MOSCOW: After more than two years of recession Elvira Nabiullina, Russia’s central bank governor, had good news to offer. Russia, which has struggled to get over a slump triggered by a sharp drop in oil prices and by western sanctions, was set for “slight positive growth in GDP” in the current quarter, she said on Friday. With oil prices ticking up, and hopes that a US administration led by Donald Trump could bring at least some sanctions relief, some investors have taken the view that Russia’s recovery can gather steam. International funds are taking an interest in Russian stocks again, with the Micex, the main stock market index, soaring 27 per cent this year.
Inside Russia, though, expectations are far more muted. Most people have yet to feel any economic stabilisation. Real incomes continue to shrink. Inflation, although expected by the central bank to drop to under 5.8 per cent by the end of the year from more than 15 per cent last December, continues to eat into pensions and salaries. Consumers remain timid: retail sales fell 4.4 per cent in October, year on year. “This recovery will be long and gradual. We are not exiting recession through one door but through a long corridor,” says Oleg Kouzmin, a former Central Bank official and now Russia economist at Renaissance Capital.
When and how quickly sentiment changes matters for the country’s political leadership. Russia is due to hold presidential elections by May 2018. President Vladimir Putin has yet to announce whether he will run. Although there is no credible challenger in sight and the country has not seen really competitive elections in more than a decade, the Kremlin is watching public sentiment closely. “No matter if the GDP growth rate is minus 0.5, or zero, or even plus one — it won’t feel very different in the near future, because we are still far from anything like a real rebound,” says a senior government official.
Analysts, and several members of Mr Putin’s economic policy team, say such a recovery will remain elusive unless Russia embraces structural reforms. Both the central bank and independent economists say that, even with a brighter global economic climate and a recovery in domestic demand, Russia will be unable to grow at more than 2-2.5 per cent in the long term. Years of anaemic investment have left the economy short of the capacity to benefit.
Many economists have urged a higher retirement age to stabilise the pension system, and more flexibility for a jobs market squeezed by a shrinking population. Mr Putin has delayed action on these unpopular measures. “Mr Putin has paid lip service many times to those calling for drastic reforms,” says an executive with an international institution, who asks not to be named because of the topic’s political sensitivity. “But he has failed to address the key things: reform the labour market, reform the pension system and, most important of all, allow the institutions to do their job independently.”
One of the main drags on investment even before the latest recession has been companies’ lack of trust in Russian courts and fear that their property might be at risk. Mr Putin has asked former finance minister Aleksei Kudrin, a long-term adviser, for an economic reform programme by May. His proposals are expected to partly focus on reforming political institutions but many observers are sceptical that this push — at odds with the authoritarian nature of Mr Putin’s rule — can succeed.
