Twice a year the World Bank files a Russian Economy Report. The last one was in November 2007. Let’s look at its first chapter – “Recent Economic Developments”. It does what it says, i.e., condenses Russia’s economic situation in 2007 into a few pages of dense text, stats and charts.

First comes the summary:

RUSSIAN ECONOMIC REPORT – NOVEMBER 2007

Russian economic performance remains robust. Having grown by 7.9% (year on year) in the first half of the year, Russia is likely to post full-year GDP growth of over 7% in 2007. Output growth was driven by rising domestic demand, in particular, buoyant household consumption and business investment. On the supply side, sectors servicing the domestic demand (construction and retail trade) continued to boom. Manufacturing growth remains solid but is tapering off. The negative contribution of net exports to GDP growth is explained by the real appreciation of the ruble, which is making Russia’s exports more expensive abroad and imports less expensive to domestic consumers.
In a context of an economy growing close to potential, with high energy prices and large capital inflows, Russia faces two main challenges: inflationary pressures and rapid appreciation of the exchange rate. The most notable monetary development in 2007 is the surge in inflation. While it remained under control in the first quarter, inflation kept gaining momentum in the remainder of the year. Inflation reached 9.3% over the first ten months of 2007. Most likely, end-of-year inflation will reach 11 percent (Dec/Dec) compared to 9% in 2006 over the same period. The surge in inflation is explained by rising world food prices and by monetary factors. Large capital inflows pushed the balance of payment surplus to record highs and are becoming an important source of reserve accumulation ($450 bn). However, unlike oil revenues, capital inflows are not absorbed by the Stabilization Fund, driving money expansion and exerting upward pressures on the ruble. Given limited monetary instruments for sterilization and the current stance of monetary policy (that limits the pace of nominal exchange appreciation), reducing inflationary pressures is becoming exceedingly a difficult task.

The Russian government continued to enjoy fiscal surpluses. The federal budget surplus reached 7.1% of GDP over the first nine months of 2007. But the approved 3-year budget entails a fiscal relaxation that under the current oil price outlook would reduce the overall budgetary surplus to 0.2 percent of GDP by 2008. The amendments introduced to the budget 2007 law entail an increase in non interest expenditure that would bring the budget surplus down from 4.8% to 2.8% at the end of 2007. These amendments aim at increasing public investments in priority infrastructure and social sectors with a view of boosting growth. However, raising public investments might not be enough to close Russia’s infrastructure gap and drive sustained economic growth. Keeping up private investments and improving the efficiency of investments will be as important. In addition, the pace of fiscal expansion needs to be studied carefully to avoid exacerbating tensions between fiscal and monetary policies.

[Read more…]