Is Russia ready for an economic adjustment and transformation?
The continued impact of the lower oil prices in a context of ongoing international sanctions has caused the Russian economy to contract by almost 4% in 2015. The recession is having a severe effect on households as double-digit inflation erodes real wages and incomes and sharply increases poverty rates. Medium-term growth prospects depend on how Russia will brave the difficult adjustment to this new economic reality. Speaking at a CEPS lunchtime meeting on December 7th, Birgit Hansl, the World Bank’s lead economist for Russia, observed that “the policy response by the authorities has successfully stabilised the economy,” As the main author of the 34th edition of the “Russia Economic Report, Hansl noted that “monetary policy prevented costly delays in relative price adjustments, highlighting the importance of the central bank’s commitment to inflation targeting in the context of a flexible exchange-rate regime”. But she also warned that the government’s and central bank’s emergency measures to support the financial sector provide only short-term relief to banks: “Additional financial-market restructuring is warranted to neutralise remaining systemic risks. Maintaining fiscal sustainability will become an especially pressing challenge as low oil prices deplete fiscal buffers, and this will necessitate difficult policy choices for the 2016 budget proposal.” In the longer term, there is an opportunity for Russia to benefit from a structural transformation of its economy. But without deep and sustained structural reforms, Russia will remain at risk of falling into a medium-term low-growth trap.