Pedestrians walk in fog past St. Basil’s cathedral, left, and the Kremlin palace, on Red Square in Moscow, Russia (Photographer: Andrey Rudakov/Bloomberg)  

Russia to Lower Forecast of Economic Growth

(Bloomberg) -- Russia’s government will lower its forecast for economic growth next year as a plan to raise value-added tax keeps monetary policy tight and curtails expansion, according to an official familiar with the matter.

Under the updated view, gross domestic product will grow 1.4 percent in 2019, compared with a previous projection of 2.2 percent, said the person, who spoke on condition of anonymity because the forecasts haven’t yet been made public.

Russia plans to raise the VAT rate to 20 percent from 18 percent in 2019, which could spur inflation and hurt consumer spending already this year, according to the official. A possible increase in government spending, however, won’t have an impact until the second half of next year, with economic growth to accelerate starting from 2020, the person said.

Changes in the tax system, unveiled this month as part of a package of budget measures including a proposal to raise the retirement age, is the latest complication for an economy failing to gain momentum after recession. It’s also a challenge for President Vladimir Putin, who’s pledged after his re-election in March to accelerate growth to a level that exceeds the global average in order to lift Russia into the ranks of the world’s top five economies and deliver a “decisive breakthrough” in living standards.

Without structural reforms, the Bank of Russia says the economy won’t expand faster than about 1.5 percent to 2 percent. The International Monetary Fund has also put the nation’s medium-term economic growth at 1.5 percent a year.

In response to a looming VAT change, the central bank extended its pause in monetary easing this month and said the balance of risks has become “pro-inflationary.”

The government’s updated forecasts also show the ruble will end this year near 62 against the dollar, almost 2 percent stronger than where it’s currently trading. The Russian currency is set to average 61 this year and 63-64 in 2019, according to the projections.

©2018 Bloomberg L.P.

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