Estimates Of Russia’s Potential Output

Martin Janíčko,Petr Maleček,Pavel Janíčko

doi:10.15388/ekon.2021.100.2.4

Abstract

Taking into consideration the specifics of the Russian economy such as dependency on oil and gas drilling & production, and including the current context of the Western sanctions, COVID-19 pandemic, as well as somewhat idiosyncratic potential output development, the main aim of this paper is to quantify recent output gap for Russia. We use three mainstream methodologies: the Hodrick-Prescott filter as a benchmark, the Kalman filter to follow, and the Cobb-Douglas production function. The sample time span ranges from 1995Q1 until 2020Q3, while all calculations are performed on quarterly frequencies. The analysis suggests that given low fixed investment ratios, limited R&D spending in non-military sectors, and adverse demographic development, under a “no policy change” scenario there might soon be even more downward pressures on the country’s potential output growth, and the economy may continue increasing only at a snail’s pace even after a possible withdrawal of the Western sanctions and the end of the COVID-19 pandemic.

Highlights

Russia’s economy has not been faring well as of late
We show that the estimation of Russia’s potential output can be performed with three standard methods, namely Hodrick-Prescott filter, Kalman filter, and the Cobb-Douglas production function with constant returns to scale
This article has primarily dealt with different output gap estimates for the contemporary economy of the Russian Federation

Summary

Introduction

Russia’s economy has not been faring well as of late. In particular, the Western sanctions following the annexation of Crimea and relatively weak energy prices have been the main culprits of the general economic slowdown, manifested itself by the recession in 2015, followed by a lacklustre GDP growth until now.Looking at a longer time span, the country already had to overcome major financial and economic crisis in 2008 and 2009, while prior to that it had been coping with major economic and social turbulences caused by abrupt privatization by a handful of chosen oligarchs, swift liberalization, frequent intentional dismantlement and/or weakening ofPetr Maleček, Martin Janíčko, Pavel Janíčko. The skyrocketing inequality in the same period, partly propelled by lifting price controls over 90% of traded goods, made things even worse. These were exactly the problems that resulted in huge output losses and significant social and political unrest between 1992 and 1996, peaking with the 1998 financial crisis, which itself went straight to university textbooks on finance and economics. In the time span of 1990 and 1998, Russia’s real GDP plummeted by approximately 45% (World Bank, 2021).Yet, with the beginning of the new millennium, Russia started to be perceived as a relatively normally functioning emerging economy which was achieved inter alia by overall institutional stabilisation and rising openness of the economy to international trade and investment inflows. The rising oil price was likely the chief factor in the country’s economic development between 2000 and 2008, while the high oil price supported the economy beyond that period, between 2010 and the first half of 2014, after it reached an all-time high in 2013 (Kluge, 2019)

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