World Bank: Russia's economic recovery gathers pace

World Bank: Russia's economic recovery gathers pace

Russia’s GDP growth is forecast at 3.2% in 2021, followed by 3.2% and 2.3% in 2022 and 2023, respectively, according to the World Bank’s latest Russia Economic Report. Global economic recovery, higher oil prices, and soft domestic monetary conditions in 2021 are expected to support a recovery led by household consumption and public investment.

This baseline scenario assumes a gradual decline in new COVID-19 infections. “In 2020, Russia’s GDP contracted by 3.0%compared to contractions of 3.8% in the world economy and 5.4% in advanced economies,” said Apurva Sanghi, the Lead Economist for the World Bank in Russia. “Several factors helped Russia perform relatively better: in recent years, the country has undertaken significant macro-fiscal stabilization efforts, resulting in an improved fiscal position. Among other contributing factors were enhanced regulation and supervision in the banking sector, fortified capital and liquidity buffers, relatively soft restrictions for industrial and construction sectors, closer ties to a relatively fast-growing China, a relatively small services sector and a large public sector that buffered against unemployment.”

Russia’s fiscal outcomes worsened in 2020, but improved in the first quarter of 2021. In 2020, the federal budget was hit by  pandemic-induced shocks and registered a deficit of Rub4.1 trillion (3.8 percent of GDP), compared to a surplus of Rub1.9 billion (1.8 percent of GDP) in 2019.

The Russian banking sector has been resilient so far, but medium-term impacts remain to be seen. Credit growth has been supported by an economic recovery and public credit support programs. Non-performing loans remained largely unchanged, at about 9% of total loans, in 2021.

Although employment is still below pre-pandemic levels, the labor market began showing some signs of improvement by the end of 2020. The national unemployment rate has been declining since last August, when it peaked at 6.4%, to 5.4% in March 2021. However, this rate is still 0.7 percentage points higher than in the same month of the previous year, which means that labor markets are not yet where they were before the pandemic.

Average real wages increased by 1.7% between 2019 and 2020, but masked important differences across economic activities: sectors that suffered the largest employment losses also had the largest real wage losses. Real wages increased in agriculture, telecommunications, and health services, but fell in many other sectors, with large declines in hospitality services, construction, culture/sports/leisure activities, and commerce.

The study also finds, however, that increases in real wages do not compensate for the decline in per-capita disposable income, which in the last three quarters of 2020 was lower by 7.9%, 5.3% and 1.7%, respectively, than in the same periods of the previous year.

The report contains a special topic section on halving poverty in Russia through cost-effective social safety nets. As a national goal, Russia aims to halve poverty to 6.6 percent by 2030. While Russia’s social safety-nets system plays an important role in reducing poverty, it does so at a high cost: the country spends over 3% of GDP, or $30 billion per year, on social-assistance programs. This level of spending is more than three times greater than the combined income deficit of all poor families in the country, before transfers.

“Traditionally, Russia has built quite an impressive social safety net system. However, the country’s expenditure on social safety nets is larger than the spending in the Europe and Central Asia region, which is 2.2% of GDP,” said Renaud Seligmann, the World Bank Country Director in Russia. “Introducing a national, targeted program that provides financial assistance to people falling below a poverty threshold could be key to cost-effective poverty reduction. In our view, implementing such a program could reduce poverty faster and at a lower fiscal cost.”