Russia needs to focus on reforms, says VTB Capital’s chief economist

The Russian government needs to focus on reforms to maintain a high level of GDP growth and improve global competitiveness, says VTB Capital.

Russian demographics are the greatest problem standing in the way of gross domestic product growth in the country, says VTB’s chief economist Maxim Oreshkin.

Economically, the country is in healthy shape, he says. It has fully recovered from the financial crisis: output levels are back to their potential indicators, recovery growth rates have come to an end and unemployment is down at its all-time lows.

Yet one of the main reasons for the low unemployment figures is the lack of a strong labour force. Due to the demographic problems in the country – low birth rate and relatively high mortality rate – the labour force has not been growing as fast as it should.

This situation is putting constraints on GDP growth in the country, as output suffers, Oreshikin explains.

“There are serious demographic challenges. Unemployment is technically structural, so Russia must increase immigration of high-skilled workers,” he says.

To improve the situation the country needs to focus on increasing productivity. In current conditions, this can only be done through supply side reforms.

Oreshkin says: “Domestically Russia needs to move away from demand stimulation and address key supply side challenges, such as labour reform. This includes making it easier to start a business and hire staff. It also needs to be easier for people to retrain and relocate.”

The outlook for this development is positive. Russia’s President Vladimir Putin has the long term development of the local economy high on his agenda.

One of his goals is to drive Russia up to the top 20 countries in the World Bank’s ease of doing business index by 2018, from its current position in 112th place.

This would involve focusing on productivity growth, reducing state involvement in various industries and improving the infrastructure and utilities sectors.

The goal is ambitious given the short time frame. Current productivity levels in the country are at a third of those in the EU and US.

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