Is it possible for institutions to predict that Russias economy will become the fifth largest in the world next year?

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 Is it possible for institutions to predict that Russias economy will become the fifth largest in the world next year?


Recently, Standard Chartered Bank predicted that next year Russia will surpass Germany to become the fifth largest economy in the world, combined with purchasing power parity exchange rate and nominal GDP growth. The IMF also raised Russias GDP growth forecast to 1.8% in 2019.

As international institutions have said, Russias economy has recently recovered to a certain extent. Since the successive recessions in 2015 and 2016, the Russian economy has stepped out of the recession in the first quarter of 2017, growing by 1.5% that year and 1.6% in the first three quarters of 2018.

The primary reason for Russias economic recovery is the sharp recovery in foreign trade. According to the statistics of Russian Customs, Russias total import and export volume reached 56.34 billion US dollars from January to October 2018, an increase of 20% over the same period of last year. Financial markets also remained stable. Russias two major stock indices outperformed most emerging market countries.

Agriculture has also made many achievements. In 2017, Russian agricultural production increased by 1.5%, and exports reached a record high. At present, the profits of Russian agricultural enterprises reach 20%, close to the oil industry, which has become a new driving force for economic recovery.

It is noteworthy that Russias economic structure has improved in recent years with its efforts to promote import substitution and promote the development of digital economy. According to the report of Russian authorities, the current high-tech industry contributes 22.3% of Russias GDP, and its employees account for about 36.6% of the total employed population.

It can be said that the Russian economy has been able to maintain low-speed growth after coming out of the recession.

Moreover, this recovery is different from that after the economic crisis of 2009, when Russias economy came out of recession mainly relying on the recovery of oil prices. In addition to the rise in oil prices and the revival of foreign trade, import substitution and expansion of production and investment in industry and agriculture have played an important role in this recovery.

However, we should also see that Russia still faces some practical difficulties in its development, which determines that there is little possibility of future high-speed economic growth.

First of all, the economic pull of oil price rebound is much worse than before. In the first half of 2018, international oil prices rose by 23.1%, while Russias GDP grew by only 1.6% in the same period. High oil prices can only guarantee fiscal surpluses, maintain stability of peoples livelihood, and weaken the driving role of economic growth. Russias traditional mode of relying on energy exports to promote growth is unsustainable.

Secondly, the lack of investment has always restricted Russian economic development. In order to control inflation, the Central Bank of Russia has long implemented a high benchmark interest rate, currently reaching 7.75%, while the market lending rate is 15% to 20%. Private investment has been restrained. However, the states fiscal surplus has just emerged, which makes it difficult to make large-scale investment. In 2018, Russian fixed asset investment grew by only 4.1%. In order to achieve moderate GDP growth, annual growth needs to reach 15%. The lack of investment largely offset the recovery of foreign trade and made it difficult for Russia to develop rapidly. Finally, the West remains Russias main source of foreign investment and technology, and Russias efforts to develop high-tech and digital economy will be limited when sanctions are difficult to loosen. At present, Russias GDP in 2018 is expected to be around $1.6 trillion, while Germanys GDP will exceed $4 trillion. There is a big gap between them. Therefore, although the international community is optimistic about Russias economic development prospects, surpassing Germany is still a big challenge. Source of this article: Author of New Beijing News: Editor-in-charge of Chen Yu: Han Jiapeng_NN9841

Secondly, the lack of investment has always restricted Russian economic development. In order to control inflation, the Central Bank of Russia has long implemented a high benchmark interest rate, currently reaching 7.75%, while the market lending rate is 15% to 20%. Private investment has been restrained. However, the states fiscal surplus has just emerged, which makes it difficult to make large-scale investment. In 2018, Russian fixed asset investment grew by only 4.1%. In order to achieve moderate GDP growth, annual growth needs to reach 15%. The lack of investment largely offset the recovery of foreign trade and made it difficult for Russia to develop rapidly.

Finally, the West remains Russias main source of foreign investment and technology, and Russias efforts to develop high-tech and digital economy will be limited when sanctions are difficult to loosen.

At present, Russias GDP in 2018 is expected to be around $1.6 trillion, while Germanys GDP will exceed $4 trillion. There is a big gap between them. Therefore, although the international community is optimistic about Russias economic development prospects, surpassing Germany is still a big challenge.

(Institute of Russian Studies, Chinese Institute of Modern International Relations, Chen Yu)