Stabilization of the geopolitical situation is essential for Russia to recover from economic stagnation
The World Bank has recently published its report on the Russian economy in which its analysts point to the threat of Russia entering a period of stagnation or even recession in the foreseeable future. For instance, under a baseline scenario, according to the World Bank's forecast, the Russian economy would grow 0.5% in 2014 relative to the previous period, and 0.3% in 2015 and 0.4% in 2016, respectively. Economic growth would average 1% in the period between 2015 and 2016 under an optimistic scenario, whereas a long-lasting recession is expected under a pessimistic scenario (-0.9% in 2015 and -0.4% in 2016).
As noted in the report, sagging growth is most likely to be induced by structural rather than cyclical factors, which implies that the Russian economy has reached its potential production level. Additionally, it is emphasized in the report that the model designed to achieve high growth rates based on the state's extensive participation in the economy has run out steam in the current situation.
As a recipe for driving the economy up to a higher phase of the cycle and recovering economic growth rates the World Bank suggests that structural reforms should be undertaken as soon as possible, rather by enhancing the effectiveness of state employees, in particular the effectiveness of public services by allowing the private sector (based on the Public Private Partnership (PPP)) to be extensively involved in this process, than through state's active intervention in the economy to diversify the latter.
Increasing the volume of private investments and making the economic environment predictable is a necessary condition for Russia to achieve high economic growth rates.
It is, with only a few exceptions, difficult to argue with the World Bank analysts. Indeed, structural reforms aimed at diversifying the Russian economy and weakening the role of the oil and gas sector (in other words, in terms of decomposing GDP growth rates into components, it means strengthening the structural component which is based on the fundamental growth factors while weakening the foreign trade component which is determined by the dynamics of global prices of energy resources) must lead to higher economic growth rates. With no doubt whatsoever, the effectiveness of making various economic policy decisions and, as consequence, growth in the economy at large depends on efficient public administration with strong incentives for civil servants, well-defined goals which can be achieved with the available financial resources. Furthermore, the effectiveness of all reforms naturally depends on the level of development of institutions and confidence of the general public and private investors in the government.
However, there is no way to talk about the degree of predictability of economic policy decisions in the current situation that threatens more economic sanctions by the developed countries and isolation of the Russian economy. It appears that the present geopolitical situation makes serious reforms difficult. Additionally, World Bank analysts' proposal to enhance the effectiveness of PPP-based public services seems to be arguable. To date, analysis of the experience gained in this field by various countries has led to no single conclusion on the effectiveness of this form of interaction between the state and business community. And in any case, in implementing projects as part of the Public Private Partnership, Russia, in our opinion, should consider the specifics of the Russian economy rather than copy the entire experience gained by the European states which have been successful in this.
Therefore, one may just hope that the crisis in Ukraine will be solved as soon as possible, economic sanctions removed (which have already had an adverse effect on the economic processes in this country) and the political situation normalized, which is a necessary condition for the implementation of the aforementioned recommendations for Russia to transit from stagnation to a new path of economic growth.
Maria Kazakova, Ph.D. in Economics, Deputy Head of International Center for Budget Sustainability Study