Russia’s spending and rate cuts to boost economic growth: WB

Economic growth in Russia will be higher than expected in 2019 and is likely to pick up in the next few years thanks partly to higher state spending and looser monetary policy, the World Bank (WB) said.

Russia’s economic growth has waned this year as investment activity evaporates and consumer demand flatlines, but it is seen increasing in 2020 as the government gears up for so-called national projects designed to boost growth.

The World Bank, in a regular report on the Russian economy, said it expected gross domestic product to expand by 1.2% this year, up from the 1.0% it projected in October. In 2018, Russian GDP grew by 2.3%.

In 2020 Russian GDP is seen at 1.6% and in 2021 1.8%, versus 1.7% and 1.8% respectively projected in October, the World Bank said.

“A less restrictive monetary policy and increased spending on the national projects is expected to help foster growth,” Renaud Seligmann, World Bank Country Director in the Russian Federation, said in the report.

The central bank will next meet on interest rates on Dec.13, where it may consider cutting the key rate, now at 6.5%, for the fifth time so far in 2019.

But Russia’s ambitious national projects, which include state spending of billions of dollars on a wide range of plans to enhance business conditions, infrastructure, healthcare and ecology, are seen having only a limited impact on economic growth.

According to the World Bank estimates, national projects will contribute 0.2-0.3 per centage points to GDP growth in 2021.

“The reason why it is not as big as one might have expected or hoped for is ... that national projects have been slow to get started,” Apurva Sanghi, World Bank’s Lead Economist for Russia, told Reuters.

“I guess we are a bit conservative but a lot will depend on implementation of these national projects: how the regions are able to implement them and what kind of private sector response the stimulus generates.”

To boost growth in the future, Russia would need to reduce the size of the state’s footprint in the economy, provide more room for competition and diversify the country’s wealth portfolio from a carbon-based one into more productive areas, Apurva said, reiterating earlier World Bank recommendations.

Meanwhile, Russian President Vladimir Putin and his Chinese counterpart Xi Jinping on Monday oversaw the launch of a landmark pipeline that will transport natural gas from Siberia to northeast China, an economic and political boost to ties between Moscow and Beijing.

The start of gas flows via the Power of Siberia pipeline reflects Moscow’s attempts to pivot to the East to try to mitigate pain from Western financial sanctions imposed over its 2014 annexation of Ukraine’s Crimea.

The move cements China’s spot as Russia’s top export market and gives Russia a potentially enormous new market outside Europe. It also comes as Moscow is hoping to launch two other major energy projects - the Nord Steam 2 undersea Baltic gas pipeline to Germany and the TurkStream pipeline to Turkey and southern Europe. The 3,000-km-long (1,865 mile) Power of Siberia pipeline will transport gas from the Chayandinskoye and Kovytka fields in eastern Siberia, a project expected to last for three decades and to generate $400 billion for Russian state coffers.

“This is a genuinely historical event not only for the global energy market but above all for us, for Russia and China,” said Putin, who watched the launch via video link from the Russian Black Sea resort of Sochi.

“This step takes Russo-Chinese strategic cooperation in energy to a qualitative new level and brings us closer to (fulfilling) the task, set together with Chinese leader Xi Jinping, of taking bilateral trade to $200 billion by 2024.”

The new pipeline emerges in Heilongjiang, which borders Russia, and goes onto Jilin and Liaoning, China’s top grain hub.

Xi told Putin via a video link on Monday that the newly launched gas pipeline is “a landmark project of bilateral energy cooperation” and an “example of deep integration and mutually beneficial cooperation”.

Flows via the pipeline are expected to gradually rise to 38 billion cubic metres (bcm) per year in 2025, possibly making China Russia’s second-largest gas customer after Germany, which bought 58.50 bcm of gas from Russia last year.

Moscow began supplying natural gas to western and central Europe in the 1950s and Europe has long been Russia’s major consumer of gas, supplied by Kremlin-controlled energy giant Gazprom, with total annual supplies of around 200 bcm.

Reuters