Credit, not oil, to fuel Russia’s growth, says prognosis

Cash, Calculator, Pen

(Moscow News – themoscownews.com – Anastasia Matveyeva, Moskovskiye Novosti – March 18, 2013)

Over the next few years, stagnation awaits the Russian economy, competitiveness of Russian producers will decline and the growth of incomes will slow down. This is the judgment of the consensus-prognosis for 2013-2014, published by the Center for Development at the Higher School of Economics. The economy will become more sluggish despite the stability of oil prices at around its current high level, from $105 to $114 per barrel.

In the mid-term perspective, the economy will grow only on the basis of domestic demand for credit, but foreign demand will not rise: for Russian exports to be competitive, the country needs to learn how to sell more than just raw materials.

The consensus-prognosis, compiled on the basis of a poll of analysts from large Russian companies, effectively predicts a stagnation of the Russian economy: in 2013 and 2014, an overall growth in real GDP of 3.2 percent is expected, but even less in growth in industrial production – 2.9 to 3 percent. In addition, this will run for a long time: through 2019 inclusive, it will hardly exceed 3.5 percent per year.

Wells for oil, not growth

Prices for oil will remain high, $105 per barrel on average, but this will not save the Russian economy. There is no longer any reason to put hopes in the export of hydrocarbons as the source of economic growth.

“In the ’00s, prices for oil were growing, and there was a lot of underused capacity,” explained Sergei Smirnov, one of the authors of the report and deputy director of the Center for Development. “But now it is technically impossible to increase extraction, and prices are not growing, but are stable, and all expenditures are framed according to these prices. For the time being, there are no new drivers of economic growth.”

In so far as economic growth in Russia carries an extensive character, its rate is slowing down due to structural problems, a deficit of investments and growing depreciation of core funds in the industrial sphere, said Dmitry Kharlampiyev, director of macroeconomics at Petrokommerts Bank. As an additional negative trend, one can note the lower balance of trade according to 2012 results stemming from an anticipated growth in imports.

“Keeping in mind that the predicted growth of real incomes (3.3-3.5 percent) is lower than the expected growth of expenses, we can draw the conclusion that people will plan on financing purchases with accumulated savings or credit,” the document says. In 2012, the growth of credit was already impressive: the overall scale of consumer credit grew by 39.4 percent, and this figure will only go higher.

No problems from the budget

No problems are expected from the federal budget – its deficit consists of 0.1 percent of GDP in all. But in the framework of the budget, social obligations will also not increase, at least not until the next electoral cycle.

Export revenue in 2013 will also not be strong – it will grow 0.3 percent in all – related to a predicted lowering of the prices of hydrocarbons in comparison with 2012, as well as of the prices on other export goods, mainly metals. Foreign demand in the next few years will hardly play the role of the “engine” of the Russian economy, according to the report’s conclusions.

“The engine can only be domestic demand,” said Agvan Mikaelyan, general director of Finekspertiza auditing and consulting group. “We will now grow only on the basis of domestic credit demand, which all developed economies have done over the last 15 years.”

Lower competitiveness

The competitiveness of Russian businesses will only decline: this will happen particularly due to the future strengthening of the ruble. Between 2013 and 2019, consumer prices will grow by 43 percent, and the real strengthening of the ruble through 2019 will be 29 percent from the level of 2012. The recent accession of Russia to the WTO will only amplify this trend.

“The WTO is not a pure horror story, it’s a purging mechanism – everything uncompetitive will vanish,” Mikaelyan said. “Competitiveness is, above all, the efficiency of labor: you either need to surrender, or change the efficiency of labor.”

But it is not just a stronger ruble that will negatively influence the export dynamic. In order for exports to be stable and not susceptible to external factors, they need to be diverse. That is, one needs to sell not just oil, but also products with high added value, high-tech products.

“Now, under the most optimistic account, this is no more than 10 to 12 percent,” Petrokommerts Bank’s Kharlampiyev said. “In accordance with this, more than 70 percent of the value of Russian exports comes from the ‘mineral products’ group, predominantly raw materials for energy.”

Expert participants in the consensus-prognosis also assessed the effectiveness of the government’s work and the country’s investment climate. In comparison with last year, these assessments have worsened. Only 8 percent of the polled experts have noted an improvement in Russia’s investment climate. Fifteen percent of respondents put a positive assessment on the government’s policy.

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