Russia Has Reached the Level of Her Potential GDP

The Russian economy has hit a ‘glass ceiling'. The World Bank has pointed out some unmistakable signs of an overheated labor market. Employment surged above its pre-crisis peak of the summer of 2008, unemployment dropped to its two-decade record low, and the share of the poor reached its historic low.


It seems that Russia has reached the level of its potential GDP (i.e. the level of potential output that can be produced by an economy if all its resources were fully employed).  Over the course of the past seven years, Russia’s economic dynamics was as follows: rapid growth in 2006-2008; a drop to the level of 2005 in the crisis years; a slow recovery from then on. This means that as soon as the Russian economy approaches the level of mid-2008, the rate of growth immediately declines. That is why there is a feeling that we have reached the ‘potential’ GDP level which can be pushed any further only on the basis of large-scale modernization. In fact, the potential of the fuel and energy complex and the raw materials sector has already been exhausted. Unless some fundamental changes are made, the only other option is stagnation.

The model that has been prevalent in Russia for the past 8–9 years is based on domestic demand expansion. At first (in 2004–2006), demand expansion was being fed by rising oil prices; later on, when oil prices went down, domestic demand was increasing in response to growth of bank crediting.

However, the model based on domestic demand expansion has no potential for further economic growth. In oil prices increase to a higher level, we will be faced with an accelerated inflation rate and rising imports. But growth in industry can occur only on a negligible scale. Therefore the real sector must become more sensitive to monetary impulses, which in the present situation leave industry unresponsive. No competition occurs in the real sector. As before, the increasing domestic demand is being satisfied only by imports.  

A. L. Vedev – Director of the Structural Research Center  
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