The World Bank shares the position of the Bank of Russia on the nature of inflation in the Russian Federation

The World Bank has published a new report on the economies of Europe and Central Asia, including Russia. The bank’s analysts have raised their forecasts for the country’s GDP growth in 2024–2025, but, like the Bank of Russia, they note a noticeable overheating of its economy and problems with low productivity and state dominance in industries that may be market-oriented.

According to the latest World Bank (WB) report on the economies of “emerging and developing countries in Europe and Central Asia” (ECA), in 2023 their growth rate increased to 3.3% from 1.5% in 2022, then how in 2010–2019 they averaged 3.1%, and in 2000–2009 they averaged 5.1%. The increase in dynamics in 2023 “reflects the transition from recession to growth in the Russian Federation and Ukraine, as well as a more robust economic recovery in Central Asia,” the authors note. Without Russia and Ukraine, growth rates in the region (includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Bulgaria, Croatia, Poland, Romania, Belarus, Moldova, Armenia, Azerbaijan, Georgia, Turkey, Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia) fell to 3.1% in 2023 from 4.8% in 2022 due to “a sharp slowdown in the economies of major trading partners, tightening financing conditions and the impact of the cost of living crisis.”

In 2024–2025, the growth of ECA economies will slow down to an average of 2.8%, primarily due to weaker growth in Russia (the forecast for the Russian Federation has been increased for 2024 to 2.2% from 1.3%, by 2025 – up to 1.1% from 0.9%), in Ukraine and Turkey – against the backdrop of continued tough economic policies. In Central Asia and the South Caucasus, growth is expected to slow due to a decline in remittances. In the countries of Central Europe and the Western Balkans, the World Bank expects a noticeable acceleration in GDP growth due to the recovery of labor markets, wage levels and increased investment, stimulated by the influx of money from the EU. The most significant risks of the forecast are the escalation of current military conflicts in Europe and the Middle East, which will lead to “more serious supply disruptions and increased volatility in energy and food prices.”

It is noteworthy that the World Bank makes its forecasts within the framework of the main topic of the report “Creating opportunities for private sector development.” In particular, the bank’s analysts explain the lack of progress in this (in almost all countries of the region) by the output gap in the Russian Federation, which, according to their estimates, has increased, exceeding 2% of potential GDP, which indicates a significant increase in inflationary pressure on the demand side. “Due to overheating of the economies in some countries (including the Russian Federation and Turkey.— “Kommersant”) significantly increases the risk of a prolonged period of high inflation, motivated by rapidly rising labor costs,” the report’s authors note. Let us remind you that the Central Bank of the Russian Federation adheres to a similar point of view. “The slowdown in productivity growth affected the economies of almost all countries in the ECA region, but it was especially sharp in Russia, the South Caucasus and the Western Balkans,” the World Bank says. COVID-19 and the conflict in Ukraine have further exacerbated the slowdown in productivity growth, hampering private investment, disrupting education, regional trade and financial inclusion.

The report notes that in ECA, the average density of new business registrations is 2.9 per 1,000 working-age adults—half that of developed European countries. The rate at which companies in the ECA region file new patents is much lower than those in advanced Europe or the United States, and the quality of the competitive environment has changed little between 2006 and 2022 in most ECA countries. The World Bank records the worst results in matters of state participation in the economy. Kazakhstan, Russia and Serbia have the lowest scores among ECA countries. There are more than 53 thousand companies with state participation in 21 countries of the region, the Russian Federation accounts for more than half, and they are present in almost all sectors of the economy. The share of income of such companies ranges from a little more than 40% in the Russian Federation to a little more than 5% in Albania and Kosovo. On average, 55% of state-owned enterprises in ECA operate in competitive industries where government intervention may be less justified given the robust functioning of market mechanisms.

Artem Chugunov