Russian Economy Hampered by ‘Poor’ Business Climate, OECD Says

By Scott Rose

Dec. 12 (Bloomberg) -- Russian economic growth will be constrained in the coming years by a “poor” business environment and energy inefficiency, the Organization for Economic Cooperation and Development said.

Gross domestic product will probably expand by 4.1 percent in 2012 and 2013 after 4 percent this year, the Paris-based OECD said in a report published today. Acting Finance Minister Anton Siluanov expects 2011 growth of as much as 4.5 percent.

The economy “is not fully exploiting opportunities provided by Russia’s rich endowment of natural resources and the high skill level of its population,” the OECD said. “A glaring and persistent handicap for the functioning of the Russian economy is the poor business environment. This is holding Russia back from becoming the modern, diversified, innovative economy that it aspires to be.”

Prime Minister Vladimir Putin, who seeks a return to the presidency next year, targets growth of 6 percent to 7 percent to turn the economy into one of the world’s five largest. Tens of thousands of people in Moscow and other cities protested yesterday over claims of fraud in a Dec. 4 parliamentary vote that reduced his party’s majority.

During Putin’s two terms as president between 2000 and 2008, he worked to centralize power and increase state ownership of the country’s biggest companies. Buffeted by a booming global economy, growth averaged 7 percent a year during his tenure.

Modernize the Economy

Policy makers should focus efforts to modernize the economy on energy efficiency and on improving productivity across the economy rather than on high-tech development, the OECD said.

The economy will also grow “several percentage points of GDP” over the medium-term from entry into the World Trade Organization, primarily as a result of loosening its own regulations, according to the report.

Russia should make monetary policy more transparent and protect the budget from a tendency to spend more as revenue rises, the OECD said.

While Russia will probably end this year with a small federal budget surplus, the government should move faster to reinstate rules that protected windfall oil revenue, the report said. The budget may return to a deficit of 1 percent of GDP next year, followed by 1.1 percent in 2013.

The non-oil deficit, which strips out revenue and expenses related to the oil and gas sector, has surged to 10.2 percent GDP this year, compared with 6.5 in 2008, the report said. The figure will edge up to 10.8 percent in 2012 before falling to 10.2 percent in 2013, it said.

“The non-oil deficit that rose during the boom and then expanded rapidly during the crisis remains very high” and above Russia’s medium-term target of 4.7 percent of GDP, the report said. That “makes the fiscal position vulnerable to a sharp reduction in the oil price.”

Editors: Balazs Penz, Brad Cook