Moderating Risks, Bolstering Growth

Abstract

Half a year ago, Russia's economic
 prospects looked uncertain. The global economy was losing
 momentum, the expansion in the euro area was grinding to a
 halt and commodity prices were beginning to fall. Yet, while
 output growth is slowing this year in line with weaker
 growth in Europe and elsewhere, Russia's latest economy
 performance has been solid, though aided by favorable oil
 prices. The economy returned to the pre-crisis peak towards
 the end of last year, supported by strong consumption, as
 growth held steady at the same rate as in 2010. In 2011,
 measured in current dollars, Russia's economy was the
 ninth biggest in the world, compared to the eleventh biggest
 in 2007. This year, Russia's output might exceed US$2
 trillion. Equalizing for prices difference with purchasing
 power parity, Russia's economy is already the sixth
 biggest today. The current account looks strong thanks to a
 large surplus in the trade balance, and the Central Bank of
 Russia added again in 2011 to its stock of foreign reserves.
 Employment returned to pre-crisis levels even earlier than
 output, and wages grew at a solid pace. Inflation reached
 its lowest level in two decades. Inequality declined and
 consumption levels of low-income households improved. The
 fiscal balance returned to a surplus. And while average
 public debt levels in advanced economies exceeded 100
 percent of growth domestic product (GDP) in 2011,
 Russia's public debt was no more than 10 percent of
 GDP. Economic policies can help to shore up Russia's
 resilience in a volatile economic environment, diversify its
 economy, and strengthen its growth potential. First, fiscal
 policy should be used to rebuild fiscal buffers while oil
 prices are high. This will not only help to prepare for the
 next crisis, but also make sure that fiscal policy does not
 become procyclical as the output gap closes. Furthermore,
 monetary policy should continue to focus on low inflation,
 and financial policies on strengthening oversight. Finally,
 removing structural barriers to growth can help to bolster
 investment and productivity. Improving the business
 environment will go a long way to make the most of the
 economic benefits of Russia's World Trade Organization
 accession in summer 2012.