Following the worst slump since the Soviet Union collapsed, Russia is bouncing back. GDP expanded by an annual 0.5% in the first quarter, according to VTB Capital’s GDP Indicator. Unemployment dipped in February; consumer confidence rose in the first quarter; and retail sales are back in positive territory year-on-year. Higher aluminium and oil prices – the energy sector accounts for around a third of GDP – also bode well. The World Bank expects GDP to expand by 5%-5.5% this year as the recovery proves “robust”.
What the commentators said
Even if oil prices don’t keep rising, their “lagged effect” will continue to boost the economy as the benefits trickle down, said a Bank of America Merrill Lynch research note. A 30% rise in the oil price adds 3% to GDP after one year and 6% cumulatively after six years. Add in the inventory cycle and a jump in consumption as unemployment dips further and incomes keep climbing, and growth could hit 7% this year.
But can Russia keep up this sort of pace over the medium-term? Don’t count on it, said Capital Economics. The main reason Russia looks unlikely to fulfil its potential over the next few years is the overall lack of investment in the economy, which has already caused oil production to stagnate. Fixed asset investment comprises just 20% of GDP, compared to an average of 25%-30% in emerging markets. This is due to the lousy legal environment, notably weak property rights and investor protection, as well as too much bureaucracy.
Policymakers insist they appreciate “the need for big improvements”, said Jason Bush on Breakingviews. “But they said that after the last crisis.” A strong short-term growth rebound now could see them put off urgent reforms for even longer.