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Mainstream, VOL LIV No 48 New Delhi November 19, 2016

Russian Economy: From Recession to Hope of Recovery

Monday 21 November 2016


As the year 2016 comes to an end, the Russian President, Vladimir Putin, has reason to feel relieved with signs of economic recovery after persisting recession during the last few years. This is because Russia’s Minister for Economic Development, Alexei Ulyukaev, has been confident that, as estimated by the Central Bank of Russia, the annual GDP growth in 2016 will be positive at about 0.2 per cent to 0.3 per cent. This will be a major development since in 2015 the GDP was a negative -3.7 per cent. In fact Russia’s official estimate appears to be rather more optimistic than the estimates of the IMF which expects Russia’s annual GDP in 2016 to be -1.2 per cent while the forecast of Russia’s GDP in 2017 is one per cent. Hence this is a commendable develop-ment since about a year back analysts estimated that Russia’s annual GDP for 2016 would be -8 to -10 per cent. Few other economic indicators also suggest a recovery trend. For instance, Russia’s exchange rate has gained from about 80 roubles per dollar in early 2016 to 65 roubles per dollar at present. The inflation rate has gone down from 12 to 13 per cent in 2015 to about eight per cent in 2016 mainly due to economic stability.

The economic recovery has been possible due to the policy measures undertaken by the Russian Government. Firstly, the government adopted the policy of freezing wages in public sector companies reducing state expenses. Secondly, in 2016 the Russian Government increased procurement and investment in defencerelated industries preventing decline in the industrial sector. This has helped several engineering enterprises and IT industries that have witnessed substantial growth this year. There are reports by some Russian analysts that the Russian Government is supporting the policy of privatisation of state holdings including Rosneft which has helped in this process of economic recovery. Thirdly, the Russian Government and the Central Bank of Russia adopted free-floating exchange of the rouble that partly helped quick adjustment to shocks and the rouble gained against the dollar during the last few months. There has been some stability in the exchange rate of the rouble in 2016 and this has helped Russia’s competiti-veness in foreign markets. In fact this policy measure has been appreciated by the IMF. Fourthly, Russia, with about 30 per cent of the global hydrocarbon resources, has close ties with Iran and improved relations with OPEC countries on issues relating to oil production. At the same time pursuing a ‘Look East’ policy Putin has enhanced economic ties with China which has emerged
as its major trading partner in addition to intensifying economic relations with the BRICS countries.

Looking back, Russian economy experienced a crisis situation for about two-to-three years. Russia’s annual GDP declined from 4.3 per cent in 2011 to 1.3 per cent in 2013. Industrial production declined from 5.1 per cent in 2011 to 0.4 per cent in 2013. The economy suffered in 2014 due to the Western economic sanctions for Russia’s alleged annexation of Crimea. In fact the Russian economy was virtually crippled due to problems of exports to the West European markets. Moreover, Russia’s financial institutions were denied of loans and investment affecting economic development. What worsened the economic situation for Russia was the sharp decline in the international price for oil from $ 145 per barrel in 2007 to below $ 100 per barrel in 2011 going further to below $ 40 per barrel in early 2014. Russia, being a major exporter of oil in the world and oil exports accounting for about 60 per cent of state income, this decline in prices very adversely affected the economy. Moreover, apart from decline in oil prices due to persisting slowdown in the global economy, the demand for oil declined significantly aggravating the economies of oil exporting countries including Russia. In 2016 oil prices have remained in the range of $ 45-50 per barrel giving some solace to these countries. What should be a matter of great concern is that the international reserves of the Central Bank of Russia have gone down from $ 524 billion in October 2013 to $ 395 billion in September 2016.

There are several problems that need to be addressed by Russia’s political leaders. Firstly, over-dependence on oil and defence sectors has resulted in the neglect of other sectors of the economy. As a result Russian economy suffers from lack of diversification and modernisation. As there is a realisation of this problem, some efforts are being made to solve these short-comings. A very significant issue is that, according to some Western analysts and critics, the technological level in non-defence industries in Russia has remained at where it was at the time of the Soviet break-up. While this could be a bit of exaggeration, this is a major problem facing the economic growth process. Secondly, unemployment has become a major problem accounting for about six per cent of the labour force in the country. Moreover, Russia suffers from high-income disparities among various sections of the population. As per some official data, in 2016 about 20 million out of the total population of 145 million suffer from poverty and are living below minimum subsistence level and happene to be worse affected by inflation, lack of basic consumer goods, high cost of medicines etc. At the same time about 110 Russians are billionaires holding 35 per cent of financial assets, and many of them have parked their money in the West. Hence Putin has a challenging task of getting back that money for Russia’s sustained economic recovery and development.

Gidadhubli is a Professor and a former Director of the Centre for Central Eurasian Studies, University of Mumbai.

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