Russian economic revival masks long-term problems
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Russian economic revival masks long-term problems

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The Russian economy is expected to see growth accelerate to 2% next year but private sector economists are warning that the upturn only conceals structural weaknesses such as poor demographics, a shrinking labour force, and low productivity levels

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Siluanov: aiming for 3.5% growth

Russia’s economy may return to positive territory this year, but it faces an uncertain future as it struggles to break out of a long-term cycle of super-low growth, leading economists have told GlobalMarkets. William Jackson, senior emerging markets economist at London-based Capital Economics, said the country was over the worst of the last recession. With consumer spending rising, and interest rates and prices set to continue to fall, he tipped Russian GDP to grow by 1.5% in 2017 and 2% in 2018, even though oil prices remain stuck at around $50 per barrel. Jackson tipped the central bank to continue to cut interest rates, from 9.25% at present, to 8% by end-2017, and 6% by end-2018.

But he added that a raft of underlying weaknesses — terrible demographics, a shrinking labour force and weak productivity — remained there for all to see. “Nothing has changed,” Jackson said. “Output per worker is flat or falling, and structural issues like the lack of property rights haven’t been solved. That’s why I see growth falling back to 1% in 2019 and remaining there in the long-term.”

Vladimir Tikhonov, Moscow-based chief economist at BCS Financial Group, pointed to the same flaws bedevilling the world’s 12th largest economy. “The only way you’re likely to see growth get much above 1% in the long-term is if the government pushes through serious structural reforms and channels far more capital into non-commodity sectors,” he said.

Oil dependency

Russia has proven capable of making the occasional judicious financial decision in recent years. Most notable was the central bank’s decision to allow the rouble to float freely against other major currencies, a decision designed to help the country weather future fluctuations in oil prices.

But finance minister Anton Siluanov’s April 2017 pledge to boost “ambitious” growth levels to 3.5% and beyond, by pushing through structural reforms and weaning the country off its continuing dependence on oil exports, are all but unattainable in the current economic and political climate, experts warned.

Worse, experts warned, a lack of commitment to much-needed reforms would ultimately undermine political stability at home. “If growth remains at a super-low rate for good, government will be forced to make unpopular decisions, including cutting social costs and education budgets,” Tikhonov said.

“I don’t believe we will see social instability rising sharply within the year, but if we look at a longer time horizon, you’re going to see more spending cuts, more people unhappy and an increasing in instability.”

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