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. Last Updated: 07/27/2016

GDP Growth Not Real, EBRD Says

Despite the strong gross domestic product figures posted by the government over the past three years, the economy has a long way to go before it starts showing any real growth, the European Bank for Reconstruction and Development cautioned Wednesday in a report urging Russia to diversify the economy from the resource sectors.

"What we've seen in Russia during the last years by its nature cannot be considered real economic growth but rather catching up between available industrial capacities and growth in productivity after the 1998 crisis," chief EBRD economist Willem Buiter told reporters at the presentation of the bank's annual transition report on Russia and 26 other countries in the former Soviet Union and Eastern Europe.

The Russian economy has been showing negative growth for much of the past decade, and its GDP in real terms is still almost 30 percent below the level it was at in 1991, when the Soviet Union collapsed, economists say.

Capacity utilization in Russia is about 57 percent now, back at the levels where it was in 1993, according to the World Bank, which with the International Monetary Fund is also pushing Russia to diversify the economy.

"More importantly, it has gone up sharply from 37 percent after the 1998 crisis but remained flat since 2001, which means that it has reached its maximum level," said Christof R?hl, the World Bank's chief economist for Russia.

Progress in Transition*
selected countries
CountryPrivate sector**Large-scale privatizationGovernance & restructuring Competition policyBanking reform
*The EBRD uses a scale from 1 to 4+, with 1 being the lowest and 4+ being the highest score.
** Private sector share of GDP, percent, as of mid-2001
Source: EBRD

The EBRD expects the economies of the nine most-developed countries of Central Europe and the Baltics to grow by 3.7 percent in 2003, compared with a forecast of 2.2 percent in 2002. The EBRD forecasts that Balkan countries will grow 4.1 percent in 2003, up from 3.6 percent this year.

However, growth in the Commonwealth of Independent States is expected to slow down to 4.0 percent, down from 4.4 percent this year, as the easy growth from Russia's oil and gas and the 1998 default and devaluation runs out of steam.

The Russian government is predicting GDP growth of about 4 percent in 2002 and 3.5 percent to 4.4 percent next year.

"The growth in Russia starting from next year will be only driven by new capacities, created by investments and by the increase of productivity and technological progress," R?hl said.

In addition to long-expected progress in the restructuring of Russia's energy and banking sectors, the EBRD pointed at three main weak spots in the economy: the lack of diversification, the small role of small and medium-size companies, and difficulties with both entering and exiting business projects.

"Diversification of the local industrial groups into noncore sectors is a good thing, provided it does not restrict the ability of others to do the same," Buiter said. "It is a positive development that they are bringing capital to other industries, but the question remains whether they will encourage competition in these sectors."

According to the EBRD report, successful diversification depends on a regulatory environment and on the extent to which both domestic and foreign firms can compete in the new markets that these conglomerates are trying to enter. "It should be a level playing field for all," Buiter said.

Russia has one of the lowest scores for competition and progress in restructuring enterprises among the 26 countries surveyed by the EBRD. The bank said the spread and strengthening of vertically integrated business conglomerates may constitute a barrier to enterprise reform and development of SMEs.

SMEs account for 26 percent of Russia's workforce, which is progress but still two or three times less than in other former communist countries like Poland or Hungary, the EBRD said. Also, the activities of Russian SMEs differ drastically from those in other European countries. "They are mainly active in trade and catering, while very few of them are actually manufacturing goods," Buiter said.

The EBRD said Russia's private sector contributes 70 percent of GDP, a chunk that it called "remarkable." But at the same time, the EBRD said failure to reform the state sector is probably the most important problem. "Distorted competition caused by various forms of state intervention remains a key weakness of the Russian business environment," the report said.

However, the bank said it expects to see significant improvements in SMEs with the introduction of new taxation and accounting procedures for small companies in early 2003.