Russia Should Leverage Commodity Boom to Boost Growth

Russian growth of 4.3 percent projected for 2011

Lower world growth and euro area crisis are main risks to outlook

Stronger policies would leverage commodity boom and lift growth rate

For 2011, the IMF is projecting growth of 4.3 percent. But Russia could do much better. Before the global financial crisis, the economy was growing at more than 7 percent per year, and it could take off again if economic policies and the supporting policy institutions are strengthened.

Russia also remains overly reliant on oil revenues, which makes it vulnerable to a slowdown in economic growth and a sudden drop in commodity prices.

In an interview, IMF mission chief for Russia Juha Kähkönen and deputy mission chief Daria Zakharova discuss the outlook for Russia’s economy, and weigh risks such as continued crisis in the euro area or a pronounced slowdown in the global economy.

IMF Survey online: What is the outlook for Russia’s economy?

Kähkönen: Russia is still benefiting from high oil prices, but its post-crisis economic performance has been disappointing, with only moderate growth and high inflation.

Russia saw a major decline in output of about 8 percent of GDP during the global crisis, and is still catching up. The economy grew by 4 percent in 2010 and is projected to grow by 4.3 percent this year. Growth has suffered as a result of a bad harvest in 2010 brought on by drought. The economy is also slowing down now because of the ongoing turmoil in advanced countries.

Going forward, Russia’s outlook will depend not just on the external environment but also on economic policies.

If current policies—a high nonoil fiscal deficit and no clear medium-term anchor for fiscal policy, monetary policy that is insufficiently focused on reducing inflation, a financial sector lacking adequate oversight, and stalled structural reforms—are maintained, the result will be muddling through, with growth tapering off to below 4 percent in the medium term. But if there is a major strengthening of the economic policies, Russia’s potential is huge. The country could easily grow by an annual rate of 6 percent or more on a sustained basis if the right policies are put in place.

IMF Survey online: How vulnerable is the economy to ongoing turmoil in Europe and the slowdown in global growth?

Zakharova: If the crisis in the euro area intensifies and leads to another global downturn and a precipitous fall in oil prices, Russia’s economy could be severely affected.

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