Potential Growth : Outlook and Options for the Russian Federation

This paper examines the past and future trajectory of the Russian Federation's potential growth: the speed at which an economy could grow if all resources were utilized efficiently. The findings show that it peaked before the 2008 global financial crisis and continued to decline up to 2017. The estimated potential growth rate was 3.8 percent in 2000-09 and 1.7 percent in 2010-17, a 2.1 percentage point decline. The most recent deceleration was due to a slowdown of productivity growth and a shrinking potential labor force, rather than a shortfall in capital accumulation. For its future trajectory, under the baseline scenario, Russia's potential growth is expected to continue its gradual downward trend, from 1.5 percent in 2017 to 1.3 percent in 2022. It is expected to recover gradually thereafter, primarily driven by stabilization of the labor force. The simulations of proposed reform measures currently being considered by policy makers, including a combination of pension reform, more migration, higher investment, and gradual acceleration of total factor productivity growth, can double Russia's potential growth rate to 3.0 percent by 2028. Under the assumptions discussed in the paper, pension reform, increases in migration, investment, and productivity contribute 0.4, 0.2, 0.6, and 0.3 percentage points, respectively, to the increase in Russia's potential growth rate. Potential growth is found to be most sensitive to changes in total factor productivity growth, suggesting that reforms that increase productivity may have the most impact on boosting Russia's potential growth.