.4 274.5 258.8 290.1 270.7 281.5 278.7 277.6 295.3 415.9 286.2 205.0 270.8 279.2 296.0 256.6 297.4 282.8
= 100%)
Average dollar wage, US$ 532 697 588 698 806 754 804 868 875 861 835 821 804 824.7 862.1 873.9 1185.4 859 887 883 932 958 951 960 923
Share of people living below
13.3 13.4 13.0 12.5 12.7 - - 13.5 - - 12.5 - - 12.1 - - 11.0 11.0 - - 13.8 - -
subsistence, % 1/
Russia Ecomomic Report | Edition No. 30
Unemployment (%, ILO 6.1 7.8 8.2 7.2 6.1 6.3 6.2 6.3 5.6 5.2 5.2 5.2 5.0 5.0 5.1 5.2 5.1 5.1 6.0 5.8 5.7 5.6 5.2 5.4 5.3 5.2
definition)
39
Source: Goskomstat, CBR, EEG, IMF, staff estimates
1/
Cumulative from the year beginning. 2/ Annual change is calculated for average annual M2. 3/ All terms up to 1 year.
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