Experts predict slowdown, stagnation for Russian economy in 2013
(Interfax – Moscow, 29 December)
According to economic experts interviewed by Interfax news agency, the lack of new economic ideas and structural reforms will impede Russia’s economic growth in 2013. The following is excerpt from report by privately-owned Russian news agency Interfax. Subheadings as published.
The ending year has shown that the old drivers of growth are no longer working, and it is unclear when the new ones appear, if at all.
The Strategy 2020, which was promoted during the election campaign period and which offers a new model of economic growth, was developed in 2011 by more than 1,000 economists led by head of the Higher School of Economics Yaroslav Kuzminov and head of the Russian Academy of National Economy and Public Administration Vladimir Mau, is gathering dust on the shelf. Moreover, the only “reform” that was carried out this year by the government – a reduction in the accumulative part of pensions – is rather different, to put it mildly, from what was offered by the authors of the Strategy 2020.
“The tax manoeuvre”, which was much talked about at the beginning of 2012 and which was supposed to encourage the development of high-tech and industrial sectors of the economy, has also fallen into oblivion.
The country’s economy is at risk of going through a fairly long period of inertial growth of about 3 per cent a year. If in the medium term the government persuades the economy to grow by 5 per cent or more, this will mean that the government did an excellent job. However, this is not on the cards yet.
The dynamics of Russia’s economic growth quarter by quarter this year is indicative.
In the first quarter the growth was 4.9 per cent, in the second 4.0 per cent, and in the third 2.9 per cent. There is still no information about the fourth quarter, but it is clear that the growth will be no higher than in the third quarter. (passage omitted)
The economic growth is gradually slowing down and can come to a standstill, if nobody kindles the economy’s smouldering sparks. Oil prices and raw material extraction are not going up, and the consumer boom is fizzling out at the end of the year.
As has been stated at all levels, a new growth model is needed, but so far there is nothing in sight.
It seems the government does not fully understand how to breathe new life into the economic activity, or they can not agree among themselves. It is not surprising that the government has still not adopted either main guidelines for its activities until 2018, or a long-term forecast for the economy until 2030, although it was supposed to.
In this context, the latest meeting on measures to stimulate economic growth at the White House (the Russian government), which was initiated by the Economic Development Ministry, is quite indicative. According to one of the attendees of the meeting, no decision was taken there, and the finance minister left in the middle of the meeting. The meeting’s purpose was more to inform the participants about the Economic Development Ministry’s proposals, which are already well known for a long time, and primarily deal with the possibility of changing the budget rules to direct more resources on modernization, especially on the road infrastructure. However, a decision on the budget rule has already been taken at the political level and nobody is going to review it, so it turns out that there is nothing to discuss at these meetings.
The shortage of new ideas and, most importantly, real reform, was particularly noticeable during Russia’s flagship economic forums in St Petersburg and Sochi, which are gradually turning into an old hat.
Dry statistics show that in 2012 the country’s GDP growth will slow down to 3.5 per cent from 4.3 per cent in 2011, and inflation will go up to 6.6 per cent from 6.1 per cent in 2011. The industry growth rate fell in 2012 (by the latest December forecast made by the Economic Development Ministry) to 2.8 per cent from 4.7 per cent in 2011, investment in fixed assets to 7.8 per cent from 8.3 per cent and retail trade turnover to 5.7 per cent from 7 per cent.
In 2012 an annual average price of oil reached a record level of over 110 dollars per barrel of Urals, after 109 dollars in 2011. In 2013, it is most likely that oil prices will cease to beat the records, and the Russian economy will have to learn to grow against the background of a downward trend in oil prices and low external consumer demand.
Economists interviewed by Interfax expect that in 2013 the economic growth will slow down to 3.3 per cent. The Economic Development Ministry’s official forecast is somewhat more optimistic – 3.6 per cent, but the ministry agrees that if the recent months’ trend is not reversed, next year’s GDP can grow by only 3 per cent.
By tradition, let’s try, with the help of economists, to find answers to the most frequently asked questions: Why is the growth slowing? Why can’t the capital flight turn into a capital inflow? What are the risks faced by the Russian economy in 2013? Will a new position in the World Bank Doing Business ranking accelerate the economy? Will the government manage to fulfil presidential decrees on improving productivity and levels of investment?
Slowdown or stagnation?
Russia’s economic growth in the second half of 2012 was not impressive, to put it mildly. The annualised growth rate has been declining for six months, from June to November (in November GDP grew by 1.9 per cent). Seasonally adjusted, the GDP increase did not exceed 0.1 per cent for four months out of the last five. In November compared with October, according to the Ministry of Economic Development, the GDP growth was, as in the previous month, 0.1 per cent. While it is not yet possible to say that the economy is stagnating, but the warning signs are already there, and in the first quarter of 2013, according to economists, stagnation is quite possible.
Nadezhda Ivanova (economist, Sberbank Centre of Macroeconomic Studies) said: “The current situation is characterized by a slowdown in the economic growth, which may be due to the global trend of slowing growth (a drop in Russian exports to the euro region and the flight of capital) and uncertainty in the global economy, as well as the exhaustion of the old model of economic growth in Russia, based on rising oil prices and consumption.”
Dmitriy Dolgin (economist, Alfa-Bank) said: “There is an acute lack of new ideas in the Russian economy. Neither the government nor businesses have a clear understanding of what to invest in and, more importantly, why. Rather, there is a desire to minimize risks, and this results in the tightening of fiscal policy and slowing growth. The population continues to spend, but more and more abroad. Hence, the economic growth is close to stagnation.”
Dmitriy Polevoy (economist, ING) said: (passage omitted) “Given our expectations that the figures will stay the same for the most of the first half of 2013, the economy will be close to the state of stagnation.”
Vladimir Tikhomirov (economist, Otkrytiye financial company) said: “This is not stagnation yet, but we will probably reach it in the first half of 2013.”
Sergey Drobyshevskiy (economist, Gaydar Institute of Economic Policy) said: “I would describe the situation in the Russian economy as corresponding to the current moment. According to estimates made by international financial institutions and the Central Bank of Russia, an economic growth at 3.5-4.0 per cent per year represents a potential or trend growth in the current structure of the economy and in the global economy as a whole. Therefore, as long as the growth rate does not fall below 3 per cent a year, I would not describe the situation as a slowdown or stagnation.”
Mariya Pomelnikova (economist, Raiffeisen Bank) said: “We believe that the GDP growth rate of 2-3 per cent with stagnation tendencies in the industry may become the new reality of the Russian economy in the coming years.”
Olga Sterina (economist, Uralsib financial company) said: “The current situation in the economy can be described as stagnation. According to our forecast, an average annual growth rate in the next few years will amount to 3 per cent, even if oil prices stay at current levels on average.”
Investors vote with their feet
Despite the authorities’ pleading, the money continues to run away from the country. After a net outflow of more than 80bn dollars in 2011, the outflow in 2012 will be about 70bn dollars, although last spring the Central Bank believed that in 2012 the capital outflow could be zero, and the Economic Development Ministry expected an outflow of about 20bn dollars.
To explain this phenomenon not only by a poor investment climate or lack of investment demand, the authorities have started finding positive factors in the outflow – apparently, this is not just a flight of capital from the country, but the expansion of Russian companies abroad, which really can not be called a negative factor.
In addition, in December the Russian Direct Investment Fund presented a study assessing the dynamics and quality of the capital flight from Russia, prepared in collaboration with Ernst & Young and the Moscow State University centre of national intellectual resources. In their view, the Central Bank calculations generate the myth of a giant outflow, whereas in fact it is at least half of what official statistics show. For example, in 2011 the Russian Direct Investment Fund calculated an outflow of 33-40bn dollars, compared to 80.5bn according to official figures.
Obviously, the Russian Direct Investment Fund is inherently interested in improving the country’s investment image. At a meeting of the Russia Foreign Investment Advisory Council last year, part-time co-chairman of the council and chairman of the board of directors of Ernst & Young Global James Turley told Vladimir Putin, on behalf of the foreign investors, that “we support your candidacy for president”, which caused considerable surprise among many members of the Russia Foreign Investment Advisory Council, who are used to keeping business and politics separate.
Central Bank chairman Sergey Ignatyev has already said that the Bank of Russia is quite satisfied, “for its own purposes”, with the current method of calculating the dynamics of the movement of capital, and it is not going to change it.
Be it as it may, it is clear that despite all the talk about the volume of the outflow and even its “usefulness”, this subject is painful to the authorities, and we asked economists when this trend would change.
Tikhomirov said: “First, time has come to pay those debts that were accumulated by the private sector before the crisis. Therefore, a large part of the outflow is caused by current debt payments. Second, with high external risks and a risk of a domestic economic slowdown, Russian companies are being conservative about investment in the country, which is increasing the outflow. Third, the notorious problem of a poor investment climate, which stems from the lack of political will to carry out deep democratic reforms in society and political structures (separation of powers, independent control over the bureaucracy, and so on).”
Dolgin said: “In order to change the situation, it is necessary to increase the attractiveness of Russia, not only in terms of business conditions, but also the quality of life. Since the crisis, about 30 per cent of the outflow of capital has been caused by individuals, who are buying property and transferring money abroad – this is due to the fact that the continuing growth in people’s incomes is not supported by improvements in education and public health, or by accessibility of the Russian housing market.”
Drobyshevskiy said: “The world economy is still in a very fragile and near-crisis state. In these conditions, a ‘flight to quality’ and outflow of capital from developing markets are obvious, therefore until the global economy turns toward a sustainable growth, there are no reasons to talk about the possibility of a massive capital inflow to developing markets, including Russia.”
Ivan Chakarov (economist, Renaissance Capital) said: “We believe that the situation with the outflow of capital attracts too much attention. According to our calculations, the net outflow is 5 per cent of GDP, which is half of the amount during the crisis in 1998 and three times lower than in the 2008-2009 crisis. The political cycle in Russia is over. Also in the near future (in 2013) the global economy will begin to recover. In this regard, we expect to see a small influx of capital next year.”
Pomelnikova said: “In our view, to a large extent the outflow of capital is now due to the lack of investment opportunities inside the country, while the structural problems of the investment climate were obvious before the crisis we well. We believe that it is local businesses that are leaders in terms of the outflow of capital, for whom neither positive real interest rates, nor growing oil prices are guarantees of the strength of the economy any longer.”
The main risk is still the same
Traditionally, the main risk for the Russian economy is a possible drop in oil prices as a result of the global economy’s slowdown and the lack of structural and institutional reforms.
Economists warn of a possible increase in interest rates, which will also slow down the economic growth.
Chakarov said: “At this point the main risks for Russia are external risks – continued problems with debts in peripheral euro region countries and possibility of a fiscal cliff in the USA. However, compared with 2008, Russia today is much better prepared for managing these external risks. The Central Bank has a more flexible exchange rate of the rouble against the currency basket, the government has introduced a fiscal rule on the distribution of excess revenues from oil extraction, and the foreign debt has been refinanced for a long-term period.”
Sterina said: “Among external macro risks, we should single out a stronger than expected recession in Europe; among internal macro risks, the continuing outflow of capital, which, according to our estimates, will reach 50-60bn dollars in 2013, and increased political risks. If we are talking about the longer term, this is the demographic factor.”
Ivanova said: “External macro risks are a slowdown and even recession in the world economy due to renewed crisis in the euro region, political stupor in the USA (the problem of the fiscal cliff will not be properly resolved) and a slowdown in China which will be faster than what we are witnessing now. As a result, there will be a sharp drop in oil prices, increased capital outflow, and a budget with bigger deficit, which must be financed by increased borrowing, which would divert resources from the private sector.
“Internal macro risks are unbalanced macroeconomic policies and the weakening of the budget policy. The absence of structural and institutional reforms and reforms to improve the efficiency of public administration will result in further economic slowdown, and increased social disintegration in society, which may complicate further reforms even more.” (passage omitted)
Dolgin said: “The main risks are rising interest rates, which are preventing the restoration of the economic growth and may hit hard by the banking sector. (passage omitted)
Tikhomirov said: “Further slowdown and even stagnation are not risks. The risk is a recession, rising unemployment and social tensions. The latter can be mainly caused by external factors: a fall in commodity prices, which is likely to be accompanied by a sharp slowdown (and perhaps even decline) in the global economic output.
“As for the government, it has very few tools to significantly improve the situation. The budget is already stretched and the only reserve that the government already wants to use is its own reserves (the National Welfare Fund) and the money of future pensioners. However, without structural (including political) reforms, even these funds are unlikely to reverse the trend, and can only bring about a sluggish growth instead of stagnation. So sustainable development is only possible with continuously high private investment, but they will not happen without deep reforms, including political ones.”
Are we doing business, or just pretending?
The 2012 saw further fetishization of the World Bank’s Doing Business ranking, which came into fashion last year, when Vladimir Putin ordered that Russia should climb 100 positions up in the list by 2020 from the 120th place in 2011 and enter the top 20. The so-called “road maps” of national entrepreneurial initiative, which are being drawn by the president’s Agency of Strategic Initiatives, are intended to help reach this goal.
The government seems to believe that if in this list, which ranks economies on the “ease of doing business”, Russia will rise to high enough positions, the investment attractiveness of the country will grow by itself. But the World Bank ranking deals only with the countries’ capital cities and cannot reflect the “ease of doing business” in the whole country, and Moscow is behind other Russian regions in this list.
Dolgin said: “The fact that the authorities have finally recognized the World Bank’s ranking as a good indicator of the business climate in Russia is already a great breakthrough which shows that the government finally understands the link between the poor quality of institutions and the flight of capital. However, to significantly improve its position in the ranking, Russia needs radical transformation in the customs and in the administration of electricity markets and real estate, and this will require more than one year. Among former Soviet republics, there has been only one obvious success story in moving up the Doing Business list – this is Georgia in the second half of the 2000s, but it required serious political changes.”
Pomelnikova said: “Obviously, any moves in this direction, in our opinion, can only be welcomed. However, we fear that the desired effect will be achieved only after some time. We believe that the introduction of such measures will have a short-term effect on the perception of Russia by foreign investors, rather than significantly improve the expectations of the local business community, which, in our opinion, is playing a key role in the outflow of capital.”
Drobyshevskiy said: “I would like to consider these ratings only as an incentive to improve the business climate first of all for domestic market participants. In other words, the government’s goal should be to improve the business and investment climate for Russian companies and businessmen, and if it needs incentives in the form of moving up in one of the rankings, then they are useful.”
Tikhomirov siad: “I have grave doubts that without reforming the existing system the Russian government will be able to make significant progress on many of these parameters. This is a chicken and egg problem – to improve the ranking, investment is needed, and because the government has no money, they have to rely on the private sector, which does not really want to invest in Russia.”
The president’s instructions are unlikely to be fulfilled
In one of his first decrees in May, Russian President Vladimir Putin set the government a very difficult task – to improve labour productivity by 50 per cent by 2018 and the volume of investment from the current 22 per cent of GDP to 27 per cent. Adding the adopted budget rule aimed at reducing the government’s spending, the government is now between a rock and a hard place.
In its long-term forecast up to 2030, the Economic Development Ministry was not shy to write directly that these figures can only be achieved in a “forced” scenario of development, which involves first of all easing the budget rules and allocating a large amount of government funds to the development of infrastructure. But the decision on the budget rule has already been made, including at the political level.
This is to a large extent the reason why the long-term forecast up to 2030 was not approved this year – the government simply had no choice: either to accept it in its draft version and subscribe to the fact that it was not going to fulfil the president’s instruction, or to choose a “forced” or ” innovation scenario”, but then the budget rule must be softened. Next year we will know how the government managed to pass between Scylla and Charybdis.
Drobyshevskiy said: “I agree that the achievement of these indicators in Russia will have a positive impact on the economy and welfare of the citizens. However, I do not believe that this can be achieved through economic policies alone.”
Ivanova said: “We need to fight corruption and introduce a fundamental change in the relationship between the authorities and the judicial system, and reform the judicial system (including in relation to economic crimes and economic disputes). We also need to decentralize power: regional authorities must have more incentives to improve the business climate in the regions. We need to improve the efficiency of public administration based on modern methods of management. We need a strategy for economic development, to be drawn up in collaboration with the business and expert communities.”
Chakarov said: “I think that increasing investment to 27 per cent of GDP by 2018 is an achievable goal. Large infrastructure projects planned for the Olympic Games in Sochi and FIFA World Cup in 2018, as well as a stronger involvement of the private sector (if the business climate improves), should help to raise the level of investment from the current 22-23 per cent of GDP to the planned 27 per cent.”
Tikhomirov said: “This is an absolutely impossible task, and the government will definitely fail.”
Polevoy said: “There should be fewer words and great speeches, and more consistency in the achievement of at least some of what has been announced and planned, and coherent work of departments, whose positions often vary widely. The authorities must regain the trust of the private sector and the population, which is impossible without political change.”