Geopolitical Risks Cloud Future of Russian Economy

Uncertainties set to hamper growth in the short to medium term

Capacity constraints continue to weigh on economic growth

Lingering geopolitical uncertainties likely to impact investment

Speaking to IMF Survey at the launch of the IMF’s regular health check of the Russian economy, mission chief Antonio Spilimbergo said Russia needed to build on recent reforms in order to address structural problems related to governance, corruption, and administrative barriers as one way to improve its growth prospects.

IMF Survey: Russia is experiencing a period of slow growth. What factors are behind this, and what can Russia do to reverse the trend?

Spilimbergo: First, Russia’s growth model is based on energy exports, which were supported by significant oil price increases since 2000, and the use of spare capacity in the economy. Now that oil prices have stabilized and spare capacity has been exhausted, growth has slowed significantly. In fact, the entire economy hit capacity constraints in 2011, as evidenced by the beginning of the economic slowdown, while inflation remained elevated. Second, geopolitical uncertainties following Russia’s action in Crimea have recently depressed the economy further, with a particularly negative effect on investment.

Russia could implement a number of policies to improve its growth prospects. In particular, Russia needs more and better investment. This requires addressing problems of governance, corruption, administrative barriers, and regulation. While Russia has already implemented some policies to address the situation, much more remains to be done. Continued efforts at global integration are also needed to attract investment and foreign technology. Other areas where improvement is needed include reinvigorating the privatization agenda, improving competition, increasing the size and efficiency of the banking sector, and reducing price distortions, especially utility prices.

IMF Survey: What effect are the sanctions imposed by the United States, European Union, Japan, and other countries having on the Russian economy?

Spilimbergo: Responding to the situation in Ukraine, many countries and the EU adopted sanctions against Ukrainian and Russian individuals and entities. Concerns about the possible escalation of sanctions have increased the perceived risk of doing business in Russia, which is having a chilling effect on investment. Initially, capital outflows increased significantly and bond issuances by the...