Chink of light as World Bank improves forecast for Russian economy

The Russian economy is struggling to adjust to continued low oil prices, trade embargoes and geopolitical concerns, according to the World Bank.

The Russian economy is struggling to adjust to continued low oil prices, trade embargoes and geopolitical concerns, according to the World Bank.

Vladimir Smirnov / TASS
Russian analysts cite the rise in oil prices and economic reforms, including the devaluation of the ruble, among the main reasons for the recent improvement in the country's economic performance.

There may be a light at the end of the tunnel for the beleaguered Russian economy; the World Bank’s latest forecast predicts the fall of GDP in 2016 to be 1.2 percent instead of the previously projected 1.9 percent. According to the bank, Russia's GDP will grow by 1.4 percent in 2017 and by 1.8 percent in 2018.

The Russian economy is adjusting to the new environment better than expected, says Sergei Khestanov, an associate professor of the Department of Finance and Banking at the Russian Presidential Academy of National Economy and Public Administration.

According to him, the free float of the ruble, which led to the devaluation of the national currency, has become one of the main tools of adaptation. Thus, a free-floating exchange rate has become a stimulus for the growth of exports and import substitution.

"According to recent data, 43 percent of the budget comes from export earnings, which are calculated in dollars," said Khestanov. "Moreover, almost all the costs are in rubles, which is quite effective in reducing the budget deficit."

At the same time, World Bank experts downgraded their global growth forecast from 2.9 percent to 2.4 percent. According to the organization, the growth of the Chinese economy will continue to slow down: The country's GDP growth will fall from 6.9 percent to 6.7 percent by year-end 2016.

Non-resource economy

The Russian economy is struggling to adjust to continued low oil prices, trade embargoes and geopolitical concerns, according to the World Bank: "Though necessary to support the adjustment, tight fiscal and monetary policies are also weighing on growth," reads the report.

However, according to the World Bank experts, there are tentative indications that the decline in some sectors may be bottoming out: "Industrial production is recovering, despite shrinking investment and restricted access to external financing for Russian firms."

The adaption of the Russian economy to difficult conditions is demonstrated by a "qualitative growth in agriculture, chemical and food industries," said Stanislav Novikov, the BKS Financial Group's deputy chairman in charge of retail business.

In May 2015, Bloomberg described all three of these industries as "new growth drivers" for Russia.

The share of agriculture to GDP rose to 4.4 percent, the highest since 2003, Bloomberg notes.  

"In my opinion, the forecast for Russia's GDP may be even more optimistic – perhaps, in the absence of shocks, our economy will already be able to show a symbolic growth at the end of this year," said Novikov.

Oil price influence

Experts cite the rise in oil prices as another reason for the improvement in the forecast for the Russian economy. On June 7, 2016, the Brent crude oil price exceeded the 51-dollar mark for the first time since October 2015.

The World Bank based Its April forecast on the level of only $37 per barrel. This was precisely the reason for the improvement in the forecast for Russia's GDP, according to Bogdan Zvarych, an analyst from the FINAM investment group.

"Expectations about oil production and consumption in the near future are changing, which will lead to the reduction of the world's overproduction of oil in the coming years," he said.

According to Zvarych, this has a positive impact on long-term forecasts on the movement of oil prices, which leads to improved forecasts for Russia.

However, Sergei Khestanov noted that the World Bank does not take into account the recent oil price increase: "The thing is that the World Bank is quite conservative in its calculations and bases its forecasts on the average values for a quarter, six months or a year," he said.

Therefore, if oil prices remain at the current level, the World Bank experts will be able to adjust the forecast in the next quarter in the direction of improvement, said Khestanov.

The Central Bank of Russia also improved the forecast for the country's GDP, which is expected to fall by 0.3-0.7 percent in 2016, the bank head Elvira Nabiullina said on June 10. The previous forecast assumed that GDP would decline by 1.3-1.5 percent this year.

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