World Bank urges Russia to diversify its wealth portfolio

Russia’s GDP growth has weakened this year along with weaker global economic performance, reports the World Bank. The country should shift its focus to human capital and natural resources such as forests to mitigate risks connected to hyper-dependency on fossil fuels.

A sharper focus is needed on domestic reforms in Russia amid a weaker global outlook, considers Modern Diplomacy. According to the World Bank’s latest Russia Economic Report, the country’s economic growth picked up to 1,7% in the third quarter of 2019 after a weak performance in the first half of the year. Global growth has also weakened substantially in 2019 due to a slowdown in industrial activity and global trade. Crude oil prices fell 14% in the first nine months of 2019.

The country’s export performance was impeded by decreasing external demand and oil production cuts acting under the current agreement with OPEC. Domestically, growth was dampened by “relatively tight monetary policy in the first half of 2019, weak real disposable income dynamics due to higher inflation on the back of the VAT rate hike, and a slow start in the implementation of national projects” explained Renaud Seligmann, the World Bank’s Country Director for the Russian Federation. “A less restrictive monetary policy and increased spending on the national projects are expected to help foster growth,” Seligmann added. The World Bank expects Russia’s growth to pick up to 1,6% in 2020 and 1,8% in 2021, when national projects are expected to contribute about 0,2-0,3% to GDP growth.

According to the report, the country’s banking sector has been largely stable this year, although credit expansion has been uneven, led mostly by retail lending. The Central Bank of Russia has been gradually introducing regulatory measures to curb household lending, as unsecured consumer lending could threaten financial stability. Meanwhile, the moderate poverty rate is expected to continue to decline through 2021. However, the report recommends that the government continues monitoring the needs of the most vulnerable Russians, increasing the existing programmes and expanding their reach to reach the goal of reducing poverty by half by 2024.

This year’s report also examines the wealth of Russia as a nation measuring produced capital, natural capital, human capital and net foreign assets. “We […] see that the human capital, at 46%, comprises the largest share of wealth in Russia, with the natural capital share standing at 20%,” said Apurva Sanghi, World Bank’s Lead Economist for Russia. Nonetheless, the report points out that Russia’s human capital wealth per capita is only one-fifth the Organization for Economic Cooperation and Development’s average. As for natural capital, Russia’s forests, which provide annual absorption of about 640 million tonnes of CO2 equivalent, underscore the country’s importance as an ecological global donor. At the same time, the country’s large share of carbon-based wealth faces increased risk due to future price uncertainty and large-scale attempts at global decarbonisation. The World Bank urges Russia to diversify its wealth portfolio away from its fossil fuel sector and towards other productive capital.

By Anna Litvina

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