Russia’s economic situation
Transcript of the presentation given by Academician V.V. IVANTER at the occasion of the Franco-Russian seminar on the development of Russia (47th Session, Paris). Kindly translated by Anne-Marie de Grazia.
The situation in Russia is very interesting considering that the attention of the West is concentrating on Ukraine and on the matter of sanctions, while in reality the situation is rather different. As far as the sanctions are concerned, they have had practically no impact. The big companies continue to trade with the West. But the main problem at present is the policy of credit and of domestic monetary policy. This is the policy which has broken growth.
Growth in the first trimester amounts to 0.7%. True, there has been industrial growth, particularly in February and March. But despite of this, the structure of growth is not satisfactory. Indeed, in 2013, GDP growth amounted to 1.7%, industrial growth to 0%. Growth in 2013 was mainly carried by financial services. This disproportion is ground for worries. It is by now corrected in part, but only in part.
The drop in investment: a problem of « climate » or of the withdrawal of the public sector?
The slowdown in growth is broadly linked with the drop in investment. One customarily links such a drop with the general “climate.” But in reality, private investments have increased by some 10%, FDI Foreign Direct Investment have increased by 40%, but state investments and those of public companies underwent a strong drop. The “climate” therefore is normal for the private sector and for FDI. As a matter of fact, the “climate” has not deteriorated in ten years. However, investments have been substantial until 2008, as well as in 2010-2011. But public sector policy has changed, first because the great projects linked to the Olympic Games have ended, but also because the state has tended to withdraw from the investment sector. If one is to have a market economy in Russia, this economy must have access to the monetary resources. Now, these resources are:
- (i) Own-resources. On this point there exists a difference between the commodities sector and the sector of large companies on the one hand, and the sector of small and medium companies. Clearly, the first two sectors have own-resources largely superior to those of the third sector.
- (ii) Resources of internal credit. In this domain too, there is an important difference between the commodities sector and the other sectors. Let’s state simply that the sector of small and medium companies of the manufacturing industry must borrow at rates between 12% and 18% (nominal rate) which corresponds to 5%-13% in real rate. These companies in fact don’t have access to credit.
- (iii) Access to foreign financial resources. The latter is largely limited to the commodities sector or to the very large companies.
The problem is that the policy of the Central Bank and of the Ministry of Finances remains concentrated on a policy of fighting inflation. This is an inheritance from the 1990s. In fact, the increase in real income has been, since 2000, widely superior to the increase in prices. In 2013 for the first time there has occurred a stabilization. This is a true problem, because the population is very sensitive to the general evolution of its income. But one can well see that for the past several years, inflation is no longer a problem for the Russian economy. It remains high indeed (between 6% and 7% per year), but it gives no sign of accelerating.
The role of the Russian administration and the conflict with political authorities.
The reaction of authorities has been inadequate. In the face of the stagnation of the economy, and of the strong risk of a budget deficit, the budget expenses needed to be reduced. However, social expenses could not be touched, nor could military expenses. Therefore, it was the expenses linked with sustaining economic activity which have been decreased the most. When one has a look at the real situation, one sees that at the level of the execution of the budget there has been in fact a surplus, because part of the expenses indicated in the law of finances have not been carried out. This is a rather surprising situation. Pressures to reduce expenses are kept up in some sectors. A very high level reunion took place between the economists of the Academy of Sciences and the Presidency and part of the government. These questions have been discussed. Clearly, some part of the financing problems can be resolved by means of “direct” measures implicating the State, but these are relevant to a “hands-on” management of the economy, not to regular mechanisms insuring the necessary financing for these sectors.
At the occasion of the Saint Petersburg Forum, the President has made public the fact that he signed on May 14th a directive to the Central Bank and to the Ministry of Finances to insure the financing of industries. This must be done through a refinancing of the commercial banks by the Central Bank, with preferential rates for projects concerning investment and the development of industrial production. This directive has been “lined” with a directive from the Prime Minister taken at the end of May. A direction of control will be constituted to this end within the Presidential administration. The bureaucratic system has reacted. But if a mechanism has been created, its application remains very problematic.
The problem is that the Central Bank will be “selecting” the commercial banks, and not the quality of the projects or of the titles which will be submitted to it. This selection is supposed to be carried on by the commercial banks themselves. In order to do so, the banks must call on “independent consultants.” This creates another problem. If one resorts to « foreign consultants,” the latter will not be in possession of the relevant informations. If one resorts to Russian consultants, it will bring up grave suspicions of favoritism. Moreover, the files must also be submitted to the comity for economic development, presided by the Ministry of Economic Development. This comity decides or not of the priority of the project. The project is then submitted to the opinion of the Ministry of Finances, because the latter must guarantee to an extent of 25% the sums being engaged.
All this goes to show that in reality part of the administration is against the Presidential directive and is seeking to limit its effects. One could talk here of a legal “sabotage,” coming from the part of the administration which remains convinced that the priority for Russia at present is still the fight against inflation.
Russia’s experience shows that one cannot « negotiate » with the economy, nor with part of the administration. The present attempt is a form of “negotiation” with these two actors. Nevertheless, in the present context, it is probable that the “sabotage” of the monetary and financial sector of the economy will be broken in the short term. Indeed, the consequences on social stability of the present stagnation, or quasi-stagnation, are not admissible for the political authorities.