The issue of the growth potential of the Russian economy and the possibility of accelerating economic development is one of the key issues for strategic planning. The SBS Consulting study analyses current macroeconomic trends, structural features of the Russian economy, as well as scenarios and prerequisites for achieving high growth rates in the long term. It focuses on the factors influencing economic growth, including the role of the oil and gas sector and the possibility of economic diversification.

Features of the Russian economy

After the transformation period of the 1990s, the Russian economy has established a stable structure dominated by extractive industries and low-value-added manufacturing. About half of the gross value added in manufacturing industries is generated by metallurgy, food processing and the production of coke and petroleum products. These industries accounted for more than 40% of value added in 2022, despite market volatility.

Share of the oil and gas sector

The share of the oil and gas sector in Russia's GDP fluctuated from 14% in 2020 to 20.7% in 2018, reaching 17.9% in 2022. These fluctuations were caused by changes in global demand and ruble exchange rate dynamics, rather than by significant transformation processes in the economy.

Economic growth rates

Due to high dependence on the oil and gas sector, the Russian economy is growing at a low rate. Over the last 10 years (2013-2022), overall GDP growth was only 9.7% relative to 2012, which is equivalent to an average annual growth rate of 0.93%. Even excluding 2022, growth for 2013-2021 was only 11%, equivalent to an average annual growth rate of 1.17%.

The role of the oil and gas sector

Long-term economic growth of 5% annually requires the same growth in the oil and gas sector, which is unlikely. The maximum growth rate of gross value added in this sector for 2017-2022 reached 9.1% (2018), but the average annual growth rate was only 0.28%.

Growth of the non-oil and gas economy

With an average annual growth rate of 0.28% for gross value added in the oil and gas sector, the non-oil and gas sector needs to grow by 6% for the overall economy to grow by 5%. This requires output growth of about 6%. However, inter-sectoral linkages in the economy impose reciprocal requirements for output growth in the oil and gas sector to ensure the required growth in other sectors.

Growth potential of non-oil and gas industries

The analysis shows that the non-oil and gas sector of the economy can grow by 6% annually. In 2023, gross value added in manufacturing and construction grew by 7%, in the IT and tourism sectors by 10%.

Analysis methodology

Price-adjusted company revenue data were used to assess growth potential at the micro level. The study covered 40 activities in the main sectors of the economy. Ten-year average revenue growth rates were calculated for the top 10% and the worst 10% of companies.

Study Results

The average real annual revenue growth of the top companies for 2013-2022 in all 40 industries was over 10%. In 27 of the 40 industries, this figure was between 30% and 50%, and in 8 industries it exceeded 50%.

Growth assessment to 2035

To assess growth opportunities to 2035, we studied the shares of goods and services produced for the domestic market and for export, as well as the shares of domestic consumption of domestically produced and imported goods and services.

Growth forecasts

Most industries (29 out of 40) are expected to grow between 1% and 7% per annum at current trends until 2035. 7 industries are expected to decline (between 1% and 5% per year), and another 3 industries are expected to stagnate.

Opportunities for growth

There is a significant potential for demand growth in the manufacturing industries by developing exports or substituting imported products. This potential is particularly strong in the following industries:

• Apparel manufacturing (import share - 74%, export share - 10%);
• Pharmaceuticals and production of medical supplies (import share - 53%, export share - 8%);
• Motor vehicle production (import share - 39%, export share - 8%);
• Furniture manufacturing (import share - 27%, export share - 3%).
With the appropriate economic policy, including tax reforms, availability of bank financing and demand support, Russia's economy could grow at a higher rate even if external demand for oil and gas declines. Achieving an average GDP growth rate of 3-4% or even 5% is a completely realistic goal.

Conclusion

Economic growth at rates higher than in the oil and gas sector is possible and does not require exceptionally high growth rates in other sectors or artificial restrictions on the cost and marketing of raw materials. Reduced exports of Russian hydrocarbons can support the growth of the rest of the economy by increasing domestic production and consumption. In all the sectors studied, if the share of successful companies expands, stable and high growth is possible in the medium and long term.