OECD.Associated Working Papers.The Russian economy is recovering from the severe 2008/9 recession, but has not yet reached pre-crisis peak activity levels. Trend growth of around 4% is not fully exploiting opportunities provided by Russia’s rich endowment of natural resources and the high skill level of its population. This OECD Economic Survey makes recommendations for a well balanced combination of further strengthened macroeconomic policy settings, decisive improvements in the business environment, including determined efforts to reduce corruption and strengthen the rule of law, and increasing energy efficiency. Such a combination could generate synergies which will help to accelerate overall convergence and improve living standards for the Russian population.
In recent years Russian leaders have increasingly emphasised the importance of modernising the economy, stressing the need to reduce the dependence on oil revenues and diversify the economy. The process of accession to the OECD dovetails closely with this agenda. The accession process provides a useful opportunity to take stock of the evolution of convergence, identifying both progress and areas where the gaps are still large and thus where peer review and drawing on OECD experience may be particularly useful.
One area where the gap with OECD countries has remained very wide is the business climate. State involvement in the economy is pervasive, corruption endemic, the rule of law weak, and the foreign trade and investment regimes relatively restrictive. These deficiencies are reflected in low levels of competition, sluggish innovation, low investment and a greater dependence on natural resource extraction than would otherwise be the case. Although on a number of fronts improvements can be discerned, there is a need for further policy action and reinforced implementation efforts in many areas.
Another area where Russia lags the most advanced countries is energy efficiency, and this has been a major factor in poor environmental outcomes and the high carbon-intensity of the economy. The energy-intensiveness of GDP in Russia is among the highest in the world. The main imperative is to ensure that the price of energy reflects marginal social costs, which means removing subsidies and export taxes on energy and introducing mechanisms to price in the negative externalities of fossil fuel use. The installation of meters for all energy use should also be sped up, and measurement of energy consumption improved.
Another area where Russia lags the most advanced countries is energy efficiency, and this has been a major factor in poor environmental outcomes and the high carbon-intensity of the economy. The energy-intensiveness of GDP in Russia is among the highest in the world. The main imperative is to ensure that the price of energy reflects marginal social costs, which means removing subsidies and export taxes on energy and introducing mechanisms to price in the negative externalities of fossil fuel use. The installation of meters for all energy use should also be sped up, and measurement of energy consumption improved.
As regards outcomes in most other areas, Russia is within the range of OECD countries, not an outlier. Labour markets are relatively flexible, although more could be done to bring social protection up to the standards of more advanced countries. The population is well educated, with exceptionally high rates of tertiary enrolment, even if educational performance as measured by PISA scores ranks below most OECD countries.
Moreover, in some respects Russia exhibits relative strengths. For example, it has negative net public debt (that is, public financial assets exceed gross public debt), an attribute shared by very few OECD economies. This reflects prudent policies that saved a large share of the oil price windfalls over the past decade. Also, while Russia remains a relatively high-inflation economy, monetary policy has delivered a gradual decline in inflation over the past 12 years, and the policy framework is being adjusted to the new lower-inflation environment to which the country is moving.
Scope remains for improvements to the macroeconomic policy framework, however. The budget has become increasingly vulnerable to a correction in oil prices, with the non-oil deficit expanding rapidly in 2008 09 and remaining above 10% of GDP in 2010 11. Moreover, fiscal policy has proved to be insufficiently countercyclical. The prompt reinstatement of a fiscal rule limiting the non oil deficit is called for, perhaps supported by binding ceilings on annual expenditure growth, and a rule-based framework could be strengthened by setting up an independent fiscal council to provide advice on technical issues. Concerning monetary policy, as the conditions for successful inflation targeting fall into place, exchange rate flexibility should be further increased, together with a clearer central bank mandate to pursue price stability as the primary objective and increased transparency as regards politicy decisions and economic analysis.
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