Russia’s economy is treading water or even going backwards under Vladimir Putin, the country’s first three-term president, according to experts who said the world’s eighth-largest economy had been too geared toward commodity-driven exports for too long.
Putin returned to office in May 2012 pledging to boost economic growth to between 6% and 7% a year, the minimum rate needed to ensure long-term sustainable development.
However last month the Ministry of Economic Development and Trade (MEDT) warned gross domestic product (GDP) would grow just 2.4% this year, against a previous forecast of 3.6%.
Vladimir Tikhomirov, chief economist at Otkritie Securities in Moscow, said Russia was “stagnating into the model it inherited from the Soviet era” – a raw material-focused economy with a few splinters of technological prowess focused on defence and aerospace.
“Over the past year, Russia made no big progress in terms of improving its economy. There were big hopes. Putin pledged a better investment climate, promising to invest in private enterprises, but none of that has happened.”
In its annual regional growth outlook report issued today, the EBRD is expected to urge the Russian authorities to enact speedy reforms in order to improve the business climate, particularly for foreign investors. In a speech last month, EBRD president Sir Suma Chakrabarti warned that economies skewed toward natural resources were less likely to create jobs or lead to strong, long-term growth.
What has surprised many is the lack of an immediate boost from Russia’s accession to the World Trade Organization (WTO) last August.
“The WTO has only made a marginal difference [to Russia],” Jason Hurwitz, an analyst at Alfa Bank in Moscow, said. “There has been a general economic decline in growth in emerging markets over the past year, and when that happens, Russia tends to underperform, as it’s more ‘emerging’ than most other markets.” Other economic metrics also point to a gloomy future. Consumer price inflation came in at 7.2% in April, up from 3.7% a year ago, driven by rapid rises in the price of food and services, although the government expects inflation to moderate by year-end to 5.8%.
The MEDT also warned in April that industrial production growth would only reach 2% this year, against a previous forecast of 3.6%, providing further evidence of a one-dimensional emerging economy struggling to find the right balance of primary and secondary production.
The Kremlin decided last year to embark on an aggressive, multi-year expansion in military procurement, seen as a sign it recognized Russia’s narrow band of industrial expertise.
While global defence spending fell 0.5% in 2012, Russia boosted military spending by 16% to $12.3 billion. Yet despite this, Russia’s economy only seems likely to slow further, missing Putin’s optimistic targets. “Unless we see more privatization and market deregulation, more private investment, more foreign investment, Russia’s growth potential will continue to remain very limited,” says Otkirite’s Tikhomirov.
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