Russian economic growth has underperformed the global average almost every year since the 2008-09 financial crisis. But it’s far from a homogenous pattern: in fact, since 2017, there has been a pronounced trend toward increasing divergence across the main sectors of the Russian economy. This has been significantly accentuated by the Covid crisis. The sectors exhibiting the highest growth appear to be those that benefit from Russia’s relative macroeconomic stability and are less sensitive to the country’s lack of growth momentum. This rising differentiation in growth across sectors has important implications for investment strategies, as we expect growth in sectors such as IT, agriculture and financials to continue to outperform the rest of the economy.
Since the 2008-09 financial crisis, Russia’s economic growth has underperformed the world’s average almost every year, with notable gaps observed versus the rest of EM and the CEE region throughout the past decade. The sluggish growth performance was partly attributable to the structural deficiencies, external factors, but also in no small degree to the macroeconomic policies that favoured the maintenance of macroeconomic stability over attaining high growth rates. The priority accorded to securing macroeconomic stability was in particular embodied in the operation of the fiscal rule within the fiscal policy framework, as well as inflation-targeting in the monetary sphere.
Indeed, the growth-stability dichotomy in Russia’s economy is a feature that has persisted for an extended period due to the frequency and intensity of crises erupting over the course of the past decade. After a period of attaining high growth rates in 2006-07, the paradigm of Russia’s economic policy shifted towards prioritizing macroeconomic stability after the global financial crisis of 2008-09. The geopolitical perturbations of 2014 and the most recent Covid crisis have served to reinforce this policy focus. While Russia has certainly had its periods of strong growth in the past several decades, the intensity of the external headwinds over the past 12-13 years has tilted the balance between pro-growth and pro-stability policies in favour of the latter.
Another dimension to the “growth-stability” dichotomy in Russia is the significant emphasis placed in economic policy on securing high levels of reserves. The lack of conversion of these sizeable reserves accumulated by Russia into boosting economic growth has been due to a number of factors. One was the lack of institutional capacity to ensure an efficient spending of fiscal reserves on large-scale infrastructure projects. This in turn was compounded by the pre-cautionary motives associated with concerns regarding the effects of economic crises (2008-2009 crisis) and geopolitical shocks (2014 crisis episode). As a result, Russia stands out across EMs as an economy with among the lowest fiscal deficits and government debt levels, while at the same time exhibiting a combination of high reserves but low economic growth. This pattern contrasts with the one observed in some other emerging economies during crisis periods, at which time greater efforts were made by EMs to boost growth at the expense of higher deficits and debt levels.
Indeed, the Covid crisis generated notable differentiation across sectors as some were disproportionately affected by the pandemic and quarantine measures (tourism, travel), while others were given a major boost (telecommunications, IT and computer services). Russia’s macroeconomic policy, including sectoral taxation patterns, may have contributed to the differentiation patterns observed throughout the economy. Apart from Russia-specific factors, global sectoral factors may have also contributed to the patterns observed in Russia — in particular the rising dichotomy between manufacturing and extraction industries on the one hand and the services sector on the other.
As a result, sectors such as financials and IT have been increasingly diverging from the lacklustre performance in the transportation, construction and public sectors. The oil and gas and agricultural sectors have occupied the middle ground, broadly reflecting industry-specific and global factors. Overall, services such as finance and IT exhibited improved growth performance in 2016-19 compared to the 2011-15 period, while extraction of raw materials and transportation were among the sectors with deteriorating growth dynamics.
One of the best performers in recent periods has been the financial sector, which benefited from the organic growth in the sector via increasing financial penetration, as well as the significant expansion in the array of services offered to the population. Most importantly, however, the high real interest rates sustained by the CBR to maintain macroeconomic stability resulted in the greater attractiveness of investment in financial instruments than capital investment. The high real rates incentivized investment in financial instruments at the expense of the real sector.
The above observations concerning sectoral growth patterns suggest that greater differentiation across Russia’s sectors may be warranted in devising top-down investment strategies. If the current prioritization of macroeconomic stability were to persist, sectors such as IT, agriculture would be well positioned from a top-down perspective. Finally, it is important to note that the outperformers from the services sector that benefit from Russia’s growth-stability dichotomy also exhibit relatively good scores in the ESG ratings, most notably compared to the natural resource sectors. As investors increasingly focus on ESG issues, the longer-term implications for sectoral growth performance may prove significant.