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The World Bank’s optimism stems from its faith in the power of globalisation, buttressed by the recent statistical trends. Unemployment is declining, wages are recovering and poverty is declining. The employment and labour force participation rates remain at high levels while unemployment is close to minimum (Figure 2).

The labour force participation rate is unchanged at 63.2%. High employment rates, in conjunction with the continued decline in the working-age population, should reduce the unemployment rate further. It decreased to 4.6% in the third quarter of 2018, compared to 5.2% a year earlier (Figure 3).

Figure 2:Labour force and employment (million people).

Source: Rosstat and Haver Analytics.

Figure 3:Unemployment rate (in %).

Source: Rosstat and Haver Analytics.

The employment structure is also steady. The gap between male and female employment remains stable — unemployment for women is usually around 0.3% points lower than that for men. Most of the unemployment is still long term: 30% of the unemployed had been looking for a job for over a year. Regional unemployment is unequal, but echoes the declining national trend.

Real disposable income dynamics remains volatile. Income started to grow at the beginning of 2018. Its average growth rate in real terms in the first 10 months of 2018 was 1.6% (Figure 4).

Labour pensions rose by 3.7% in January 2018 and social pensions by 2.9% in April 2018 — slightly above the current rates of inflation. As a result, the real growth of pensions in the first 9 months of 2018 in Russia was only 1.2%.

The official poverty rate continued to decrease slowly in the first half of 2018. Driven by a rebound in real disposable income, the poverty rates in Russia decreased in the first and second quarters of 2018 (Table 1). The World Bank expects the trend to continue (Table 2).

The share of those who are economically secure in the population was unchanged in 2017, after decreasing by 5% points from 79% in 2014 to 74% in 2015 and further to 72% in 2017. This contraction was driven by a large fall of disposable incomes and wages in 2015 and a continued decline in incomes in 2016–2017.

Figure 4:Real income dynamics (in %, year-on-year).

Note: Pension and disposable income dynamics adjusted for one-time payment in January 2017.

Source: Rosstat and World Bank staff estimates.

Table 1:Poverty (cumulative).

Source: Rosstat.

Table 2:The moderate poverty rate is expected to continue to decline in 2018 and throughout 2020.

Source: Rosstat, World Bank staff calculations.

Consumer price inflation has been rising since July 2018, though it remained below the Central Bank of the Russian Federation’s (CBR) annual 4% target (Figure 5).

The increase in inflation since end of 2017 was mostly attributable to two factors. First, higher prices for oil, which affected gasoline prices and transportation costs for producers, and second ruble depreciation (Figure 6), which exerted an upward pressure on inflation through higher prices of imported food and utilities.

Household inflation expectations remain elevated, prompted by a hike in gasoline prices. Domestic inflationary risks stem mainly from VAT rate increase, the closing output gap in 2018, pass-through from the ruble depreciation and elevated inflation expectations. Risks to inflation in the near term tilt towards the upside.

Russia’s banking sector remains relatively weak, with less capital buffer (12.2% as of end of September) and higher non-performing loan (NPL) ratio (10.8% as of end of September) than other emerging nations (15.6% and 4.4%, respectively). However, the situation has stabilised, lending activity is recovering and profitability is improving, though the sector remains weighed down by high provisioning charges. Lending growth continued in both the retail and corporate segments, though it was much weaker on the corporate side due to weak economic growth. Credit to the corporate sector grew by 9.7%, year-on-year, in the last 10 months. During the same period, loans to households grew by 22.5%, year-on-year. The growth was lead mostly by unsecured loans and mortgage loans, and household debt is at an all-time high. A strong demand for residential mortgages reflects the declining interest rates and anticipated increases in real estate prices due to a change in the funding scheme for the construction companies.

Figure 5:Inflation rose but remained below the CBR’s target (CPI index and its components, in %, year-on-year).

Source: CBR and Haver Analytics.

Figure 6:Ruble depreciation since the beginning of 2018 (change in oil prices and the nominal exchange rate, logarithmic scale).

Source: CBR.

The fiscal balance improved at all levels of the budget system due to higher oil prices, combined with a weaker ruble, a better tax administration and a conservative fiscal policy. To boost growth, the President of Russia issued a “May Decree” in 2018, which introduced a set of goals for 2024. Putin wants Russia to become one of the five largest economies in the world (currently Russia is ranking 6^th in terms of PPP); the GDP growth rate to be on par with the world’s average; halving the poverty rate; fostering population growth; raising life expectancy to 78 years and paving the way for the digital economy to reach 30% of GDP. These goals have already prompted the government to increase spending on education, health, infrastructure, social policy, digital economy, support of SME and exports starting in 2019. Twelve national projects and the comprehensive plan for modernisation and expansion of infrastructure are included in the federal budget for this purpose.

The World Bank forecasts Russia’s growth for 2018–2020 will remain modest at 1.5–1.8% (Figure 7), rates below the EMDE average (4.6%), but exceeding the AE average (1.7%) in 2020. The key factors governing the World Bank’s projection are a dyspeptic global environment, a declining labour force and slowing total factor productivity growth (TFP).

The declining trend in TFP is a global phenomenon. Weaker productivity growth has been attributed to slower investment growth, partly because of deleveraging pressures and other crisis legacies, combined with an ageing population and maturing global value chains. In Russia, TFP growth slowed as productivity gains of first-generation reforms wore off. The changing composition of investment from machinery to construction could also have contributed to the lower TFP growth. Globally, investment growth halved between 2010 and 2016, with the weakness shifting from advanced economies to EMDEs over this period. In Russia, although investment growth slowed from an average growth of 10.4% during the previous decade to 2.8% in 2010–2017, the investment as a share of GDP increased (Figure 8). This helped to accelerate capital growth over the period 2010–2017.

Figure 7:The growth forecast for Russia suggests benign growth (real GDP growth, %).

Source: Rosstat, World Bank.

Figure 8:Russia’s investment-to-GDP ratio stopped increasing; capital-to-GDP ratio remains low. (a) Gross fixed capital formation as a percent of GDP for Russia. Capital as a percent of GDP for Russia. (b) Lower line indicates GDP weighted average of 32 advanced economies.

Source: Haver Analytics, Penn World Table, World Bank.

Russian demographic trends are worse than those found in many EMDEs (but not China) as the country’s low total fertility rate in the early 1990s accelerated population ageing. Russia’s total fertility rate remained low until the mid-2000s. The decline in the total fertility rate began to take a toll on the working-age population after 15 years, with potential labour force growth peaking in 2007 at 0.7% before declining to −0.7% in 2017. This suggests to the World Bank that short of unexpected surges in productivity growth, the outlook for Russian GDP growth is mediocre.