Behind Russia’s ‘high income’ rating from World Bank: 

The World Bank upgraded Russia from an “upper-middle income” country to a “high-income” one, a status it last had in 2014.

The ranking was boosted by growth in trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%), which led to increases in both the real (3.6%) and nominal (10.9%) GDP.

The improvement, however, is on account of the war economy, and is unlikely to endure, according to most experts. “Economic activity in Russia was influenced by a large increase in military-related activity in 2023,” the World Bank said on Monday.

In its country assessment in May, the International Monetary Fund (IMF) had flagged “some signs of overheating” in the Russian economy.

Russia and the ranking:

• The World Bank classifies economies into four groups based on per-capita gross national income (GNI) in US dollars: low, lower-middle, upper-middle, and high. The Bank’s 2024-25 classification for high-income countries raised the threshold to $14,005 or more.
• Last year, Russians earned $14,250 per person on a gross national income basis, the Bank estimated. Bulgaria and Palau joined Russia in becoming “high-income economies” with $14,460 and $14,250 per-capita GNI respectively, the Bank said.
• In nominal terms, Russia ranks 72nd globally in per-capita GNI and 53rd in purchasing power parity.

Ukraine too rises in ranking:

Ukraine, which has been fighting Russia’s invasion since February 2022, too has got an upgrade. Ukraine improved its status from a lower-middle-income country to an upper-middle-income one after economic growth resumed in 2023, the Bank said.

However, this was purely on account of the base effect, and a resumption of economic activity in the country’s western and northern parts, also due in part to the war.

“Ukraine’s upward change in classification resulted from a resumption of economic growth in 2023 (real GDP grew 5.3%, following a drop of 28.8% in 2022) along with a continued decline in population, which has fallen more than 15% since the invasion from Russia began,” the Bank said.

• “These factors were further amplified by price increases of domestically produced goods and services to result in a large increase in nominal Atlas GNI per capita of 18.5%. While Ukraine’s economy was significantly impaired by Russia’s invasion, real growth in 2023 was driven by construction activity (24.6%), reflecting a sizable increase in investment spending (52.9%)…,” it said.
• (In order to reduce the impact of exchange rate fluctuations in cross-country comparisons, the World Bank uses the ‘Atlas’ conversion factor, which averages exchange rates over three years.)
• Algeria, Iran, and Mongolia too, have moved up from the lower-middle income to the upper-middle income category.
• The resilience of Russia:

The resilience of Russia, which is now under more individual sanctions than Iran, Cuba, and North Korea combined, has come as a surprise. “After the initial recessionary impact of sanctions in 2022, the (Russian) economy has returned to growth in 2023, supported by fiscal stimulus including military spending and credit expansion, and by successfully mitigating the impact of the sanctions.

• “Restrictions on trade and financing from the G7 countries and EU resulted in trade diversion to China, India, Türkiye, Central Asia and the South Caucasus, and investment in new infrastructure and logistics,” the Bank noted.
• Matching this process, the share of Russia’s external trade transactions in the currencies of countries that imposed sanctions fell from about 80% in 2021 to less than 30% in 2023.
• Indeed, things are much better than they might have been. Russia’s job market is strong, unemployment is at a record low, and rising wages continue to propel consumer spending.
• Following a relatively small contraction of 1.2% in 2022, the economy outperformed expectations in 2023, growing by 3.6%.

However, the medium to long-term economic prospects remain dull.

Businesses and households in Russia face great uncertainty, with sweeping restrictions on exports, crucial and persistent gaps in the supply of technological equipment, and higher trade costs.

Why curbs on Russian economy haven’t worked :

OIL:

• The sanctions on Russia’s energy sector are not as tight as the ones that were imposed on Venezuela or Iran. The West designed the sanctions keeping in mind its own interests, to ensure that Russia would continue to produce fossil fuels, and there would be no significant surge in oil prices. The sanctions, and subsequent price caps, were loosely designed.
• While Russian fossil fuel exports to most of Western Europe has fallen, overall export volumes have remained relatively steady. This is because the oil that used to go to Europe is now being absorbed elsewhere, especially China and India.
• With global oil prices still elevated and the discount on Russian oil now lower than at the beginning of the war despite the $60 per barrel price cap, Moscow’s oil export revenues remain high and bolster the economy, according to the IMF.

INVESTMENTS:

• Corporate investment has recovered since 2022, adding an estimated 4.5 percentage points to the growth in GDP in 2023. Investment is flowing to Russia’s defence and manufacturing sectors.
• Western sanctions have made retooling of the economy necessary. The IMF has highlighted that some imports are being substituted by domestic goods, resulting in investments in new production facilities.
• Also, some multinational corporations have stayed back, hoping that the war would end and sanctions would be lifted.

CONSUMPTION:

• Private consumption has recovered strongly, adding 2.9 percentage points to GDP growth. This is being driven by buoyant credit and a strong labour market, with record low unemployment of just 3%, and a general rise in wages.
• The largely voluntary military recruitment model, using monetary incentives, has allowed sections of consumers to continue spending.
• Government spending too has added to growth, with the fiscal impulse estimated at 1.2 percentage points of GDP in 2023. Defence spending has been ramped up to an estimated 7% of GDP. Despite the large increase in military spending, overall government spending has increased, though not as much in real terms, according to economists.

Also, some sanctions had been imposed in 2014 after Russia annexed Crimea, and those had already been factored in the cost. Economic policy mandarins in Moscow have learnt to work around these measures over time.