World Bank spells out dangers of Russia’s pivot towards the east

The economic transformations taking place in China and India are having subtle and indirect impacts on Russia’s economic growth, and will continue to do so over the next decade, according to a new report from the World Bank which also calls on the authorities in Moscow to diversify  the economy, strengthen international trade an create a more favourable investment environment.
The report   A Rebalancing China and Resurging India: How Will the Pendulum Swing for Russia? assesses these potential impact of four potential scenarios – China’s slowdown, China’s rebalancing, India’s expansion, and a combination of all three.

  1. The overall impact of China’s economic slowdown on Russia’s growth would, the report predicts, be relatively minor, but the impact on welfare would be more significant, and an increase in direct taxes would be needed to balance lower trade revenues. At the same time, a continued slowing of the Chinese economy would offer an opportunity for Russia to grow its non-oil tradable sectors.
  2. China’s rebalancing, on the other hand, could bring about a rise in Chinese demand for oil and agricultural products, thereby having a positive, albeit small, impact on Russian trade.
  3. India’s rapid expansion could trigger additional demand for Russian exports, but only a moderate GDP growth gain because of the low level of Russia-India trade. The current share of Russian exports to India is barely 2%, in contrast to 11% for China.
  4. A combination of all three could have a small but negative impact on Russia’s economic growth. Since China is a much bigger trading partner than India is with Russia, the negative impact of a slowdown in China could outweigh the positive effects of both the rebalancing of China’s economy and the expansion in India’s economy.

Specifically, the report,s authors predict that

  • Continued slowdown in growth rates in China from the current 6.5% to 4.6% by 2030 will lead to a reduction in the volume of Russian exports to China by 17%.
  • By 2030, the volume of Russian oil and gas exports  to China will have dropped by  18%
  • Although  the  volume of Russian exports to India are expected to grow by 8% this will only result in 0.06% growth in GDD due to the small scale of trade between the two countries

The report argues that it now a matter of urgency for the Russia to speed up domestic structural reforms as continuing rigidity and impediments in both the labour and goods market will increase the  impact of negative external shocks and reduce the benefits from positive ones. In addition, Russia’s poor connectivity and non-tariff barriers in countries that trade with Russia, could limit Russia’s ability to adjust smoothly to changes in the international economic environment.

  • Reinforce the diversification of exports, with an emphasis on reducing the country’s dependency on natural resources.
  • Enhance Russia’s comparative advantage in high-skilled services, such as communications, financial insurance, business services, tourism, education, and health services.
  • Introduce policy measures that increase mutually beneficial trade between China, India, and Russia, and by extension, measures that increase strategic partnerships between large emerging economies.
  • Implement policy changes that improve the attractiveness of Russia’s economy to FDI. Both China and India are increasingly looking for investment opportunities abroad.
Source: worldbank