Economic growth rate is expected to slow down

According to mass media, tomorrow the Ministry of Economic Development will present a new version of the socio-economic projection in the Russian Federation in 2014–2017. The Ministry of Economic Development (MED) recommends, as it did in the previous year, the most conservative scenario as the baseline scenario in the adjusted version of the projection. This scenario shows that Russian GDP will grow 0.5% in 2014, 2% y-o-y in 2015 (comparing to 1.1% and 2.4% respectively, as provided in the previous April version of the projection).

The new version of the MED's projection doesn't rule out a recession in the first half of 2014 (as a reminder, Minister of Economic Development Alexey Ulyukayev has recently officially admitted that Russia has entered a recession phase), as well as measures the effects of potential economic sanctions and continuous stressful geopolitical situation (should sanctions be imposed, the Russian economy is expected to fall 0.2%–0.3% in 2014).

Indeed, the new figures of the MED's projection are based not only external political factors but also economic factors (being , by the way, heavily influenced by external conditions). These factors are depletion of economic growth factors, unfavorable investment climate and poor institutions, and, consequently, weakening investment (the MED expects investment to fall by 2.4% in 2014 comparing to 1.9% of the previous forecast version), as well as sweeping capital outflow (about $100bn in 2014, according to the MED's estimates).

Additionally, real household income contraction (by 2.4% in Q1 2014) will became a substantial factor that slows down the Russian economy and, consequently, less consumption; the fall in real income will be strengthened by higher inflation (the MED notes that there is the risk of 6.5% inflation at 2014 year end). Ongoing weakening in the demand for Russian export, most part of which is made up of fuel and energy goods, as well as shrinking of its physical volumes, will be another factor speaking against increase in economic growth rate.

Therefore, from al l has been said it follows that in the short run economic growth rate is anticipated to slow down in the Russian Federation and, consequently, making the Russian economy lag further behind the developed countries not only through economic factors but also external political factors.

Maria Kazakova , Ph.D. in Economics, Deputy Head of International Center for Budget Sustainability Study