Russia’s GDP growth projected to lag behind EU & CIS countries

russianoil

 

2016/04/18 • Economy, Russia

Article by: Dirk Mattheisen

The Curious Case of Benjamin Russia

At his annual phone-in event with the Russian people on April 14, President Putin struck an optimistic note and projected that Russian GDP would contract by only -0.3% in 2016 and would grow 1.4% in 2017.  Only days earlier, the IMF released its World Economic Outlook report and projected a fall in Russian GDP in 2016 of -1.8%, growth of 0.8% in 2017, and growth of 1.5% through 2021.

Russia’s economic growth is really two problems. It has to return to growth and it has to keep up with other countries in order not to fall behind economically.  If Russia does not grow and if it does not grow as fast as other countries, Russia will, in a curious reversal, grow less developed because investment will be insufficient to renew its aging economic infrastructure.  Oil and gas, for  instance, will require massive investment to maintain production and to exploit more difficult fields.  Russia must attract new investment that is used productively. That said, let’s see how Russia is doing based on comparisons using the IMF’s latest data.

One comparison is how Russia is doing in relation to the Commonwealth of Independent States (CIS), the collection of countries that were once part of the Soviet Union.  According to the IMF, the “CIS-minus-Russia” is expected to grow by 0.9% in 2016, 2.3% in 2017 and 4.2% by 2021.  In its own backyard, Russia is expected to be a laggard.  In fact, from 2017 when Russia hopes to return to growth through 2021 the IMF expects Russia to be the worst performer among CIS countries, with the exception of Belarus (which seems unfair since Belarus doesn’t have oil or gas, didn’t support Russia’s annexation of Crimea or invasion of eastern Ukraine, and has nothing to do with Syria—but economics is unforgiving).

Another comparison might be the IMF’s Emerging and Developing Europe (EDE) group, including such struggling countries as Kosovo and Serbia, but also Hungary and Poland.  Here, Russia fairs worse.  EDE is expected to grow by 3.5% in 2016 and by 3.3% thereafter through 2021, more than twice as fast as Russia.

 Still another comparison might be with the European Union, that body of Western democracies that Putin believes is on the verge of economic collapse and whose collapse he earnestly promotes.  There is little comfort in the projections though.  The IMF expects the EU to grow about 1.8% from 2016 through 2021.  Even by 2021, the IMF does not expect Russia to catch up with Putin’s enfeebled European Union.  Although Russia and the EU’s growth rates converge, with the EU growing slightly faster, it is not the company Putin hoped to keep.

How about comparison with the states where Russia maintains Russian-separatist enclaves, Georgia, Ukraine and Moldova?  Again, things don’t look so good.  The three states are expected to average growth of 1.5% in 2016, 3.2% in 2017 and 4.3% by 2021, nearly three times as fast as Russia.  So much for economic subjugation through conquest.

 Perhaps further afield, among the BRICS? As a group, the “BRICS-minus-Russia” (Turkey added separately for interest) are projected to grow at 2.7% in 2016, 3.7% in 2017 and 4.3% by 2021.  Even beleaguered South Africa manages to outpace Russia by a large margin.  Only Brazil does worse, declining -3.8% this year and next, although by 2021 Brazil is projected to also overtake Russia by a wide margin.  Brazil, as a fellow underperformer, should give Putin pause.  Racked by corruption and economic mismanagement, as of this writing Brazil is set to impeach its President, herself like Putin an old communist apparatchik.  In fact, as described by the Financial Times, plans to reform Brazil’s economy sound a lot like what Russia needs. The Times quotes Brazil’s Vice President Temer as saying,“What’s needed is tighter fiscal policy, lower interest rates, a weak currency, and eventually structural reforms to raise savings and investment.”  The other underperformer, South Africa, although it outperforms Russia, suffered the same political crisis as Brazil, with its President Zuma narrowly escaping impeachment.  Economically speaking–as a BRIC in economic crisis–Russia sits in the uncomfortable company of South Africa and Brazil, an association Putin should find politically uncomfortable.

As bad as it looks, it is probably worse.  Not only does Russia perform poorly against comparator groups, it is likely to do worse than the IMF projects.  The problem is not oil or sanctions, although these make the situation more difficult.  The problem is that growth in Russia was falling for years before the fall in oil prices in 2014 and the imposition of sanctions.  Already in 2013, Russian growth had fallen to 1.3% because of lack of investment.  In 2014 and 2015 investment fell steeply.  This suggests that Russia will struggle to achieve growth of even 1.3%–if it is even possible–for the foreseeable future because there is nothing to drive a reversal in declining investment.  Without undertaking reform measures recommended by the IMF or, for that matter, by Alexei Kudrin, Russia will fall short of the IMF’s 2017-2021 projection and be that much more behind its comparators.

Put it all together and the chart to the left is how the IMF expects Russia to compare in 2021. For a country that aspires to be a great nation and to lead an alternative international world order to the democratic West, this is not the path to power or to greatness.  It is the path of growth in reverse to lesser and lesser significance, if Russia does not correct course.  Like the character in the film The Curious Case of Benjamin Button, Russia may find itself regressing to a less economically developed state while the rest of the world moves forward.

Tags: ,

  • rgb

    Here is a clue: this article is about the Russia.

  • Dirk Mattheisen

    The IMF expects Ukraine to grow 1.5% in 2016 and 2.5% in 2017 and by 2021 by 4.0%, against Russia’s -1.8%, 0.8% and 1.5% and, as I wrote, I think that is optimistic for Russia. That is pretty impressive for Ukraine that lost over 10% of its area and industrial base to continuing Russian aggression and subversion, which goes a long way to explaining the figures you cite.

    • Murf

      That was a good article Sir. Thank you.
      The Trolls tend to forget that reorienting any economy takes time. They also like to ignore Putin’s lack of success at doing so. Even though they have far grater resources.

  • Alex George

    But the difference is that Ukraine’s poor performance is due to the aggressive warfare that Russia has waged against it.

    Russia has only its own poor decisions to blame for its woes.

  • Murf

    Yah yeah, your numbers like your dreams are off.
    Ukraine’s GDP shrank 10% in 20215. That is after a recovery from -17% in the first quarter.
    It is projected to grow by 1-2% this year.
    In January it shrank 2% but recovered 1% Febuary. A stark contrast to -17% last year.
    I am optimistic for the quarter.
    Industrial production increased 7.6% in Feb. and steel production was up 20%!
    So the traditionally worst quarter of the year could show little loss. This will set up the rest of the year for good growth.
    Something Russia can’t even dream of.

    • MichaelA

      good numbers my man
      beat the trolls with facts

    • Dirk Mattheisen

      Nice analysis, Murf. I’m optimistic also. The controlling factor being how aggressive Russia is prepared to be. Hopefully, the harm they are doing themselves will dawn on them.

      • Murf

        I hope this business in Doho and the failure to come to an production limit will be the slap in the face Putin needs.
        Sooner or later he will have to cut the Donbas lose. If he backs of on the special status of the Donbas clause I think there can be some progress.
        That is the biggest sticking point.