Rapport de l’Institut de Prévision de l’Economie Nationale (Moscou)

Les collègues russes de l’Institut de Prévision de l’Économie Nationale (IPEN-Académie des Sciences de la Russie) qui est le principal centre de recherche et de prévisions en Russie ont publié ce rapport sur la nouvelle politique économique de la Russie. Ce document, traduit du Russe en Anglais, et d’un extrême intérêt si l’on veut comprendre les termes du débat de politique économique qui se déroule actuellement en Russie. Je le publie donc, avec l’autorisation du directeur de l’IPEN-ASR, pour le mettre à disposition du public français.

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RUSSIAN ACADEMY OF SCIENCES

INSTITUTE FOR ECONOMIC FORECASTING

 

 

 

 

THE NEW ECONOMIC POLICY

 – THE POLICY OF ECONOMIC GROWTH

 

 

Edited by

Academician V.V. Ivanter

 

Moscow  2013

 Authors:

V.V. Ivanter, M.N. Uzyakov, M.Yu. Ksenofontov, A.A. Shirov, V.S. Panfilov, O.J. Govtvan’, D.B. Kuvalin, B.N. Porfiriev


INTRODUCTION

 

At the beginning of 2013 a disturbing trend of plummeting rates of economic growth in Russia continued. In the first quarter of this year the GDP grew by some 1% which was worse than the forecast of the Ministry of Economic Development of Russia. Given this the Ministry now reconsiders its forecast for economic growth in 2013 as decelerating. Under a conservative scenario the GDP growth should slow down to below 3%. According to an optimistic scenario which involves implementation of infrastructure projects the indicator above should reach some 3.2%.

However low rates of economic growth followed by shrinking inflow of investments and decelerating income growth are absolutely unacceptable for the modern Russia development.

First of all, in the next few years Russia has to handle the acute issues stemming from the multi-year underinvestment in both industrial and social infrastructure. If significant funds to cope with the issues above are failed to be allocated and used purposefully Russia should expect fast growing number of large-scale industrial accidents and disasters.

Secondly, over the past two decades production output grew mostly thanks to over-exploitation of existing enterprises rather than building the new ones. As a result, new capacities are often needed just to keep the existing production output and to prevent it falling down because of the accelerated depreciation of completely obsolete capital assets. Our estimates show that the minimal additional costs needed annually to keep the existing infrastructure, buildings and equipment functioning in Russia amount to no less than 2% of the GDP.

Thirdly, in contemporary Russia conditions only high rates of production growth provide for modernization of and qualitative changes in the economy. Needed for these are massive innovations thirsty for large-scale and widespread investments which are practically unrealistic in a slowly growing transition economy.

Meanwhile, despite the above problems with the fixed industrial assets spare capacities are available in the Russian economy. The data concerning the actual capacity utilization prove this along with the findings of industrial enterprises’ surveys that consider insufficient effective demand as а key obstacle to the output growth. The latter point refutes the tenet arguing that in modern Russia additional demand for money could result in increasing inflation alone. Large-scale measures to stimulate demand can and have to become a key means of maintaining high rates of economic growth.

At the first stage of the new economic policy domestic demand should be based mainly on investment growth and much less on increasing consumer demand. If so the accelerated development of infrastructural sectors should constitute a strategic direction and a major factor of economic development of Russia. This is a must to eliminate numerous bottlenecks hindering transportation of goods and people within Russia and constraining the enterprises’ access to resources and energy. In addition, the development of infrastructure as such provides for significant increase in the amount of domestic demand mostly oriented on the local producers.

One more strategic direction of the Russia economic development involves re-industrialization, which should also follow two basic paths. One of these entails restoration and development of the defense and industrial complex and high technologies. Another critical path implies restoration and development of energy, transport and equipment machine building to propel traditional engineering including production of roller bearings, electric stuff, machine tools, etc. It should be emphasized that contemporary Russia has not only capacity and space for development, but also resources needed for it. In particular, reserves accumulated in the energy/fuel sectors and those of the government along with the lending expansion can be used as financial resources needed for development at this stage. However, launching of the new drivers of economic growth cannot be limited merely to liquidity injection into the economy. What is needed is a set of measures including not only financing and crediting but also organizational activities. Improvement of the institutional environment is paramount and should not stick to improving the quality of justice and financial and banking systems alone. Full recovery and efficient operation of research, design, logistic and other organizations should also be provided. The measures above should make up the bulk of the new economic policy.

 

  1. THE GENERAL CONDITIONS OF THE SOCIO-ECONOMIC DEVELOPMENT OF RUSSIA

 

Development resources and growth potential. The most important factors contributing to the future development of the Russian economy include:

  1. 1)    Huge reserves of primary resources: minerals, agricultural land, renewables, etc., the development of which alone could provide for massive investment flows. In particular, the Russia’s share in the world prospected oil reserves amounts to at least 10-12%, while that of the prospected coal and gas reserves is no less than 10-11% and 25-30%, respectively. The proven oil reserves exceed 20 billion tons. In addition, Russia owns 20-25% of the global timber resources, some 10% of productive agricultural lands, and vast reserves of many other essential resources.
  2. 2)    An accumulated total production capacity, which incorporates fixed assets, technological know-how, employees, etc. A substantial part of this capacity is able to meet the existing market demand both internally and abroad. In particular, new great facilities in steel, chemical, food, machinery, construction materials industries and others came into commission in 2009-2012. Every such a facility adds a certain reserve to capacity load.
  3. 3)    Solid labor, educational and cultural potential adapted to market conditions in Russia. These have contributed to the labor productivity steadily growing in recent years. This growth results not only from modernization of production facilities and investment in fixed assets but also stems from a new corporate environment development. However, the potential to increase productivity of the Russian economy is still significant. According to our estimates, the total excessive employment in manufacturing in 2012 amounted to some two million people. In other words, the estimated potential for productivity growth thanks to more efficient organization and management tools in this sector of the national economy alone amounts to 15-20%.
  4. 4)     Availability of space for quantitative and qualitative growth. Here the space for growth implies not merely geographical territory but the economic domain which involves the concept of full satisfaction (saturation) of basic needs. In Russia these needs are far from glut as some key indicators prove. These include the living space per person and ownership of automobiles per 1,000 households which in Russia are 3-4 times lower than in the developed countries. In addition, the amount of durables used per household in Russia is significantly lower with its development of transport infrastructure lagging manifold behind from that in the developed countries. The development of the Russia vast territory also provides for significant capacity of economic growth.
  5. 5)  The current situation in Russia is unique given the possibility to increase the gross capital formation of the GDP ratio without reducing the level of consumption due to the high savings rate existing here. For example, in 2006-2012, the savings to the GDP ratio averaged to 30% while the gross capital formation/GDP ratio reached about 20% only.

The resources and space for quantitative and qualitative growth of production existing in Russia imply its economy’s capacity of growing by 6-7% annually in the long-run perspective. Lower rates of the GDP growth would prove the poor quality of economic policy.

The major problems hindering economic development. The space for growth is a necessary but insufficient condition for rapid economic development. Rich natural resources along with modern educational system, advanced technological culture, developed industrial infrastructure also do not always guarantee high economic growth rates. To transform the potential of space for growth into real increments in output and living standards the permanent joint efforts of the government, business and public guided by the targeted policy of the state are a must. Such a policy should facilitate handling the key development issues which include:

  • 1) Long-term shortage of funds for the renewal of buildings (houses), infrastructure and fixed assets accumulated in many sectors and areas of the economy. This precipitated aging and obsolescence of the assets above thus resulting in multiple additional costs to compensate the damage incurred (i.e., expenses for response to and recovery from industrial accidents, urgent repairs, investments in renovation or replacement of the fixed assets). Hence, the imperative for high GDP growth rates follows not only from existing demand for the qualitative economic growth but also from the need to pay back the accumulated investment and social “debts”.
  • 2) Extremely high level of technological heterogeneity which is a key specific feature of the modern Russian economy. Economic policy has to cope with the challenge of new industrialization which calls for the overcoming of technological gap experienced by a number of Russian industries and providing for intensive renewal of assets and organization of a significant number of new centers for innovative growth.
  • 3) Substantially debilitated or broken trade-offs between the developers of new technology and potential investors which failed to be replaced by the new interaction mechanisms. It followed from the protracted economic crisis of the 1990s accompanied by reduction in investment flows and effective consumer demand for innovation. At the same time the emerged opportunity for massive import of technology provided for the still existed assets of domestic capital investment and innovation capacity being no longer in demand.
  • 4) The slack of existing monetary policy aimed solely at maintaining the relative stability of the ruble and failing to involve specific actions to achieve the proper pace and quality of economic growth. This policy in Russia is based on the logical conjunction of “low inflation – reduction of macroeconomic risks – economic growth” which, however, is not indisputable. The recent economic history both in Russia and globally has repeatedly manifested a decline in inflation being not always conducive to macroeconomic risks reduction with some kinds of such risks even increasing.
  • Given recent Russian environments structural economic changes (i.e. industrial, technological, financial, institutional transformations) have been in extremely high demand. Under such conditions the tough anti-inflation policy focused on monetary measures to reduce total demand produces an ambiguous effect: an unstable short-term increase of demand contrasts to the long-term adverse effect of shrinking supply. Given different price elasticity of supply and demand the monetary restrictions often exacerbate imbalances and thus fuels inflation.
  • 5) The excessive social differentiation that has developed in Russia and in part follows from the structural imbalances in the economy. In particular, 20% upper income households concentrate 47% of the total disposable resources of the households. The salary of 73% of the Russian employees is below the average wage level of the national economy.
  • 6) The excessive regional economic differentiation is manifested by the large income gap between the most and the least developed regions. This gap soars to 60 times in terms of gross regional product (GRP) and 150 times in terms of the amount of investments per capita. The current financial conditions existing in the regions and even more in the municipalities almost totally preclude even conducting of serious studies of the issues associated with the major development projects if the latter fail to attract funding by the federal government or big business.
  • 7) Insufficient level of institutional development and inefficient system of the law enforcement. In economic terms, this problem involves high transaction costs. However, one should find a reasonable compromise between the policy of structural and technological modernization of Russia, and these of reforms and maintaining current socio-economic stability.

In addition, permanent reforms are a source of specific risks to socio-economic development with the most important of these including:

–      change in the criteria required to estimate the outcomes of development which means replacement of the essential indicators that characterize the state of the economy by “instrumental” indicators showing the progress or the pace of reforms;

–      deterioration of the investment conditions and increase of uncertainties in decision-making precipitated by the drastic change in the economic environment.

  1. 2.     KEY DEVELOPMENT TRENDS AND MACRO-ECONOMIC DYNAMICS FORECAST

 

In 1999-2008 Russia proved that thanks to sound economic policy and favorable external conditions its economy can grow very rapidly. Within the time span above the growth rates of the GDP as measured by purchasing power parity (PPP) were 2.3-3 times higher than in the USA and EU nations. According to the international comparison data in 2008, the GDP per capita in Russia exceeded 60% of that in the Eurozone countries. It can be argued that in 1999-2008 Russia not only recovered economically since the early 1990s devastating crisis but also restored its position in the community of developed countries. As a result, the capacity of the national economy and the magnitude of development issues it can solve in the future significantly exceed those existed 10-15 years ago.

In 1999-2005 export was the main driver of economic growth in Russia providing for about 50% of the GDP increase. However, in 2006-2008 its contribution shrunk to 17%. During these three years the average GDP growth rate increased from the previous seven-year period reaching 7.3% a year. In 2006-2007 investments jumped by almost 20%, consumption by 12-14% (in annual terms). In fact, this triennial period marked the beginning of a new, inner oriented, stage of economic development in Russia.

The 2008-2009 economic crisis. The composition of the national exports dominated by primary commodities facilitated significantly to alleviate the negative impact of the global financial and economic crisis on the Russian economy. The volume of world trade in 2009 dropped by 12% while the Russian export declined only by 4.7%.

Nevertheless, the Russian GDP decreased considerably plummeting by 7.8%. The decline in producers’ revenues, a radical deterioration of the conditions of borrowing accompanied by insufficient efforts of the government failed to support the “flywheel” of inner oriented investment growth keep working. Empirical data show that in 2008-2009 China lost 4% of its GDP relative to earlier trend while Russia lost circa 19%. Recovery from the crisis also failed to be smooth. In contrast to the pre-crisis period the rates of economic growth in China in 2010-2012 dropped by 20% while deceleration of these rates in the Russian economy was almost twofold. The fundamental question is whether the Russian economy is capable to come back to the path of accelerated and inner oriented economic growth.

The economic situation in 2010-2013. The key macroeconomic challenge for today’s Russia implies not so much overcoming the fallout of the 2008-2009 crisis but restoring the dynamics of development. While production output as a whole has already exceeded the pre-crisis maximal level the economic growth rates remain very moderate. Actually the inertial or sluggish scenario of economic development becomes a reality providing for the rate of growth plummeting to 2-3% annually or even lower (if no substantial corrections of the economic policy existing till now are implemented shortly).

Possible and desirable rates of economic growth. The argument of the Russian economy lacking potential for growth could be used only as a loose justification of keeping the existing passive economic policy operational. One’s appeals to the sluggish pace of economic growth in the developed countries as a benchmark look even more inappropriate. Compared to these countries the situation in Russian economy is fundamentally different as well as the challenges it confronts. In fact, development capacity is dependent on a set of factors which analysis shows that the Russian economy in the short to medium term is capable to grow substantially faster than 3-4% annual rates of the GDP growth.

To start with, given the new industrial facilities put into operation in 2009-2012 the existing capacity load of the key industries does not exceed 2007 level when the rate of economic growth was much higher than now.

In addition, development constraints are often attributed to the record low rate of unemployment meaning insufficient labor force to propel production growth. This is only partly true. For example, in manufacturing (which concentrates the main limitations to development) no dramatic situation in employment exists. In January-October 2012 the number of employees in organizations (including the ‘external’ part-timers and contractual personnel) amounted to 48 million or 2.8 million less than that in January-November 2008. Within 2008-2012 the number of employees in manufacturing dropped by 1.4 million. Thus the above evidences the decline in unemployment being loosely related to an increase in the demand for labor from the manufacturing industry. It would be too early to argue that the amount of labor force already constrains economic growth.

It is worth mentioning too, that capacity for economic growth depends on the opportunities to increase demand. Here obvious restrictions of external demand (precipitated by the sluggish situation in the world economy) and government consumption (due to the existing fiscal policy) are observed. However, as far as consumer and especially investment demand are concerned the restrictions above just do not exist for the medium term perspective.

One should note that the current characteristics of Russia’s economic growth are also the major indicator of investment climate. Sustainable high rates of growth in a specific sector of the economy signal about a significant potential of increasing demand for respective products and favorable price prospects. This in turn implies significant risk reduction for investment flows, improvement of the terms of borrowing necessary funds and cutting payback period of a particular investment project. Increasing average annual GDP growth rates up to 6-7% in the midterm perspective (by 2020) is a fundamental prerequisite for encouraging investment and innovation flows to keep the GDP growth rates high in the coming years.

Table 1 shows estimates of economic growth capacity in Russia in 2013-2030.

 Table 1

Projected Capacity of Economic Growth in Russia, %

Indicator

2013-2015

2016-2020

2021-2025

2026-2030

Gross Domestic Product

  6.1

  7.0

4.6

4.1

   Final consumption expenditures:

  6.0

  5.2

4.4

4.0

Households

  7.0

  6.2

5.1

4.5

Government

  3.4

  2.0

1.5

1.5

Non-profit institutions serving households

  1.8

  1.0

0.5

0.5

   Gross capital formation

13.9

11.2

4.6

3.2

        including fixed capital formation

11.6

11.6

4.6

3.1

   Export

  2.1

  3.3

4.1

4.6

   Import

  9.7

  5.9

3.4

2.5

Scenarios of socio-economic development of Russia in the medium and long term perspectives. Economic development prospects in the coming decades can be illustrated using scenario forecasting calculations. The so-called constructive domestically-oriented investment scenario of socio-economic development implies designing and carrying out measures which would enable most of the available potential for economic growth. This is contrasted to the inertial scenario to obtain evaluation of the cumulative capacity of the measures implemented within the framework of the constructive investment scenario above. The factors that will produce major impact on economic growth within in the inertial scenario include:

  1. – Inevitable decline in the population of working age in 2013-2020 constraining opportunities for the development of labor-intensive sectors of the economy;
  2. – Impossibility of conspicuous increase in production and export of raw materials given the expected levels of capital intensity and tax burden;
  3. – High dependence of the economic growth on external market conditions;
  4. – Increasing demand for more massive public investment in infrastructure and defense sectors thus providing for growing burden on the budget;
  5. – The pace of consumer and investment demand outstripping capacities of the domestic production;
  6. – Increasing share of imports in the domestic market;
  7. – Lacking of effective mechanisms facilitating capital interflows thus hindering modernization of the production facilities.

Given the constraints above the available resources can be concentrated to carry out only a very narrow range of development tasks. Such tasks include priority development of transport and energy infrastructure, maintaining the level of natural resources production, development of specific segments of the manufacturing.

If implemented this scenario would involve 2.9% of the GDP average growth rate in 2011-2030. Within this forecast period the GDP average annual growth rates will gradually slow from 4.0% (in 2011-2015) to 2.1% (in 2026-2030). In 2030 the GDP per capita (in current prices) is expected to reach some US$36,000. Within the framework of domestically oriented investment scenario the existing potential for economic growth is assumed to be maximally employed. The opportunities of accelerating economic growth under this scenario are realized using a set of active economic policy measures with the key ones of these including:

  • –      The rapid growth of investment in fixed capital through 2020 from all finance sources including public, private, and foreign funds. The fixed capital formation/GDP ratio growth up to some 35% in 2020;
  • –      Implementation of the program for revival of investment engineering (machinery and equipment) by 2020 by building the new local facilities for industrial assembly and production of finished products;
  • –      Increasing production capacity for infrastructure and road construction by 2020;
  • –      Implementation of investment projects to maintain and expand the output of extraction, production and transportation of raw materials;
  • –      Attracting significant financial resources into research and development to improve the competitiveness of manufacturing industries and subsequent expansion of non-oil exports.

It is expected that over the forecast period implementation of a set of measures to boost economic growth within the inner oriented investment scenario will result in 5.1% of the GDP annual growth rate averagely. The highest growth rate (7%) will be achieved in 2016-2020 followed by a gradual slowdown of economic growth associated with the earlier achieved high levels of investment activity, overcoming the most severe capital shortage and saturation of demand for specific consumer products.

Exports will contribute significantly to the total GDP growth especially after 2020. Compared to the inertial scenario, annual growth rate of exports in the inner oriented investment scenario during the forecast period will more than double and will exceed that of the GDP by 2030. The growth rate of imports will be lower than in the inertial scenario due to the increased competitiveness of domestic goods and import substitution.

Household consumption is the largest contributor to the GDP growth. Expansion of exports, especially of non-oil products, coupled with import substitution will significantly impact economic dynamics after 2020.

The inner oriented investment scenario assumes high rates of growth in efficiency of production. In particular, primary energy and electricity intensity of the GDP through 2030 will amount to only 44% and 66% of the 2010 level, respectively. Investment activity and organization of the new industries will contribute to a significant increase of labor productivity, which will soar by more than 2.7 times compared to 2010.

The highest rates of production growth are typical for advanced and medium technological economic activities, construction, real estate, and finance and insurance. By 2030 the percentage of high-tech industries and high-level medium technological production input to gross output will increase from 8.5% in 2010 to 14.5%. Up to 20% of the increment in gross economic output will be provided by high-tech and medium-high-tech industries of high quality (in contrast, the inertial scenario forecasts their contribution not exceeding 12%).

A key element of the inner oriented investment scenario is the high intensiveness of capital flows into economic activities. In particular, between 2013 and 2030 the average growth rate of investment in fixed assets will exceed 15% in high-technology sector, 9% in construction, 8% in medium-high-tech manufacturing industries, 8% in finance and insurance, and 7% in trade. The incremental or subsequent increase of capital investment into fixed assets, modernization of industrial and construction facilities, increasing efficiency of production and import substitution will allow switching to the strategy which provides for increasing volume of the non-raw materials exports thus expanding capacity of the Russian economy beyond 2030.

One more key characteristic of the inner oriented investment scenario involves large-scale import substitution. Despite substantial increase in investment and consumer demand this should reduce the share of imports in the domestic market to the level of the 2010 (post-crisis) economy. Meanwhile increasing the gross capital formation/GDP ratio within the period of up to 2020 will be accompanied by the share of imports in the domestic market keep growing thus providing for modernization of production facilities and purchase of new equipment.

Increase in labor productivity will significantly impact the employment composition. Most rapidly (4.3-fold) labor productivity will grow in the high-tech industries, trade (3.6-fold), medium-high-tech manufacturing (3.4-fold) and will triple in finance and insurance sector. The key risks of this scenario imply that maintaining high rates of economic growth by 2020 will require not only ensuring increase in domestic demand but also creating the capacity to expand exports in the second half of the forecast period.

The comparative assessments of key macroeconomic indicators of the two basic scenarios of economic development in Russia to 2030 considered above are summarized in Tables 2 and 3.

 

Table 2

Key indicators of economic development perspective in Russia – I

Indicators, scenarios Period (years)
2006-2010 2011-2015 2016-2020 2021-2025 2026-2030
GDP growth, %          
Domestically oriented investment scenario

2.3

5.8

7.0

4.3

3.6

Inertial scenario

3.8

3.1

2.5

2.1

Gross production output growth, %

Domestically oriented investment scenario

2.4

4.9

6.3

4.0

3.8

Inertial scenario

3.5

2.9

2.7

2.7

Table 3

Key indicators of economic development perspective in Russia – II

 

Indicators, scenario Year

 

2010 2015 2020 2025 2030
 

Labor productivity (times increase)

         
Domestically oriented investment scenario

1

1.44

2.01

2.40

2.76

Inertial scenario

 –

1.33

1.62

1.83

2.00

 

Energy intensity (times increase)

Domestically oriented investment scenario

 1

0.81

0.66

0.57

Inertial scenario

0.84

0.73

0.64

0.49

 

0.57

Gross capital formation / GDP, %

Domestically oriented investment scenario

21.9

25.9

35.0

31.2

28.9

Inertial scenario

23.0

24.8

25.7

25.5

 

Share of imports in domestic market*, %

Domestically oriented investment scenario

15.4

16.1

15.9

14.8

14.4

Inertial scenario

16.8

17.9

18.9

19.8

 

GDP per capita (‘000 US$, at current prices)

Domestically oriented investment scenario

10,5

17,6

24,4

32,4

54,0

Inertial scenario

16,9

21,2

26,1

36,0

 

*Imports / Output + Exports – Imports

 3. KEY FINANCIAL POLICY IMPERATIVES

 

Modern Russia needs a new economic policy. However, an important reservation should be immediately made: this new economic policy is a must not because the existed earlier failed. It is necessary given that over the last 15 years the Russian economy has considerably changed in terms of the volume of production, variety of economic activities, behavior of businesses, motivations of the public and the quality of institutions. In addition, the rate of economic growth failed to recover from the 2008-2009 crisis and reach pre-crisis level; moreover, in recent months the economy has started to decline rapidly. The above makes one thinking hard about the efficiency of the existing model (concept) of economic policy.

Coping with the challenges of structural and technological modernization of the economy will call for a significant increase in the rate of capital formation. In the bulk of the developed countries 20-25% ratio between capital formation and GDP couples with 2-4% GDP annual growth rates. In India and China with capital formation/GDP ratio as high as 40% and 50%, respectively the GDP average growth rates amount to 8% and 10% per year. The development challenges to these countries are similar to those confronting Russia and thus should be considered a guide to its economic policy. To overcome the existing constraints on production capacities the capital formation/GDP ratio in Russia should be increased to approximately 35% by 2020.

Increasing activity of the state to improve the pace and quality of economic growth requires correction of the monetary policy priorities. The monetary authorities’ excessive focus on financial stability in specific cases opposes to the tasks of development thus making the monetary strategy development dependent on tactical decisions.

The reorientation of existing financial policy towards the medium and long-term goals of socioeconomic development is a major condition for the Russia realization of existing potential. In a market economy increasing production in the long-term perspective is possible only via overcoming a consumer’s purchasing power constraints. Overcoming these constraints involves two strategies or policies, extensive and intensive. The potential and/or efficiency of the extensive one which implies engaging untapped or underexploited resources of manpower, virgin lands, easily accessible minerals, etc. in economic turnover by now is almost exhausted. Therefore intensive strategy dominates in the most developed and “medium-developed” economies at least.

The intensive strategy to overcome consumer budget constraints assumes permanent crediting of consumers (both households and businesses). At the macro level this manifests itself in an increase of the debt-to-income ratio (in terms of the total debt of the government, households and businesses). At the macroeconomic level debt-to-income ratio is a very important indicator to understand the factual state of the national economy.

In the developed countries the wealth has been accumulated over decades, and the capacity of financial institutions, instruments and technologies as engines of economic growth turned to be exhausted. The debt-to-income ratio in those countries seems to have reached its natural limits. Therefore, in the developed countries restarting sustained economic growth unless new or modified factors of effective demand emerge is unlikely.

In this regard the situation in Russia is fundamentally different. It has a chance to use the advantage of employing all the benefits that have been achieved at the stage of “healthy” increase in the debt-to-income ratio. This is facilitated thanks to such circumstances as the public indebtedness being low whatever a standard, low debt burden of the households, Russia’s status as the world largest exporter of raw materials much wanted by the global markets, etc. In other words, Russia has a solid capacity for debt financing of economic growth.

At the same time, the shortage of loans allocated to expand working capital becomes a significant constraint to economic development of enterprises, particularly in the industries with a long production cycle. In addition, high credit interest rates result in increasing costs and prices thus actually becoming a factor stimulating inflation. Given this efficient flow of the capital from the raw materials sector to manufacturing, infrastructure, agriculture, which development should help technological modernization of the Russian economy is not provided. By now the stock market has also failed to turn into a diver of capital flows.

In a monetary economy opportunities for development are to a large extent pre-determined by availability of financial resources. At the moment the situation with the distribution of financial resources is as follows.

The State (Government). The federal government obtains considerable financial assets incorporating the reserve fund, the sovereign wealth fund and liquid shares that currently are not involved in practical economic development policy. As to the fiscal policy, set forth are the following tasks: thriving for a balanced (zero-deficit) budget, reducing the public spending/GDP ratio, and reaching specific ‘milestone’ indicators that should be perceived as external constraints of the fiscal policy alone if the outcomes of socio-economic development are considered as a target. The organization of reserve funds implies financial investments outside Russia only.

Business. In modern Russia businesses differ qualitatively in terms of their funding. The larger part of the private companies (if criteria of the number of employees, amount of value added and some other are employed), especially in manufacturing, experience an acute shortage of the investment funds needed for long-term development. This calls for increasing the investment attractiveness of the segment of the national economy above that in turn requires reduction of the tax burden up to 50% of the existing level. Specification of measures to reduce the tax burden suggests a more detailed classification of the Russian business using some criteria other than the companies’ state of finance alone.

Meanwhile, a key objective of economic development implies changing of direction of the flow of funds provided by the energy resources sector. In particular, the legislation on excessive profits and their application is a must. It should provide for increased tax burden imposed on excessive profits not used for development purposes and tax credits for those employed as investments into (a) non-primary and non-core business, and (b) the development of small and remote mineral deposits as well as new extraction (development) technologies (provided special permissions for the core business).

Households. Households play a triple role in the production cycle. First, they constitute major factor determining the amount and structure of final demand. Second, households influence quantitative and the qualitative characteristics of the human resources which is paramount for production. Third, in present conditions households are the largest investor injecting funds into the economy indirectly (using the banking system) and/or directly (through investment funds, individual purchases of securities and real estate).

Financing economic growth by households implies active development of investment banks, mutual funds, brokerage firms, funded pension insurance, life insurance, etc. in the future. Gradual solution of this problem would significantly contribute to accelerating socio-economic development in the med-term perspective.

The Russian capital moved to and used abroad may also play an important role. Even a partial return of it back to homeland would produce a significant macroeconomic impact.

Mechanisms of funding economic development. The financial system existing in Russia is mainly focused on a relatively small group of the biggest companies integrated into global economy. What is built is a kind of elitist system of financing while that for the bulk of the population is of a very limited scope. Development of mass financing up to now relies almost exclusively on bank lending.

Quite a modern banking system existing in Russia, however, is experiencing chronic problems with liquidity. These problems are further compounded by segmentation of the interbank market, which results in inefficient money redistribution. Massive leakages of liquidity occur within the system above stemming from capital outflows and rapidly growing imports. In addition, the existing system for refinancing used by the Central Bank of Russia only exacerbates the adverse structural loopholes above.

Thus, today one should primarily consider the issue of development of mass crediting system for the industries (facilities) and above all – the investment. Lending terms are not just about interest rates only, but also involve various additional fees and requirements to ensure the solvency of the borrower, and restrictions of and limits on the time-length and amount (value) of loans, directions of lending and use of crediting instruments.

Russia has already established specific development institutions to support financially the major economic projects. However, these institutions are technically incapable to manage smaller-scale projects including these of medium and small businesses.

At the macroeconomic level one could distinguish three main issues constraining the terms of lending:

  • – Shortage of liquidity within the financial sector, which not always implies gross chronic shortage of liquidity but rather refers its structural issues or temporary failures (cash gaps);
  • – Low assessment of the prospects of the non-financial sector development providing for poor quality of potential loan investments;
  • – Imperfect financial services market including its institutional underdevelopment and narrowness of instruments involved.

The functional issues above directly correspond to the two types of excessive financial risks: liquidity risk and credit risk (i.e. the risk of payback failure). The solution to the liquidity problem implies development of refinancing while effective functioning of the development banks’ system provides for reducing uncertainty of the implementation of the credited projects.

Refinancing of the bank loans issued to industries and the role of developmental banks. One could consider organization of an effective mechanism for refinancing commercial bank loans to the industrial sector of the economy the most important factor of the funding system development and thus stimulating economic growth. The uncertainty of the implementation effectiveness of the supported projects and, consequently, of payback prospects, perspective dynamics of the price for “money” and banks’ liquidity often make banks just give up specific investment projects or considerably raise the price of loans (lending rates) by including costs of covering all risks of the bank thus making credit unattractive.

Given that the overall high level of financial risk in Russia is largely precipitated by significant systemic and systematic risks the government should tackle the problem of financial risk management relying on a comprehensive (complex) policy approach. As to credit risks these could be reduced through organization of the system of state guarantees and their efficient distribution. Interest rate and currency risks could be managed through the derivatives market development and the public bodies’ involvement in this segment of the financial market.

Finally, as far as liquidity risk is concerned the development of refinancing system should be mentioned as a priority policy tool. Refinancing reduces vulnerability of the commercial bank to a liquidity shortage resulting from a protracted “freezing” of funds. One should strike an important difference between refinancing and public investment. The latter implies allocation of public funds as a necessary (pre)condition of a project implementation (somewhat analogous to advance payment). Meanwhile, refinancing of a particular project assumes the state’s (government) commitment to support the liquidity of the creditors providing loans to the effective (priority) projects only. Given this the needed funds are allocated solely on a return (payback) condition, and such loans are secured. Thus, the development of refinancing facilitates more efficient and effective use of public funds to fuel economic growth.

The Central Bank’s refinancing set of tools is permanently updated. However, over the years a significant disadvantage persists, implying non-representativeness of the refinancing objectives which mostly involve foreign currency assets, state liabilities and debt liabilities of the largest corporations. Given that the Central Bank of Russia replenishes liquidity in the economy mainly through the largest corporations, the bank credit system follows that similar pattern which is not helpful to smaller borrowers (massive bank crediting). Development of the credit system to help industries’ growth requires the existing objectives of refinancing being replaced by the loan commitments or liabilities’ derivatives.

In fact, refinancing should be applied not to every loan to the industries’ development but only to those complying with specific effectiveness criteria (or development priorities established by the government). Effective refinancing is associated with refinancing of existing packages of such loans that have been scrutinized within a standardized procedure of financial expertise.

From the above it follows that the system of refinancing massive crediting to propel development of the industries should be multi-stage. “Intermediary” institutions and tools are needed to transform the commercial banks’ requests into a form acceptable for the Central Bank and (in a backward direction) provide for the Central bank’s refinancing of commercial banks effectively crediting the industries.

The system of development banks could serve such an intermediary with the renewed (improved) Vnesheconombank (VEB) being a key element of this system. Currently, VEB is mostly distributing federal funds. However, the spectrum of a development bank’s activities within the national economy should be significantly expanded. The development bank should direct, guide and coordinate private investment loans, reduce the excessive risks of commercial lending, conduct financial expertise of the relevant projects, develop standards of such expertise for the Russian banking sector and probably provide licensing of this kind of activity. The development bank’s basic investments should reduce and alleviate risks of the private projects providing guarantees, liquidity replenishment to private lenders, etc. Distribution of public funds is the last resort when all listed above fail to ensure national development priorities.

VEB precisely could become an economic agent providing significant part of the refinancing for ultimate (end) lenders. In turn, the Central Bank could offset the VEB’s corresponding loss of liquidity by refinancing it and using the ultimate borrowers’ package of liabilities earlier examined by the VEB’s experts as collateral. Undoubtedly, one development bank cannot provide credits to all investment projects which differ a lot. In specific areas the Central Bank refinancing could be channeled to end creditors via other big banks. However, a network of regional development banks is needed with the most privileged of those being eligible to directly apply to the Central bank for refinancing, while the other could apply using VEB as a mediator.

We believe that the sketch design above could be quite operational: the system of development banks could refinance commercial banks that provide effective crediting of the industries, while the Central Bank in turn would refinance the respective investments of the largest development banks.

Lending development policy. Solving liquidity problem of the banking system requires increasing of the amount of the federal or ‘central’ (reserve) funding to guarantee liabilities of the banks. The Bank of Russia has sufficient capacity to do this: the federal funds are currently excessively granted by international reserves. Therefore, both an opportunity and necessity exist to increasingly enlarge the monetary base.

According to our estimates, with no external threats existing to the stability of the Russian ruble until the end of 2015 the Central Bank may expand the monetary base by about 4.5 trillion rubles, which means its annual growth rate of 17-18%. In subsequent five years the annual growth rate may reach 14-16%. This would create some short-term risk to the internal stability of the ruble (inflation risk). At the same time, the logic of economic development in tune with the constructive forecast scenario implies transformation of the issued loans into effective investments that will reduce the risk of inflation to a minimum. Moreover, in the long term, the relevant investments may stimulate a deflationary effect given these result in additional production facilities which would provide for increasing supply of goods and services with higher efficiency (material intensity, energy intensity, labor input, etc.).

Particularly important is the way (form) the monetary authorities produce emission of reserve money. We argue that refinancing of commercial bank credit (i.e. ex post financing of loans, not prepayment) should dominate in reserve money emission by the end of 2015, and in the subsequent five years in particular. Meanwhile, at the initial stage a tension may arise between increasing of the overall level of liquidity in the banking system and the local funding issues. In this connotation, alternative forms of the monetary base replenishment would be appropriate.

Firstly, credit auctions are needed (being conducted across industry sectors, as the level of profitability varies considerably by sector), which would provide for the commercial banks with their clients/companies’ specific business projects actively participating. Secondly, it would be expedient to inject a part of the reserve fund and the welfare fund into the development banks’ capital. At the early stage these alternative forms of money emission would help to eliminate the shortage of the long-term funds.

In addition, by 2015 the problem of the liquidity rapid redistribution between the banks is likely to be solved thanks to the development of interbank market. This should also help to reduce high volatility largely precipitated by non-uniformity of the budget process within time. As a result, one should expect a significant easing of the borrowing terms. Our estimates show that by 2015 the average indicative interest rate in real terms could drop to 1% to 3%.

‘Streamlining’ the structure of demand for financial resources would facilitate increasing the role of credit in economic growth financing. If realized the non-financial sector credit indebtedness would rise by an average of 27-28% annually until 2015 and by 23-25 % in the subsequent five years. Accordingly, the annual rate of M2 growth would amount to 22-23% and 17-20%. Meanwhile, the liquidity of money supply would decrease. In particular, the share of cash would drop from 24% in 2011 to 20-21% in 2015 and further down to 16-18% in 2020. At the same time the monetization of the economy would increase from 44% in 2011 to 51 -52% in 2015 and 61-63% by 2020.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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