Russian bounce

Russian growth: Russia is emerging from last year's slump much faster than most people expected. But without reforms to boost investment, Russia's medium-term growth could well disappoint.

Economists are busy revising up their forecasts. Russian growth this year could reach 7 per cent, similar to the pre-crisis average between 2003 and 2007, according to Bank of America Merrill Lynch. While a sudden dip in the oil price would quickly halt the upward revisions, that risk is diminishing as the global recovery strengthens.

But Russia is even more reliant on pricey oil than in the past. The factors that propelled growth in Russia during the last decade cannot be counted on in future - especially the tremendous productivity increases caused by the shift from socialism to capitalism. These gains will grow more elusive. A country with Russia’s per-capita GDP is unlikely to achieve catch-up growth worth more than 4 per cent of GDP a year, and the advances will diminish with time, according to research by Capital Economics.

Higher oil prices, combined with looser credit conditions, accounted for just under half of Russia’s GDP growth between 2004 and 2007, a period when Russian oil production increased against a backdrop of sustained oil-price inflation. But with oil now back above $80 a barrel, a prolonged period of further price increases is far from guaranteed. Moreover, Russian oil production is now stagnating — and will decline without major new investment.

Such factors won't immediately impact Russia's post-crisis recovery. But sustained growth would require a pick-up in investment more broadly. Russia’s investment-to-GDP ratio, at around 20 per cent, lags the emerging-market norm of 25-30 per cent. The country routinely scores dismally on business climate measures, reflecting its weak financial system, lousy investor protection, and intrusive bureaucracy. Russia's leaders say they understand the need for big improvements. That is also what they said after the last crisis a decade ago. By breeding complacency, a strong short-term recovery could ultimately make matters worse.