Russia is optimistic on growth but still 'far from where we want to be,' former deputy PM says

  • Russian current and former officials continue to express optimism in Russia's growth trajectory, despite the threat of further sanctions and challenges in diversifying the economy away from raw materials reliance.
  • Economic growth in Russia hovers just under 2 percent annually, a pickup from the 0.7 percent average of the last 10 years but a far cry from the 6.9 percent average of the decade before that — and still a way from the current world average of around 3.5 percent.

Russia has major challenges ahead in terms of improving its competitiveness on the world stage, but its current and former officials remain positive despite mounting Western sanctions.

Russian Railways chairman and former Deputy Prime Minister Arkady Dvorkovich, speaking at the Ambrosetti Forum in Cernobbio, Italy on Friday, admitted the slow pace of progress in the country of 144 million.

"I think we're far from where we want be … A long way to go, but we are getting more competitive with time," he told CNBC's Steve Sedgwick, emphasizing the country's plans to strengthen foreign partnerships and increase public and private investment into education and innovation.

Economic growth in Russia hovers around 2 percent annually, a pickup from the 0.7 percent average of the last 10 years but a far cry from the 6.9 percent average of the decade before that and still a way from the current world average of around 3.5 percent. Its longstanding reliance on raw materials revenues, observers say, has hindered the modernization of its economy and looks set to continue to do so, despite President Vladimir Putin's pledge to bring growth to 4 percent.

Diversification promises

For the past decade, Russian leaders have talked about diversifying the economy, but critics say that efforts so far have been lacking. Between 2005 and 2015, education spending fell by 0.8 percent to 2.6 percent of GDP, and healthcare spending declined by 0.6 percent to 3.8 percent of GDP. These figures amount to between one half and one third of public spending in the same areas by the U.S., Germany and Australia. Putin vowed to significantly boost these areas after being reelected in March.

Asked if he felt his government had failed, Dvorkovich was more forgiving.

"I think we did a good job, but maybe a bit slower than we could," he said. "And still we're on the upward trend."

Russia's unemployment rate reached a record low in July of 4.7 percent, down from 5.1 percent the same period last year. Its economy has been in recovery for the last year, following two years of steep recession brought on by a global drop in oil prices and Western sanctions.

Dvorkovich described a series of difficult structural reforms underway, including controversial pension reforms, and a phase of "aggressive investment policy" — both public and private — aimed at 20 percent of gross domestic product (GDP), up from the current 17 to 18 percent.

"That's a plus that should produce higher growth," the chairman said. "And innovation — the combination of investments into education, science and technology — it's quite a challenge but we are ready."

In the face of current and likely future sanctions from the West, with some economists predicting recession for Russia as result, the scope of this challenge will be hard to understate.

More crushing U.S. sanctions on the horizon

U.S. lawmakers convened on Thursday to discuss new penalties for Russia over its interference in the 2016 presidential election and what it's called Moscow's "malign actions" including alleged cybercrimes, human rights violations and its support for Syrian leader Bashar al Assad. Impending measures could target Russia's sovereign debt, oil investments and wealthy business leaders connected to the Kremlin.

In August, a bipartisan group of senators introduced the Defending American Security from Kremlin Aggression Act of 2018 (DASKAA), which has been referred to as the "sanctions bill from hell." The discussions by the Senate Banking Committee, the second of three being held on Russian sanctions, underscore the resolve of legislators in both parties to punish Putin for his actions.

This has put the ruble under renewed pressure after what has already been a bruising year for Russian assets. April saw Russian stocks tank by 11 percent after U.S. sanctions were imposed on a number of Russian oligarchs and entities linked to the Kremlin.

Foreign holdings of Russian sovereign bonds are at their lowest point since 2016, and the ruble since Thursday has been near its weakest against the dollar since spring of 2016. Meanwhile, yields on 10-year bonds rose more than five basis points to 9.23 percent on Friday.

Russia's finance ministry announced Thursday its preparedness to buy its own ruble debt — an emergency move — in the event of new U.S. sanctions, indicating it was bracing for the worst.