Grow back and fall. High growth rates can greatly harm the Russian economy


In may, according to the MAYOR, announced on 21 June, Russia’s GDP increased by 3.1% in annual terms. Compared to April, the pace of economic growth has accelerated almost twice and became a record for five years. Against this background, experts warn about the danger of artificial heating of the economy. Too high growth may lead to a prolonged downturn.


“If that’s what people think… it’s not!”

On 21 June, Russian presidential aide on economic issues Andrei Belousov said that the strategy for socio-economic development of the country up to 2035, is being developed as a material with which Vladimir Putin will run for President in 2018, if so decides. “If that’s what people think you can clarify: it is not so! We are talking about long-term development strategy of the country. Not for elections. I want to clarify — on the preparation of the election strategy on the basis of the governmental or expert strategies is out of question”, — he said.

Two mutually exclusive strategies prepared on behalf of the President Center for strategic research of the former Minister of Finance Alexey Kudrin and the Stolypin club under the guidance of the business Ombudsman Boris Titov. The first provides for discreet economic growth, reforming institutions of governance and the restructuring of the economy. The second is the stimulation of economic growth. Suggestions of these strategies should be integrated in shorter deadlines and a specific document — a plan of economic development until 2025 prepared by the government.

Russia in the coming years do not need the rapid growth of GDP. In the current environment this can be achieved only through a massive infusion of public money into the economy, this will lead to a repetition of the sad history of the last years of the Soviet Union, when the rapid growth in the late ‘ 80s turned into a no less rapid decline and deterioration of the material situation of Russians. This opinion was expressed by the surveyed, economists, assessing both strategies.

Hurry or be patient?

Economic growth in any case is not an end in itself. On the “Straight line” 15 June, the President said the main task of the state is not GDP growth, and rising incomes.

Real disposable monetary incomes of the population in 2016 has fallen relative to pre-crisis 2013 more than 10%. Economists of Russian Academy of expect that in 2019, the revenues will amount to 91% of pre-crisis level, which will actually mean a drop of 9% compared to 2013.

In the official baseline forecast of socio-economic development includes the growth of revenues in 2017-2019 years 0.2–0.8% year-on-year GDP growth to 2% per year. According to official projections, the faster the Russian economy to grow in the next three years will not be (the Bank of Russia expects growth of 1.3% to 1.8% in 2017 and 1.5—2% in 2019-2020-m, Ministry of economic development — 2% in 2017 and 1.5% in 2018-2020).

But it is clear that without sustained economic growth, the increase in income is hardly possible. Two strategies for socio-economic development of the country proposed by the President, the question of the desired rate of economic growth is fundamentally different. “Kudrinskaya” is expected acceleration of GDP growth in 2018 is not below 2.5% in 2020 from 3% in 2022 from 3.5%. The Stolypin club, in turn, already in the years 2018-2019 expects to achieve growth of 3.5—5% per year, and in the medium term — up to 2025 to speed it up to 5-6%. To make it offers is mainly due to the increase in public investment in the economy to 7.5 trillion over five years (1.5 trillion per year) and easing monetary policy.

“Will be punished by those who treasure”

The Surveyed economists agree that the strategy of Titova in the current environment is hardly applicable. It is based on the premise that the economy has unused capacity and resources that can be used by providing players with funding, but in reality is not the case.

“Monetary stimulus works when not to use certain resources: the demand in the economy for any reasons is reduced, increasing unemployment, idle capacity. Now, no free the investment capacity nor available workforce (unemployment is at its natural level of just above 5% and declining), and the demand is growing. In such a situation if you start to stimulate the economy by monetary, instead of high growth rates is high inflation,” — said the head of the Center for macroeconomic analysis of Alfa-Bank Natalia Orlova.

Monetary stimulus works when not to use certain resources: the demand in the economy for any reasons is reduced, increasing unemployment, idle capacity. Now, no free the investment capacity nor the available labor resources

At the same time, in the case of easing the OST (one more condition the strategy of the Stolypin club, the decline in real interest rates on commercial loans to 3% in 2019) inflation will be difficult to control, says researcher, Center for comprehensive European and international studies (CEMI) Higher school of Economics Marcel Salikhov. Cheap loans and a negative impact on individuals. “Will be punished those who save. If Titov says that businesses need a cheap loan, then a direct consequence of this policy will be that interest rates on deposits in any major Bank will fall to 1%,” explains Salih.

“We just buried money”

One of the main obstacles for the implementation of the strategy of the Stolypin club, the sides of the called the historically low efficiency of government spending. They draw a parallel with the situation in the 80-ies of the last century. The Soviet state invested in a number of major infrastructure projects, which ultimately were not completed, which led to a serious growth of public debt, budget deficit and, consequently, to the long-term decline in GDP, prolonged for more than ten years, higher inflation and reduced incomes.

The surveyed economists coincides in particular with the position of the rector of the Ranepa Vladimir Mau, who in late may said in an interview with TASS that the sharp rise in GDP due to government intervention will hurt the economy in the long term. “To demonstrate a higher growth rate in the next two years, might be easy, but extremely dangerous. In the 80-ies the growth has been achieved through a policy of acceleration, and changes in the economy happened fast enough. Paid for they were the growth of public debt and budget deficit. In the next two years, the economy accelerated, and then ten years of falling. That is a short-term problem was solved, and the long “no,” said Mau. — If you need to draw a beautiful growth, you can begin to pump money into the economy — we have very low debt now (13.2% of GDP), we can afford it. It’s not very good from the point of view of inflation. To demonstrate a higher growth rate in the next two years it is not difficult, but extremely dangerous. We need structural and institutional reforms, which require time, and they are not translated into immediate results.”

To demonstrate a higher growth rate in the next two years it is not difficult, but extremely dangerous. We need structural and institutional reforms, which require time, and they are not translated into immediate results

“If you look at the last few decades, all investment projects were very costly, took place with delayed time, excess cost from the cosmodrome “East” to the stadium “Central” in St. Petersburg, — said Marcel Salikhov from the HSE. — It makes no sense to increase investment in this inefficient system. We do not cope with the current amount of funding — just bury the money and get nothing, what happens if you increase them twice or three times?” According to Salikhov, if the situation does not change, sooner or later the confidence of domestic agents and citizens will be lost as a result of a crisis, and people will try to save money.

“At the first stage will be inflation and then the financial crisis”

The confidence of investors and now lost, says the head of the independent analytical center “Economic expert group” Evsey Gurvich. “It’s not that not enough money, otherwise would not have been capital outflows. We have every year a capital outflow of tens of billions of dollars. This means that investors prefer to invest in other projects and that our projects uncompetitive and expected profitability does not cover the risk,” he explains.

If the state will Fund such projects, it will take risks — they will accumulate, and the result, sooner or later, “this bomb will explode.” In the example of Gurvich leads the situation from Vnesheconombank, invested in projects, “which were necessary to the state, but which the private sector was not willing to Finance it.” Gurvich did not specify on what the project is about, but one of them presumably the Olympic objects in Sochi. According to the newspaper “Kommersant”, in the middle of 2016 in the structure of balance sheet of the VEB “good” assets amounted to 2.9 trillion rubles, and loans of another $ 1.5 trillion had been described as “unrecognized loss”, in which the Corporation is required coverage; perhaps this is the so-called special projects (mainly about the cost of the Olympics-2014). Another current issue is the refinancing of debt at 1.5 trillion roubles. In 2017 for these purposes the Bank will need 440 billion, and in 2018 465 billion, the State must allocate a grant of 1.1 trillion rubles through 2025.

“If you implement the strategy of the Stolypin club, the full extent of the problems the Russian economy will be significantly more than with the Bank. That is, in the first stage will be inflation and then the financial crisis,” concludes Gurvich.

Ekaterina MARKHULIA,


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