Russia must reform to boost weak recovery - World Bank

MOSCOW Tue Mar 27, 2012 2:44pm BST

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MOSCOW (Reuters) - Russia's economic recovery is relatively weak and its level of investment inadequate, the World Bank said on Tuesday in a biannual economic report that urged Russia to accelerate structural reforms to improve its poor investment climate.

The report noted said Russia's recent economic growth remained resilient and was characterised by robust expansion, with 3.5 percent growth forecast this year after growth of 4.3 percent last year.

However, the World Bank said the pace of Russia's economic recovery from the 2008 financial crisis was slow by both historical and international measures.

"The recovery from the crisis has been somewhat sluggish so far," said Kaspar Richter, the World Bank's chief economist for Russia, presenting the report.

The report noted that Russia's economy had taken 13 quarters to return to its pre-crisis level of output - a level attained at the end of 2011 - twice as long as after the previous financial shock in 1998.

It also said Russia's rebound had been slower than other economies, when measured in terms of pre-crisis growth forecasts and post-crisis performance.

It said Russia's level of GDP was now around 20 percentage points below pre-crisis growth projections, a gap that was the largest for any of 37 economies studied, blaming a slow recovery of capital investment as a "key culprit".

"Russia clearly suffers from low investment and that's one of the reasons the recovery is so weak," Richter said.

UNDER-INVESTMENT

He noted investment had fallen to around 22 percent of GDP from 26.4 percent before 2008, implying that Russia's investment share was now similar to developed economies, and therefore inadequate given Russia's need for large investments to rebuild its run-down capital stock.

Russia recorded a net capital outflow of $84 billion last year, as domestic and foreign investors have been deterred by problems such as corruption, bureaucracy and a weak legal system.

In order to revive investor confidence, the World Bank called on Russia to remove structural barriers that impeded productivity growth and economic diversification.

A World Bank study ranks Russia 120th out of 183 countries, when measured in terms of the cost of doing business, because of excessive levels of regulation, public ownership and state involvement in business.

However, the World Bank praised reform proposals contained in Strategy 2020, a policy blueprint drawn up by advisers to Prime Minister Vladimir Putin, that calls for privatisation and deregulation to boost economic growth and reduce Russia's excessive dependence on commodity exports

The plan is expected to be the basis for reforms to be adopted by the next Russian government, which will be formed in May after Putin is inaugurated as president. Putin won a presidential election on March 4.

"We know that Russia is taking this agenda seriously," Richter said.

However, some analysts have expressed scepticism over the promised reforms, noting that previous Russian reform plans have only been partially implemented and failed to improve the business climate radically.

(Editing by Alison Williams)

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