Russian Federation

Briefing Notes for the Launch in Moscow, April 2007

Growth performance and medium-term prospects

• The continued strong economic performance of the Russian Federation was reflected in a 6.7 per cent GDP growth in 2006 owing mainly to acceleration of investment and robust domestic demand. Retail trade grew by 13 per cent and the investment spending in the fixed capital was expanded by 13.5 per cent in 2006.
• Industrial output grew by 3.9 per cent in 2006. The main sources of growth in industry remained manufacturing, mining and extraction, led by oil and gas. Agriculture continued to be a weak performer in the economy, growing by 2.8 per cent in 2006. However, a grain harvest was expected to be higher than in 2005 allowing the country to export grain in 2006.
• Strong domestic demand and increased oil and gas production are expected to enable the economy of the Russian Federation to continue its expansion in 2007-2008. GDP growth is forecast to exceed 6 per cent in 2007-2008. However, further institutional reforms and investment are necessary for sustained economic growth in the country.

Fiscal policy developments

• The 2006 federal budget of the Russian Federation was 40 per cent larger that the budget of 2005. Owing to the gradual fiscal relaxation, the state budget remained in surplus for the last seven years. The budget surplus was expected to account for 6.5 per cent of GDP in 2006. However, the main budget revenues, as in the recent years, came from oil and gas exports. The Government took steps to diversify the economy and end the dependence on hydrocarbon and divert more oil revenues into the Stabilization Fund to help control inflation.

Inflation

• The monetary policy in the country in 2006 was targeted at preventing excessive real appreciation of the rouble and containing inflation. However, inflation in the Russian Federation reached 9.7 per cent in 2006 due to the increases in the costs of housing and communal services, food and non-food products. This level of inflation is regarded as being very high for country attempting to attain sustained economic growth. A surge in fiscal expenditure, increased foreign-exchange inflows and domestic demand could cause inflation to reach 9.0 per cent in 2007.

Current account and trade performance

• The current account of the Russian Federation was expected to be in a surplus of 11 per cent of GDP in 2006 owing mainly to rise in the foreign trade surplus. Exports of the country grew by 28.7 per cent to US$222 billion and imports rose by 36.2 per cent to US$93 billion in the first nine months of 2006. The trade surplus increased from US$104 billion in the first nine months of 2005 to US$129 billion in the corresponding period of 2006. Hydrocarbons exports accounted for about 70 per cent of the total export earnings in the first half of 2006 compared with 62 per cent in the first six months of 2005. Machinery and equipment and consumer goods were the largest import items of the economy.
• The current account surplus is expected to decline in 2007 due to widening invisibles deficit and easing oil prices.
• The Russian Federation is expected to become a major supplier of energy to the Asian countries. The country's share in oil imports of the countries in the Asia-Pacific region is expected to increase from the current 3 per cent to 30 per cent within the next decade. The share of natural gas exports of the Russian Federation to the Asia-Pacific region is expected to increase from 5 to 25 per cent by 2020. The country implemented the East Siberia-Pacific oil pipeline (ESPO) project. The pipeline would transport oil from eastern Siberian fields to Japan and the Republic of Korea, with an eventual extension to China.

Capital inflows and external debt

• Foreign direct investment in the Russian Federation reached more than US$20 billion in the first nine months of 2006 alone, reflecting new opportunities for entrepreneurs generated by special economic zones, concessions and other government initiatives for business development.
• In August 2006, the Russian Federation paid the final installment of its US$23 billion debt to the Paris Club of sovereign creditors. An agreement with the Paris Club enabled it to repay the foreign debt ahead of time, saving around US$7.7 billion in debt service.

Key policy issues and responses

• The "Dutch disease" could pose some challenges to the robust growth in the Russian Federation. The increase in oil prices has led to a surge in trade and current account surpluses. High inflation has resulted in a real effective appreciation of the rouble by more than 50 per cent between 2000-2006, leading to reduced profit margins in the industrial sector. However, the structure of the economy has not changed over time. The share of industry and services in GDP remained relatively unchanged between 2000-2005, and the strongest industrial sector growth has been registered in the construction sector, whose share in GDP increased from 6.6 per cent in 2000 to 7.4 per cent in 2004. Manufactured and agricultural exports remained relatively competitive in 2000-2005. However, the share of manufactured exports in total merchandise exports declined to 24.1 per cent in 2005 from 30 per cent in 2000.
• The Government of the Russian Federation undertook tight monetary and fiscal policies along with other macroeconomic measures to address symptoms of "Dutch disease". Relevant measures have been undertaken to keep macroeconomic fundamentals within permissible limits and create stabilization funds to sterilize a large part of oil revenue. The stabilization fund of the country was expected to reach more than US$90 billion by the end of 2006 in order to meet the Government's commitments to the pension fund and pay its outstanding debt to the Paris Club of leading creditor countries ahead of schedule.

Gender inequality

• The Russian Federation has made a progress in reducing gender discrimination. The country was ranked 49 out of 115 world economies in the Global Gender Gap Report 2006. The country was among the middle of the rankings in four areas of the global competitiveness index: economic participation and opportunity, educational attainment, health and survival and political empowerment. However, the gaps in the wages of men and women have widened.

 

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