World Bank Says Russia Must Face Up to Economic Challenges

Russia is enjoying a period of solid growth but must tackle several challenges to overcome its dependence on oil exports and improve long-term output, the World Bank said on Tuesday.

Just over one month before Vladimir Putin returns to the Kremlin for a new six year term where he has promised to implement genuine economic reform, the Bank said Russia's economy was still suffering from weaknesses.

It forecast robust if unspectacular growth in the years ahead of 3.5 percent in 2012 and 3.9 percent in 2013, down slightly from 4.3 percent in 2011 when Russia became the world's ninth-biggest economy in dollar terms.

But it said that in spite of high oil prices which have sent petrodollars flowing into the state coffers, Russia's economic expansion remained "subdued".

A closer look at the economic situation "reveals a number of weaknesses," the World Bank said in a report on Russia.

"While Russia's output exceeded the pre-crisis peak in the late 2011, the recovery from the (2008) crisis is slow," it said, adding this was underlined by comparisons with the recovery from the 1998 crisis when Russia defaulted.

The Bank said that while Russia's territory is four times as large as the European Union, its overall GDP is in dollar terms only 9.0 percent of the size of the EU economy.

It said Russia faces a long-term challenge of improving its sluggish productivity and diversifying the energy export-dependent economy against the backdrop of a shrinking labor force.

Public finances face "a number of strains" in the coming years, including worsening fiscal balances, a high dependency on oil energy and new multi-billion dollar spending programs.

"While Russia did well during the crisis, it still has to readjust policies to ensure macroeconomic stability as the output gap is closing and the external environment remains uncertain," it said.

Putin has promised to build a new innovation-driven economy in Russia, end systemic corruption and improve the investment climate when he returns to the presidency in a May 7 inauguration.

Some analysts have expressed hope the Russian leader now understands the urgency of reform while other commentators worry they heard the same promises before during his first two terms in the Kremlin from 2000-2008.