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. Last Updated: 07/27/2016

Report Says Services Outpace Production

The service sector grew last year at a faster rate than the production sector for the first time since the collapse of the Soviet Union, the World Bank said Wednesday.

The share of financial, telecoms, transport, tourism and other services in gross domestic product grew 5.4 percent in 2002 and now accounts for 51.5 percent of GDP, putting the sector back roughly to where it was before the financial collapse of 1998, according to the World Bank's quarterly report on the Russian economy, which was based on State Statistics Committee figures.

Some economists said the growth in the sector was even higher, but harder to calculate because much of the activity is unaccounted for.

"I think that real numbers were much higher because the lion's share of the services sector remains in the shadow economy and is not reflected anywhere," said Renaissance Capital economist Alexei Moiseyev.

The share of manufacturing in GDP grew only 3.2 percent in 2002, almost half the growth showed by the services sector.

The World Bank's chief economist for Russia, Christof Ruhl, blamed several factors for the slowdown, including higher production costs due to the strengthening ruble.

Ruhl applauded the return of healthy growth in the services sector, but said stagnating production was indicative of a resource-dependant economy.

If the economy continues to be dependent on externally-driven prices like those for oil, growth in "the services and export sectors may not be able to compensate for employment losses in the industrial sector," he said.

The government has tasked its Economic Development and Trade Ministry with correcting the imbalance in its new medium-term strategy, but forced diversification of the economy has its own risks.

In this year's federal budget, for example, structural changes in the economy are not a priority, Ruhl said.

The biggest increases in this year's budget went to defense, law enforcement, legal reform, research and education.

All of these areas are important, according to the World Bank, but the spending bill does not dovetail with the government's structural reform program.

"In fact, we don't see any correlation between the two, so probably there should be more coordination between the authorities responsible for reforms and the authorities responsible for the budget," Ruhl said. "Any key reform is likely to cost money, whether administration reform or banking reform, but it is important to make such calculations."

The World Bank sees diversifying the economy without interfering in it as the government's main task over the next two years.

"There is a huge risk that when one says 'diversification,' others mean non-market measures, including subsidies," Ruhl said.

"But this would be a very big mistake, so in the end the government should find ways to diversify the economy by creating incentives."