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Russian Federation

Briefing Notes for the Launch in Moscow, March 2008

Growth performance and medium-term prospects

  • Having boosted its share of world output by 20 per cent in the last 10 years, the Russian Federation is the world’s eighth largest economy based on purchasing power parities. The country has also become one of the economic powerhouses in the Asia and the Pacific region. Together with China and India, the country accounted for more than two thirds of the impressive 8.2 per cent growth rate of developing economies in Asia and the Pacific in 2007. The Russian Federation is the third major holder of foreign reserves in the Asian and Pacific region after China and Japan. The country is also among the top five regional and top 10 global exporters of transport services.
  • Domestic demand growth remained robust and helped to speed GDP growth in the Russian Federation from 6.7 per cent in 2006 to 8.1% in 2007. Consumption and investment continued to be the main drivers of economic growth. Household demand rose by 15.2%, and fixed investment by 21.1% in 2007.
  • The growth rates of industrial output were 6.3 per cent in 2007, higher the rates recorded in 2006. Construction industry output remained robust, particularly in the housing sector which saw a 22.3 per cent expansion in the first 11 months of 2007. The main sources of growth in industry were also manufacturing, mining and extraction, led by oil and gas.
  • Agriculture production grew by a modest 3.3 per cent in 2007. But agricultural output growth appeared unable to meet rising domestic demand for food and was one of the main causes of accelerating inflation.
  • GDP growth is expected to slow to 6% in 2008-2009, as tighter liquidity could dampen investment and consumption. The budget plan of the country over 2006-2008 reflects significant spending in order to double public sector wages and improve transport infrastructure.

Fiscal policy

  • Energy-related earnings continued to buttress the Russian Federation’s solid budget performance in 2007. The federal budget surplus accounted for 7.5% of GDP in the first eight months of the year. However, rising budget expenditure, up by about 20 per cent in the last quarter of the year, was set to lead to the budget surplus declining to about 3 per cent of GDP in 2007.
  • In 2008, in a bid to improve budget planning and transparency, the government began operating on a three-year budget basis. Energy-related earnings will be separated from other revenue inflows. The federal budget surplus is expected to shrink in 2008-2009, with high growth in expenditure and a declining growth rate for energy earnings.

Monetary policy developments and inflation

  • The Russian Federation, as other economies of North and Central Asia in 2007, had two key monetary policy targets: to curb rising inflation and to prevent excessive real exchange rate appreciation. The monetary policy of the government was also aimed at keeping domestic producer prices competitive.
  • Despite increasing food prices, inflation decelerated from 9.7% in 2006 to 9.0% in 2007. The government introduced price controls on foodstuffs in October 2007, both to lower food costs and to keep inflation in check.
  • The national currency’s exchange rate was another focus of the monetary policy in the Russian Federation. A key policy issue for the Central bank was to maintain a nominally stable rate of exchange for the ruble against a dual-currency basket, 55% of which would be United States dollars and 45% euros. A strengthening of the ruble appeared the best policy to dampen inflation as the inflation pressures forced the currency to strengthen against its target basket in real effective terms. But as tighter global credit conditions sparked concerns over ongoing domestic liquidity, the central bank cut its reserve requirements and expanded its refinancing operations to boost liquidity.
  • High energy prices and fiscal loosening were also expected to prevent consumer price inflation in the country from falling below 7.5% by the end of 2009.

Trade performance

  • The foreign trade surplus of the Russian Federation was expected to exceed $100 billion in 2007. Export volumes rose by 9.8% in the first nine months of the year to $242.8 billion. During the same period expenditures on imports shot up by 48.1%, to $136.8 billion.
  • By 2009, strong imports and moderate export growth could reduce the country’s current account surplus.

Capital inflows

  • Foreign direct investment (FDI) inflows continued to play a key role in developing and modernizing the economy of the Russian Federation in 2007. In the first half of 2007 FDI reached $25 billion and could exceed $55 billion by the end of the year thanks to improved investment climate. FDI inflows in 2007 were expected to nearly double the record inflows recorded in 2006 and close to the size of flows attracted by such leading emerging market recipients in Asia as China.

Key policy issues and responses

  • The Government of the Russian Federation is expected to continue with the existing mix of market-oriented policies and state intervention in the so-called sectors of strategic importance. There were state acquisitions in baking, engineering and metals sectors in 2007.
  • A less restrictive approach to foreign participation in the energy sector is expected to be introduced in 2008. Amendments to the subsoil law were submitted for approval with objective to allow companies in which foreign investor hold a controlling stake to bid at tenders for strategic fields and deposits. The criteria for defining a strategic oil or gas field include reserves containing over 70 million tonnes of oil and more than 50 billion cu metres of gas. Each foreign bid is expected to be dealt with on a case-by-case basis by a government commission.
  • The strength of the retail sector in 2007 reflected mainly solid wage growth; real wages rose by about 15 per cent in the first 11 months of 2007. Rising inflation is expected to cause more moderate real income growth, which could in turn bring slower growth in household consumption in 2008.
  • With a sharp rise in global food prices, continuing reliance on food imports, and limited prospect of increasing domestic food production, food price inflation is expected to remain a key driver of inflation in the Russian Federation in 2008.

Agriculture and poverty reduction

  • Chapter 3 of the Survey 2008 diagnoses Asia’s waning agriculture and assesses the impact of agricultural productivity growth on poverty. The chapter also analyses agriculture’s role in reducing poverty and inequality and proposes a two-pronged strategy to make agriculture economically and socially viable: first, revitalizing agriculture and second, facilitating migration out of agriculture.
  • One of the conclusions of the Survey is promoting agricultural development in the region, particularly food production and generally rural development that promotes off-farm employment, can make the biggest contribution to reducing poverty in the Asia-Pacific region.
  • As for the Russian Federation, there were more than 20 million people living below the official national poverty line in 2007, which was 3.3 per cent less than in 2006. However, income inequality remains a major challenge for the economy. The Gini coefficient (a measure of income inequality, with higher values denoting more unequal incomes) rose from 23.8 in 1988 to 46.2 in 1996 before dropping to 39.9 in 2002.
  • A study by ESCAP on the impact of agricultural trade liberalization shows that the Russian Federation could take half million people out of poverty in the short run and another half million in the long run if the economy undertakes comprehensive agricultural liberalization – eliminating all tariffs, export subsidies and domestic support for agricultural and food products. Under comprehensive agricultural trade reforms, the country could also increase its welfare gains from US$3.2 million in the short run to US$108.7 million in the long run.