The FINANCIAL — Slowdown in consumption, stalled investment demand, and a continuing weak external environment led to the downward revision of the World Bank’s May growth projection for Russia from 2.3 percent to 1.8 percent in 2013, according to The World Bank Group.
Despite the observed slowdown, the Russian economy is projected to accelerate to 3.1 percent growth in 2014, says the World Bank’s Russian Economic Report №30 launched today in Moscow.
“The economy appears to be growing close to its capacity, constrained by feeble investment activities and a tight labor market,” said Birgit Hansl, World Bank Lead Economist and Country Sector Coordinator for Economic Policy in Russia and the main author of the Report. “Global recovery could result in an increase in Russian exports starting in the fourth quarter of 2013, while the World Bank projects oil prices to remain stable. Next year’s growth prospects will largely depend on the recovery in Russia's most important economic partner, the Euro Area, and the increased investment activities associated with the recently announced large state investment projects to be financed off-budget,” Hansl added.
This moderately positive outlook is subject to downside risks, according to the report. “Russian exports could remain depressed if the recovery in global demand is further delayed. The tapering of quantitative easing policies, notably in the US, could temporarily negatively impact Russia's economy through lower oil prices, restricted access to international capital markets, and higher capital outflows. We note also vulnerability to increasing risks in regard to the quality of the credit portfolio given continuously high credit growth,” said Hansl.
“Considering these observations, overcoming structural challenges to the Russian economy and its growth would need to constitute an important aspect of growth-stimulating policies,” said Michal Rutkowski, World Bank Country Director for the Russian Federation. “For Russia, this would constitute a shift from the growth model followed in the past, which focused at stimulating consumption demand. As structural challenges become binding, constraints such as non-competitive sectors and markets would need to be addressed to lift Russia’s growth potential,” he added.
The Bank’s research indicates that the ups and downs—the volatility—of Russian economic growth are key to that fate. Volatility of manufacturing growth is higher in Russia than in comparable economies because its slumps are both longer and deeper. They go beyond the cleansing effects of eliminating the least efficient firms; relatively efficient ones get swept away as well. In fact, an incumbency advantage improves a firm’s chances of weathering the ups and downs of the economy, regardless of its relative efficiency. Finally, firms in sectors where competition is less intense are less likely to exit the market, regardless of their relative efficiency, according to The World Bank Group.
Two policy conclusions emerge from these findings. First, strengthening competition and other factors that support the survival of new, emerging and efficient firms will promote economic diversification. Second, efforts to help small and medium enterprises may be better spent on removing the obstacles that young, infant firms face as they attempt to enter, survive and grow.
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