Russia overview

Cityscape in Russia

The EBRD is currently only supporting its existing projects and clients in Russia. The Bank’s operational approach, following guidance from a majority of Directors, is currently not to undertake any new business in the country.

In Russia we focus on:

Diversifying the economy: private enterprises and private financial institutions that support non-resource sector growth are key for diversification. About 90 per cent of EBRD investments in Russia in 2013 were in the private sector.

Investing in and setting standards for modernisation and innovation: focus is needed on enterprises that innovate, introduce modern new technologies, or upgrade to international standards, particularly with regard to corporate governance, transparency, energy efficiency, inclusion and gender issues. Improving energy efficiency is a key aspect of modernisation across various sectors of the economy.

Supporting privatisation and private sector development: the role of the private sector in the economy needs to increase through strengthening existing private operators; increasing the MSME share in the economy; pursuing transparent and competitive majority privatisation strategies for state-owned companies; conducting policy dialogue on privatisation; and promoting PPPs as a tool to attract more private sector investment into state-dominated sectors.              

Increasing economic opportunities in Russian regions: Russia is a federal state whose component regions vary widely in terms of per capita income, unemployment and investment. To promote regional development, it is necessary to support projects and reforms that advance transition in regions that are less advanced than Moscow and St. Petersburg and that are committed to improving the investment climate.

As well as being a country where the EBRD works, Russia is also an EBRD donor. In 2013 the Russian government established its first bilateral Technical Cooperation fund, worth €40 million and covering a five-year programme, in support of the EBRD’s core operations in the country. Almost 50 per cent of the funding is earmarked for the development of projects in transport and infrastructure – with the rest split between energy efficiency, agribusiness and SMEs. At the beginning of 2014 the Advice for Small Business programme benefited from Russian funding. Russia also remains the biggest donor to the NDEP environmental window with total contributions totalling €60 million. In 2015 Russia paid €5 million to the NDEP Support Fund.

The EBRD’s latest Russia strategy was adopted on 18 December 2012

Current EBRD forecast for Russia’s Real GDP Growth in 2019 1.1%

Current EBRD forecast for Russia’s Real GDP Growth in 2020 1.7%

The Russian economy grew by 0.7 per cent year on year during the first half of 2019, following growth of 2.3 per cent in 2018. Household consumption continued to drive growth but was subdued on account of stagnant real wages and a 2 percentage point increase in VAT introduced in January 2019. Weaker external demand, lower oil prices and a stronger rouble since the start of the year have negatively affected net exports, while sanctions and continued tight fiscal policy have constrained public and private investment.

Tight economic policies that helped secure macroeconomic stability have recently turned more neutral, in recognition of their negative impact on growth. The authorities continue to follow the fiscal rule adopted in 2017, which mandates the transfer of oil revenues in excess of a US$ 40 per barrel threshold to the National Wealth Fund, but recently the rule was relaxed to allow a 0.5 per cent deficit at this threshold. There will soon be scope to start investing part of the National Wealth Fund, although how this can be done without sparking inflation remains subject to debate.

Monetary policy has also turned more neutral in recent months. The inflationary impact of a 2 percentage point VAT increase introduced in January 2019 was more modest than expected, and inflation has been declining from a peak of 5.3 per cent in March 2019 as a result of falling real household incomes and a stronger rouble. Declining inflation and weaker-than-expected output has led the central bank to cut its policy rate three times by a total of 75 basis points since June 2019. 

The banking sector remains a source of risk for the economy. While the system-wide capital adequacy ratio is stable at around 12 per cent, asset quality remains a problem, with the non-performing loan ratio standing at 10.4 per cent in March 2019. The fast growth of unsecured household credit has raised concerns and the Central Bank of the Russian Federation has introduced macro-prudential measures to address this. In the past year, the government has continued the process of banking sector consolidation, with more than 500 banks having been closed down since 2013. However, this has led to an increasing concentration of the banking sector in state hands, with over 70 per cent of bank assets now owned by state-owned or state-controlled banks.

The growth outlook is expected to improve slightly, starting with the second half of 2019, thanks to more supportive monetary policy and the implementation of the 13 national projects. However, private investment is likely to remain weak, given the continuing negative impact of sanctions imposed by the European Union and the United States of America, and exports are likely to be held back by the weaker global trade environment. A growth rate of 1.1 per cent is expected for 2019, followed by 1.7 per cent in 2020. Key risks to the outlook include the possibility of more severe sanctions and a sharp fall in oil prices, which would lead to currency depreciation, impacting the already weak asset quality of the banking sector.