Russia’s economy at its production capacity limit

The Federal State Statistics Service (Rosstat) has published the preliminary Q3 2014 results, showing that Russia's GDP growth rates stood at 0.7% relative to the same period last year, less than in Q1 (0.9%) and Q2 (0.8%).

Experts have underlined the following economic growth factors in Q3 2014: rich crop (in July–September the agricultural sector's contribution to the GDP increased 11%), improved situation in the industrial sector, timid consumption growth (despite reduction in wages and household real income), as well as the devaluation of the ruble.

It would be unreasonable to further enhance the existing production factors, because, according to our estimates, the Russian economy has already neared its production capacity. Under the circumstances, economic growth can be promoted either by new growth factors (for example human capital), or increase in the total factor productivity.

However, analysis shows that none of these can be seen in the foreseeable future. Instead, global energy market trends still have a substantial effect on the Russian economy, while oil and gas revenues remain an essential source of revenues in the Russia's budget.

As noted above, not only did high crude oil prices promote the economic growth in 2000–2007 and later become a reason for overheating, but they also helped the Russian economy to recover from the crisis of 2008–2009, still supporting positive GDP growth rates.

As a reminder, in 2014 economic growth will stay at 0.5% compared to the preceding year, as projected by the Ministry of Economic Development. The Bank of Russia has provided more optimistic forecasts: for example, the Central Bank of Russia forecasts that in 2015 Russia is expected to see a zero growth, provided that sanctions remain in force and crude oil price is about $95 per barrel.
According to the Bank of Russia, if crude oil prices fall to $80 in 2015, it would result in a recession in 2015, and if to $60 – in economic downturn. Brent oil price fell below $78 per barrel yesterday. Overall, IMF forecasts show that global crude oil prices still remain high ($105,7 per barrel ) in 2014, because they fall mostly at the end of the year and can hardly have a strong impact on the 2014 results.

At the same time, the dynamics of crude oil prices is very hard to be predicted, because they are determined by a series of factors, including the political one. There is no doubt that Russia's dependence on global energy market trends under the current complex geopolitical situation, lack of fundamental factors of economic growth, lack of investments, and low-quality institutions are of great concern as to the future of the domestic economy.

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