The following OECD assessment and recommendations summarise Chapter 1 of the Economic survey of the Russian Federation 2006, published on 27 November 2006.
See also the excerpt "Expanding State Ownership in the Russian Federation".
Recent economic performance has been impressive…
Real GDP growth during 1999–2005 averaged 6.7%. Initially driven by a rebound from the 1998 financial crisis, recent growth has been underpinned by large terms-of-trade gains that have translated, on the demand side, into a surge in domestic consumption. However, booming consumption has coincided with weakening export performance and surging imports. Investment is growing strongly but investment rates remain relatively low and will need to rise substantially if Russia is to sustain strong growth over the longer term. Already, there are indications that growth in many sectors is supply-constrained, and growth since 2003 has been driven increasingly by non-tradables. The growth of oil production, which was the major driver of growth during 2000–03, has slowed markedly.
Continued strong growth has coincided with slowly declining inflation
Source: Federal Service for State Statistics, Central Bank of Russia, Ministry of Finance, IMF, Economic Expert Group, OECD calculations.
…But the main drivers of current growth are transitory
Although Russia continues to grow at relatively high rates, the main factors underpinning current growth are transitory. The gains in competitiveness that Russian producers enjoyed after the 1998 financial crisis have now more or less disappeared. Moreover, there appears to be little scope left for Russian industry to go on raising output by increasing capacity utilisation without substantially greater investment. Finally, the impact on growth of commodity price increases will inevitably attenuate even if oil prices remain high, as the economy will adjust to the new terms of trade.
Russia has benefited from strongly rising terms of trade
Index 2001 = 100
Source: Federal Service for State Statistics, Datastream, IMF, International Financial Statistics, OECD calculations.
The overarching economic challenge facing the Russian Federation, therefore, is to create the conditions needed to sustain economic growth over the long run at rates that will permit relatively rapid convergence with the advanced OECD economies. The government is well aware of the need to make the transition to a pattern of self-sustaining investment-driven growth that can be maintained over the long term. To do this, Russia needs to press ahead with a range of structural reforms aimed at increasing potential output, while maintaining sound macroeconomic management, in order to ensure that fluctuations in the terms of trade do not result in significant imbalances between domestic supply and demand.
Macroeconomic discipline should be accompanied by structural reforms
Realising Russia’s long-term growth potential will require more than just disciplined macroeconomic management. Russia still faces daunting challenges with respect to a wide range of structural reforms aimed at improving framework conditions for business and enhancing productivity growth. Unfortunately, the pace of structural reform has decelerated significantly since early 2004. The achievements of the last two years have been modest, despite a favourable economic and political context. In general, the implementation of measures legislated during 2002–03 has continued, albeit at uneven rates, but little has been done to advance the remaining major items on the government’s structural policy agenda. The ambitious and wide-ranging medium-term programme adopted by the government in late 2005 signals its renewed commitment to reform and its awareness of the need to press ahead with a broad structural reform agenda aimed at strengthening the financial system, reforming infrastructure monopolies, enhancing competition and strengthening property rights. However, progress in most areas is still very slow. The present Survey focuses on three particular reform challenges that now confront the authorities: reforming public administration, improving the national innovation system, and restructuring the healthcare system.
The state is taking an increasingly active role in the economy
While market-oriented reforms have been de-emphasised somewhat, the government has undertaken a number of initiatives aimed at defining a rather more active direct role for the state in economic development, investing and intervening on its own and in partnership with business. Many of these initiatives entail greater state activism in spheres like health, education and infrastructure, where the case for public intervention is clear. However, there has also been a marked trend towards expanding state ownership and direct intervention in “strategic” sectors such as oil, aviation, power-generation equipment, automobiles and finance. Of particular concern is the state-owned gas monopolist OAO Gazprom’s seemingly insatiable appetite for asset acquisitions, often at the expense of a focus on its core business. At the same time, the absence of any significant steps to restructure the gas industry as a whole constrains the growth of other producers even as concern about the sustainability of Russian gas supply is growing.
The expansion of state ownership overall must be regarded as a step back. The Russian state’s track record as an owner of industrial and financial companies is poor. The corporate governance of many state-controlled companies is problematic and state interference in the operations of such companies often distorts the development of the companies themselves and the markets in which they operate. The expansion of state ownership in important sectors will probably contribute to more rent-seeking, less efficiency and slower growth. The trend towards greater state ownership should be reversed in order to improve performance and reduce opportunities for corruption and rent-seeking. At the same time, more needs to be done to strengthen the corporate governance of those companies that remain in state ownership, especially as regards transparency, and to provide for a clearer separation between the state’s roles as owner and regulator in those sectors in which it fulfils both roles.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of the Russian Federation 2006 is available from:
For further information please contact the Russia Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by William Tompson and Christian Gianella under the supervision of Andreas Wörgötter.
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