The document summarizes the economic outlook for Russia, including both short-term and long-term perspectives. In the short-term, GDP growth is forecast to continue at around 1-2% through 2019. Several reforms have been proposed to support longer-term growth, but major reforms face uncertainty without strong political will. The banking sector has seen some successful reforms through closure of unstable banks, though state ownership remains dominant in banking and other key sectors of the economy. Overall economic growth depends on oil prices and implementation of significant reforms, but the status quo is likely to continue without consensus on reform priorities.

1. Unrestricted
Bank of Finland
Russian economic outlook –
from stagnation to reforms?
Embassy of Finland - March 15, 2018
115.3.2018
Laura Solanko

2. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Rollercoaster of Russia’s GDP
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0
20
40
60
80
100
120
140
50
60
70
80
90
100
110
120
130
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
2019Q1
2020Q1
2021Q1
2022Q1
2023Q1
2024Q1
Real GDP, 2007=100 (lhs) Real GDP forecast (lhs)
Urals crude, USD/bbl (rhs) Urals crude, futures prices USD/bbl (rhs)
Yeltsin I
Yeltsin II
Putin I
Putin II
Putin III Putin IV
Medvedev I

3. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Russia can’t live on oil and gas alone
 Reserves/population
~100 m tonnes
– ~1145 in Saudi Arabia
 Generates up to ~1/3
of GDP
 Directly employs only
~3 million people (less
than 4% of labor force)
 Russia’s SWF
(National Welfare
Fund) ~4% of GDP
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4. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
But Russia is vulnerable to oil price changes
- oil price and exchange rate are very much
linked
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5. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
SHORT-TERM ECONOMIC OUTLOOK
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6. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Our forecast from September still
broadly valid (new forecast March 27)
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-10
-8
-6
-4
-2
0
2
4
6
8
2012 2013 2014 2015 2016 2017 2018 2019
Flows to inventories and statistical discrepancy Imports
Exports Fixed investment
Public consumption Private consumption
Percent / percentage points
Sources: Macrobond / Rosstat, BOFIT Russia forecast Autumn 2017.
Russian GDP growth (%) and growth contributions of demand
components and imports (%-points)
***

7. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Short-run indicators tell us that
recovery and growth are still uneven
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-15
-10
-5
0
5
10
15
Retail trade Industrial production
Construction
Volume change, % y/y
Source: Macrobond.
Note. Change in the methodology of
industrial production statistics in 2015
40
42
44
46
48
50
52
54
56
58
60
2015 2016 2017 2018
PMI Composite PMI Manufacturing
PMI Services
Index, seasonally adjusted (50=no change)
Source: Macrobond / Markit.
Russia Purchasing Managers' Index (PMI)

8. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
LONG-TERM GROWTH
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9. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Russian investment activity started to decline
already in the beginning of 2013 – most of its
peers behaved differently
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80
100
120
140
160
180
200
1.1.2010
1.4.2010
1.7.2010
1.10.2010
1.1.2011
1.4.2011
1.7.2011
1.10.2011
1.1.2012
1.4.2012
1.7.2012
1.10.2012
1.1.2013
1.4.2013
1.7.2013
1.10.2013
1.1.2014
1.4.2014
1.7.2014
1.10.2014
1.1.2015
1.4.2015
1.7.2015
1.10.2015
1.1.2016
1.4.2016
1.7.2016
1.10.2016
1.1.2017
1.4.2017
1.7.2017
1.10.2017
2010=100
Volume of fixed investment
(seasonally adjusted)
Brazil South Africa Indonesia India Malaysia
Mexico Poland Russia Turkey

10. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Working-age population in Russia
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66
68
70
72
74
76
78
80
82
84
86
2015 2020 2025 2030 2035 2040
Million
Russia: Working age population
Rosstat Middle Variant UN Medium Variant Rosstat Lower Variant
Sources: UN and Rosstat

11. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
REFORMS TO THE RESCUE?
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12. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Which reform proposals should be preferred?
 There is no single strategy
– Multiple reform proposals with
partially conflicting aims
 No easy reforms offered
– A multitude of large reforms
proposed on e.g.
 Judicial system
 Tax system
 Re-privatization
 Education
 Pension system
 The achievements of 2012-
2018 will not be challenged by
any new reforms
1. Conservative fiscal policy with aim to
balance the budget
2. Floating exchage rate and inflation
targeting monetary policy
3. Russia is ”back in global politics”
4. State interests will remain superior to
private ones
• State will remain a major owner
in energy, transportation and
finance
• State armament programme will
continue
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13. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Will proposed reforms be implemented?
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Aleksei Kudrin on 9 February 2018; replying to a
question on when the (reform) stategy will be
implemented ” For that political will is required,…”
 Other than retaining the status quo, no
”political consensus” on where the
future priorities are. Everything
depends on the Kremlin.

14. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
BANKING SECTOR – AN EXAMPLE OF
SUCCESFULL REFORMS?
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15. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Hundreds of shaky banks have lost
licencies since mid-2013
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16. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
But state ownership is large (and increasing)
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0 10 20 30 40 50
Albania
Armenia
Azerbaijan
Bosnia and Herzegovina
Bulgaria
Estonia
Georgia
Hungary
Kazakhstan
Latvia
Lithuania
Macedonia, FYR
Moldova
Montenegro
Poland
Russian Federation
Romania
Slovak Republic
Slovenia
Ukraine
Asset share of state-owned banks, %,
EBRD data for 2009
40%
45%
50%
55%
60%
65%
70%
2007m1
2007m6
2007m11
2008m4
2008m9
2009m2
2009m7
2009m12
2010m5
2010m10
2011m3
2011m8
2012m1
2012m6
2012m11
2013m4
2013m9
2014m2
2014m7
2014m12
2015m5
2015m10
2016m3
2016m8
2017m1
2017m6
2017m11
Share of big-5 state controlled banks
hh_loans nfc_loans hh_deposits nfc_deposits
Source: CBR, BOFIT

17. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Banking is not the only sector where the
role of SOEs is significant
State share
(share of SOEs in turnover of top-
100 companies in the sector)
Transport 83,0 %
Energy 70,9 %
Mining 70,0 %
Finance and Insurance 46,8 %
Housing 31,9 %
Machine building, car manufacturing 30,9 %
IT and media 22,7 %
Construction 18,4 %
Commercial real estate 15,9 %
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Source: https://www.csr.ru/wp-
content/uploads/2018/02/Doklad_effektivnoe_upravlenie_gossobstvennostyu_Web.pdf

18. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
But banking sector has a powerful and
professional technocratic supervisor (CBR)
(contrary to many of the other sectors mentioned above)
 In monetary policy and
financial supervision there is
a relatively well established
set of global best practices to
follow
 Reforms in the banking
sector have been
– about (re-)establishing central
control over the sector
– not threatening the position of
state-owned institutions
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19. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted15.3.2018 Laura Solanko 19
MORE INFORMATION AT WWW.BOFIT.FI

20. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
THANK YOU!
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