Russian boom could stall, warns World Bank

The World Bank has added its voice to growing international concern that Russia's economic boom could come to an abrupt halt.

Although the Washington-based bank predicts an impressive 7 per cent growth rate this year, in line with other predictions, it warns that Russia's economy has become badly lopsided. Massive immediate investment is essential to increase productivity in the gas and electricity sectors, it warns in its Russian Economic Report.

It argues that too much growth has come from the energy sector and commodity exports industries such as steel, with not enough emphasis on structural reforms to develop a fully functioning domestic market.

The report comes just one week after similar criticisms from the OECD, which Russia hopes to join soon.

In stark language, the World Bank warns that, unless the government encourages entrepreneurship and innovation, the current pace will not prove sustainable. At the moment, most Russian industries are not globally competitive, it points out, apart from the extraction industries and metal processors.

"It's been known for a long time that this problem was coming, but it may be more acute than expected, because demand is also growing more than expected," said the bank's Russia expert, John Litwack.

The report points out that, although there are longer-term plans to increase the domestic market prices of gas in Russia - currently around a quarter of the prices in western Europe - these are coming too slowly to curb the fast-growing demand.It is believed the Kremlin has opted to delay the most painful consumer gas price increases until after the 2008 presidential elections.

Anti-immigrant policies must be reversed if the economy is not to face a severe shortage of labour, the report finds. Although an additional million workers are required each year to prevent wage demands soaring, the current policy seeks to restrict immigrants from Central Asia. Russia's population continues to plummet, falling by around 700,000 every year, and now stands at 142 million.

In a separate signal of the kind of barriers that foreign business can face, Ikea has been forced to close its latest mall project in the city of Nizhny Novgorod. Although the huge centre, with 150 shops, only opened last month, it has now been shut for 30 days for fire safety violations.

Ikea has invested more than $2 billion (€1.5 billion) developing 10 stores and adjacent malls in Russia.

It is not the first time Ikea has been forced to close suddenly, with similar complaints about permits forcing it to shut the doors of its flagship centre on the outskirts of Moscow just over two years ago. After political intervention and a commitment from the Swedish home-store chain to donate $1 million to upgrade nearby sports facilities, the mall reopened.