Macroeconomic Development
According to Rosstat, the Russian economy grew by 3.4% in 2012, lower than the 4.3% GDP growth of the previous year but still a solid performance which ranked higher than many international peers with similar income per capita. Given the significant challenges faced by global economy over the last year, including U.S. debt issues, Euro area balancing on the edge of recession and softening of growth in China, Russian performance looks respectable.
However, 2012 was a year of two halves. With GDP growth coming at 4.9% year-on-year in 1Q12 (in line with performance of 2H 2011) there was a hope that Russia, supported by high oil prices, would be able to decouple from the rest of the world (both Emerging and Developed markets), where growth was rapidly decelerating. Early 2012 performance was propelled by strong private consumption as lower inflation enhanced real purchasing power via raising real wages and real disposable incomes, and very strong retail borrowing supported spending. In contrast, in 2H12 higher inflation related mainly to poor harvest started to eat away at real purchasing power, leading to a more moderate expansion of real retail sales and to a softening GDP growth.
The growth rate was mainly driven by domestic consumption that increased by 6.6%, while a year earlier the growth was 6.4%. Fixed investment came lower than it was expected by Ministry of Economy and grew by 6.7% mainly due to softening of consumer demand and real disposable income in the second half of the year. Investments constituted 25.7% versus 26.6% of total GDP last year. Investments were mainly driven by infrastructure projects development largely executed by state-owned companies, large private companies and federal budget, primarily in energy sector.
Industrial output expanded 2.6% in 2012. Over the year, raw material extraction and the supply and redistribution of electricity, gas and water demonstrated relatively sluggish performance (growth of 1.1% and 1.2% respectively). On the contrary, manufacturing sector remained a white spot and grew 4.1%. Raw material extraction is facing serious constraints from the production side, as capacity utilization is close to maximum.
The weak growth in the supply and redistribution of electricity, gas and water can be treated as a positive, as it reflects a decline in the energy intensity of GDP production. Electricity output edged up just 1.1%, which caused the electricity intensity of Russian GDP to decline around 2.7%, implying an improvement in the Russian economy’s efficiency.
In 2012, real wage growth came in at 7.8% in 2012, while real disposable incomes climbed 4.2%. Russia’s unemployment rate resisted the traditional year-end rise and hit a new historical record low of 5.3% versus 6.3% last year, which is lower than during the pre-crisis peak of economic activity in 2007.
Among important macroeconomic events in 2012, Russia’s accession to the World Trade Organization (WTO) and approval of the budget rule should be mentioned.
On November 10, 2011 the Working Party on the Accession of Russia to the WTO approved a package of accession documents which outlined the terms and conditions of Russia’s membership. The negotiation process has lasted 19 years, which made it the longest of any country acceding to WTO membership. Following the approval of the protocol of Russia’s accession, Russia became a full member of the WTO on 22 August, 2012. The accession package is extremely broad, comprising a set of agreements that commit Russia either over time or immediately upon accession to reduce tariffs on goods, provide more open market access for the foreign service sector, and reduce or remove subsidies in the agricultural and industrial sectors.
The benefits of WTO accession to Russia are significant in the medium term. The World Bank has estimated that Russia should gain about $53bn annually in the medium term (and $177bn of GDP in the long run) via accession, with gains coming mainly from increased foreign direct investment and reform of the service and manufacturing sectors.
Prior to the crisis there had been pressure on the Ministry of Finance to increase levels of government borrowing and curb its efforts to build up financial reserves. However, in 2012 Russian Government adopted a budget rule, which came into effect from January 2013.
The budget rule determines the mechanism for the use of oil and gas revenues and the formation and disposal of Reserve Fund and National Welfare Fund Resources. The budget rule is based on a benchmark oil price to determine the ceiling for budget spending. Spending cannot exceed anticipated revenue at the base oil price, plus a budget deficit of 1 percent of GDP. The base oil price for the next financial year and planning period is the average oil price in the previous five year period for 2013, and the previous six- and seven-year periods for 2014 and 2015, with the period increasing by one year each year until it reaches 10 years.
Therefore, with the introduction of the budget rule as of January 1, 2013, the base oil price will be calculated as the average in