RUSSIA - OECD.org

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE 2 PRELIMINARY VERSION OECD 2018178 RUSSIAG rowth is projected to remain robust, as private consumption will benefit fromrising wages, household credit and employment, the latter following a bold pensionreform. Large infrastructure projects will boost both public and private investment. TheVAT increase in early 2019 will dent growth temporarily as disposable incomes growth will decline as foreign demand weakens, while imports will rebound in2020. A weaker rouble and the VAT increase will raise inflation temporarily above the 4%target. Unemployment will increase as employment demand will only partly matchhigher labour supply following the rise of the retirement policy should be tightened in response to upward-trending inflationexpectations. Despite a strong increase in public spending, fiscal policy remains tight torebuild the fiscal position, increasing the room to respond in event of a future targeted public spending, in particular a rise in minimum pensions, could mitigatethe impact of higher VAT on income inequality.

2 Structural reforms to improve thebusiness environment would boost longer-term is picking upGrowth is picking up, supported by private consumption, as real disposable incomes areincreasing after several years of gradual decline. Rising consumer and mortgage credit alsosustain consumption. Higher oil prices are driving export revenues, while growinguncertainty about future sanctions and the higher cost of funding for emerging markets arereducing investment growth and imports of capital goods. The rouble depreciated in Apriland August amid expectations of potential new sanctions, and capital moved abroad uponturmoil in emerging markets. The depreciation is pushing up inflation, although it remainsbelow the 4% target. The unemployment rate remains low at less than 5%.Policy remains tight and structural reforms will help raise the economy s potentialThe central bank reacted quickly to inflationary pressures by raising its key interestrate in September, and should be ready to raise it further to anchor rising inflationRussiaSource:OECD Economic Outlook 104 database; and Thomson 2 o y % changes % Inflation Short term interest rate Inflation will remain contained Fiscal per barrel USD per RUB Brent crude oil price Exchange rate The rouble has decoupled from the oil price 3.

3 DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE 2 PRELIMINARY VERSION OECD 2018179expectations. The authorities also froze fiscal-rule-related foreign currency purchases tolimit further rouble depreciation. While smoothing exchange rate volatility is reasonable,the authorities should refrain from currency interventions aimed at influencing long-termexchange central bank continued the welcome clean-up of the banking sector byRussia:Demand, output and prices1 2 &XUUHQW SULFHV 58% WULOOLRQ*'3 DW PDUNHW SULFHV 3 ULYDWH FRQVXPSWLRQ *RYHUQPHQW FRQVXPSWLRQ *URVV IL[HG FDSLWDO IRUPDWLRQ )LQDO GRPHVWLF GHPDQG 6 WRFNEXLOGLQJ 7 RWDO GRPHVWLF GHPDQG ([SRUWV RI JRRGV DQG VHUYLFHV ,PSRUWV RI JRRGV DQG VHUYLFHV 1HW H[SRUWV Memorandum items*'3 GHIODWRU B &RQVXPHU SULFH LQGH[ B 3 ULYDWH FRQVXPSWLRQ GHIODWRU B *HQHUDO JRYHUQPHQW ILQDQFLDO EDODQFH RI *'3 B &XUUHQW DFFRXQW EDODQFH RI *'3 B &RQWULEXWLRQV WR FKDQJHV LQ UHDO *'3 DFWXDO DPRXQW LQ WKH ILUVW FROXPQ &RQVROLGDWHG EXGJHW Source: 2(&' (FRQRPLF 2 XWORRN GDWDEDVH 3 HUFHQWDJH FKDQJHV YROXPH SULFHV RussiaSource:Ministry of Finance.))]]]]

4 And OECD Economic Outlook 104 2 2 1012456782014201520162017201820192020Y o y % changes % of labour force Employment growth Unemployment rate Employment will stabilise following the pension reform 15 10 50510 15 10 5051020062008201020122014201620182020 % of GDP Fiscal balance Non oil balanceFiscal policy will tighten3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE 2 PRELIMINARY VERSION OECD 2018180withdrawing several banking licences, with no discernible effect on financial markets andthe wider fiscal stance remains tight. The fiscal balance is in surplus for the first time since2009, following higher oil revenues and prudent government spending in line with thefiscal rule. The recent pension reform and a planned VAT increase will further enhancesustainability of the public finances.

5 Some easing is appropriate to fund the government splanned investment pension reform will raise the retirement age to 65 years for men and 60 years forwomen by 2029. The planned rise in pensions, especially for those on low incomes, willhelp reduce inequality. The overall positive effect of the pension reform on GDP growth isestimated at around percentage point in 2019 and to percentage point in increase of the value-added tax from 18% to 20% at the beginning of 2019 will reducehousehold consumption temporarily, in particular for low-income government has adopted an ambitious investment programme for the years2019-2024, aimed at increasing the share of investment in GDP from 21% to 25%. Theprogramme should help improve transport infrastructure, accelerate the digitalisation ofthe economy, deepen financial markets and complement the pay-as-you-go pensionsystem with a system based on capitalisation. Assigning personal responsibility of agovernment official for outcomes within their control is commendable and should supporteffective implementation of the the business environment via better protection of entrepreneurs' rights,more effective competition, less government involvement in the business sector andimproved governance of state-owned enterprises would further boost investment andproductivity.

6 Fostering entrepreneurship, strengthening collaboration between thebusiness sector and academia and more public spending on research and developmentwould also add to potential growth. Administrative simplifications, such as the plannedone-stop-shop for export firms, are a step in the right will increase somewhatThe economy is projected to grow by in 2019 and in 2020, driven by a boostto household consumption from higher real wages and by public investment. Exports willslow as oil prices are no longer rising. The current account will remain in surplus. The VAThike, tighter monetary policy and more moderate household credit growth will dentgrowth in 2019 temporarily. However, the pension reform and the infrastructureprogramme will help boost growth in uncertainty remains about future sanctions and counter-sanctions, whichcould dent exports and trigger a new wave of capital outflows and further roubledepreciation. Also, the authorities remain cautious about adverse oil marketdevelopments, expecting a scenario whereby the oil price falls progressively to less than60 USD per barrel by 2020 owing to rebounding shale gas production and a petering-out ofthe OPEC+ agreement.

7 However, the growth effect of an oil price decline of this magnitudewould likely be small, thanks to the stabilising role of the fiscal rule and a flexible exchangerate.