Russia Economic Outlook

Annual data 2016 Historical averages (%) 2012-16

Population (m) 146.5 Population growth 0.5

GDP (US$ bn; market exchange rate) 1,280.7 Real GDP growth 0.5

GDP (US$ bn; purchasing power parity) 3,614 Real domestic demand growth 0.2

GDP per head (US$; market exchange rate) 8,743 Inflation 8.4

GDP per head (US$; purchasing power parity) 24,673 Current-account balance (% of GDP) 2.9

Exchange rate (av) Rb:US$ 67.1 FDI inflows (% of GDP) 1.6

Russia is slowly emerging from a two-year recession caused by low oil prices and
Western sanctions. Weak forecasted GDP growth in 2017 of 0.9%. Structural
weaknesses, low investment and fiscal tightening will keep trend GDP growth below
2% a year in the medium term. Tensions with the West are likely to remain high
throughout the forecast period; economic ties with Asia will grow. Major political or
economic reform is unlikely, but the regime will attempt to improve the efficiency of
the system.
The transition to a market economy in the early 1990s was accompanied by a
collapse in industrial production and a sharp drop in living standards. A contested
privatization process led to a highly concentrated ownership structure. Executive
weakness and bureaucratic dysfunction contributed to a sharp decentralization of
power. After becoming president in 2000, Vladimir Putin sought to restore central
control over the regions and tame independent corporate interests. Mr. Putin
presided over a period of strong economic growth in his first two terms. His re-
election as president in 2012 has heralded the development of a more authoritarian
domestic environment.
Taxation: Reforms since 2000 have aimed to rationalize the tax system and cut the
number of taxes and the corporate tax burden. Changes to the tax regime in
January 2001 included the introduction of a flat rate of personal income tax of 13%
and a simplification of the administration of social security contributions. In 2004
the basic rate of value-added tax (VAT) was reduced from 20% to 18% and a
regional 5% sales tax was abolished. The corporate tax rate was cut from 24% to
20% at the beginning of 2009. The government has pledged not to raise personal or
consumption taxes before 2018.
Foreign trade: Mainly because of high international oil prices, export revenue has
soared since 2000. Import growth picked up over the same period as a result of
rising real incomes and real ruble appreciation. Merchandise exports totaled just
over US$340bn in 2015 and imports were just over US$190bn. Oil and gas account
for about 70% of Russia's exports, with metals contributing a further 11%.

% of % of
Main exports 2014 total Main imports 2014 total

Oil, fuel & gas 70.5 Machinery & equipment 47.6

Metals 10.5 Chemicals 16.2

Chemicals 5.9 Food & agricultural products 13.9

Machinery & equipment 5.3 Metals 7.1

% of % of
Major markets 2015 total Major suppliers 2015 total

Netherlands 11.9 China 19.1

China 8.3 Germany 11.2

Italy 6.5 US 6.3

Germany 7.4 Belarus 4.7

Business Environment:

Global rank

2011-15 2016-20

59 70

The conflict with the West has worsened the business environment outlook.
International tensions are expected to remain high during the coming years, which
will keep financing costs elevated. The conflict has also increased the risks to
foreign companies operating in Russia. Protectionist and statist attitudes have been
consolidated within the government. Capital controls are unlikely, but remain
possible. The gains made by Russia's entry into the World Trade Organization (WTO)
now look to be under threat. Long-standing weaknesses of the investment
environment will persist. Increased state intervention is likely to be mixed with
market-oriented policies in some areas. There are also likely to be some steps to
attract foreign investment, such as in energy projects that have special
technological and capital needs.
Long term Outlook:

2015-30 2031-50 2015-50

Growth and productivity (% change; annual av)

Growth of real GDP per head 1.1 1.6 1.3

Growth of real GDP 0.9 1.2 1.0

Labour productivity growth 1.0 1.3 1.2

Average growth in real GDP is forecasted to be just 1% in 2015-50 (1.3% for growth
in real GDP per head). An unfavorable demographic profile, a difficult business
environment, weak institutions and overreliance on natural resources will place
strong constraints on Russia's long-term growth. The average annual decline in the
labour force is forecast at 0.2% in 2015-50. Given its strong industrial tradition,
Russia's chances of diversifying its economy could be good, but this potential is
unlikely to be fully realized in the medium term following a sharp deterioration in
political and economic relations with the West. Growth rates could be significantly
higher if commodity price growth proves to be more rapid than anticipated or if
major (and disruptive) policy shifts are undertaken.