GO
Loading...

Russia dealt triple blow over its economy

Amos Chapple | Lonely Planet Images | Getty Images

The chorus of concern over Russia is increasing in volume. The World Bank and ratings agency Standard and Poor's (S&P) have both slashed their growth outlook for Russia, following a similar move by the International Monetary (IMF), and have warned of the structural challenges that the country faces.

The World Bank has revised its growth projection for the world's eighth biggest economy from 2.3 percent to 1.8 percent in 2013, whilst Standard and Poor's (S&P) estimate that growth will slow to 2 percent this year, down from 3.4 percent in 2012 and 4.3 percent in 2011.

The IMF cut its forecast on Tuesday to 1.5 percent after an initial estimate at the start of the year of 3.7 percent. These three organizations all cite that the country is in desperate need of further investment as the economy edges closer to full capacity.

(Read more: Putin on the Ritz? Russian said to have billions)

"Slowdown in consumption, stalled investment demand, and a continuing weak external environment led to the downward revision," the World Bank said in Wednesday's report.

The country, which is still very much reliant on its oil exports, has been hit by a drop-off in orders from the European Union - Russia's most important investor and its number one trading partner, accounting for around 50 percent of its exports.

However, the Russian economy is also suffering from a lack of investment in its vast natural resources extraction sector and is constrained by and a tight labor market, the reports said.

"The country is experiencing large private capital outflows as the business environment deters both domestic and foreign investment," Sophie Tahiri, an economist at ratings agency Standard and Poor's said in a press release on Wednesday.

Lower oil revenues has been a considerable drag on the Russian economy as the country has looked to diversify and to introduce incentives to boost growth and encourage private investment in infrastructure.

(Read more: Russian Olympic site still in shambles, Putin anxious)

In June, Russian President Vladimir Putin told a economic conference in St. Petersburg that Russia would seek to boost growth by investing 450 billion rubles ($13.7 billion) in Russian infrastructure, business and transport links, such as the trans-Siberian railway. He added that a key priority was to improve Russia's business climate and the Moscow stock exchange to allow Russia to compete on a global business level.

At the same event Igor Shuvalov, Russia's deputy prime minister told CNBC that the country needed to spend its oil wealth on education, healthcare, housing and infrastructure.

"We need to grow more than we are doing so now. With today's oil and gas prices we anticipate 5 percent growth maybe next year or in 2015, but not now unfortunately," he said.

But S&P's Tahiri remained unconvinced that Russia can make the necessary structural changes, saying that Russia's prospects for easing the capacity constraints in its natural resource extraction sector are slim with the amount of investment it has received.

"Activity in the non-energy sector is also likely to remain muted until the country's business climate and competitiveness improve markedly," she said.

IMF directors have urged the country to undergo "ambitious" supply-side structural reforms to attempt to stimulate growth and reduce vulnerabilities. New governmental policies are needed to boost productivity and improve the investment climate, governance, transparency, and property rights protection, it said.

Moscow's MICEX Index and RTS Index both fell in mid-morning after the World Bank released its report, but regained ground in afternoon trade.

Follow us on Twitter: @CNBCWorld

Europe Video

  • Limor Schweitzer, founder of RoboSavvy discusses the different uses of 3D printing, saying the technology could have a big impact on education and really make robotics "shine".

  • Eamon Javers, Washington Correspondent for CNBC said U.S Secretary of Defense Chuck Hagel's resignation may have appeared a "surprise", but President Barack Obama had known about this situation for a few months.

  • Kate Shoesmith, head of policy at the Recruitment and Employment Confederation, responds to U.K. Labour Party leader Ed Miliband's comments that he will not tolerate rogue employment agencies undercutting wages.