October 6, 2012
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№ 7 (July - August 2012)

Russian Economic Growth Prospects Remain Tied To Oil

Despite the record high rise in oil prices in the past decade, Russian economic growth rates have varied only slightly, according to the IMF’s Senior Resident Representative to Russia, Odd Per Brekk. “Russia’s experience could be summed up as two intertwined problems. One is short-term instability and the other is sub-par economic growth over the long-term,” Brekk stated at a briefing held at the Association of European Businesses in Moscow on Monday.

By Ben Priddy

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Despite the record high rise in oil prices in the past decade, Russian economic growth rates have varied only slightly, according to the IMF’s Senior Resident Representative to Russia, Odd Per Brekk. “Russia’s experience could be summed up as two intertwined problems. One is short-term instability and the other is sub-par economic growth over the long-term,” Brekk stated at a briefing held at the Association of European Businesses in Moscow on Monday.

Brekk explained that structural dependence on oil prices and increasing domestic inflation create short-term economic volatility in Russia. Over the long-term, limited room for increasing capital utilization and efficiency presents a significant challenge to economic growth prospects. Policymakers will therefore need to rely on alternative drivers to maintain growth rates.

Short-term tightening of fiscal and monetary policies and long-term structural reforms will strengthen growth prospects, according to the IMF’s latest Article IV Consultation on Russia – an annual report that outlines key economic challenges and policy recommendations.

Brekk explained further that, in light of the worsening global economic crisis, Russian policymakers should move to anchor the country’s fiscal policy to more conservative estimates of global oil prices, in order to shield the Russian economy in the short-term. Recent efforts in the Duma to do so, according to Brekk, are not ambitious enough to have a positive effect on long-term economic growth, as they rely on speculative oil prices that often tend to be over-stated.

Stuart Lawson, Executive Director and Senior Advisor at Ernst & Young’s Russia and CIS division, co-chaired Monday’s briefing and stated that the Russian economy’s dependence on energy will remain, at least in the short-term. Extractive industries must be ‘built-out,’ and it is unrealistic to expect a move away from dependence on natural resources sectors in the next 3-5 years, according to Lawson.

Russia’s accession to the WTO might increase foreign investment in Russia and strengthen prospects for economic diversification. Still, Brekk stated that important domestic policy decisions must be made to move away from economic dependence on energy, decrease the country’s non-oil deficit, and encourage greater transparency and privatization.
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