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Too Much State Involvement and not Enough Investment in the Russian Economy

 Presentation (PDF, 2.33 Mb)


Speaking at the HSE Banking Institute, Senior Resident Representative of the IMF in Russia, Bikas Joshi described the prospects for the Russian economy.

Bikas Joshi quoted IMF Managing Director Christine Lagarde’s assessment of the current condition and future prospects of the world economy as the ‘new mediocre’. Among developed countries the US is still a bright spot - with an adjusted prognosis for growth at 2.2% for 2014 and 3.1% for 2015. While the Eurozone and Japanese economies are much slower with less than 1% growth this year and Japan’s growth rates expected to fall in 2015.

The picture for developing countries is mixed. While China and India can sustain relatively high indicators (although the prospects for China are getting worse) the Brazilian and Russian economies are stagnating. The prognosis for Brazil has dropped from 1.8% to 0.3% in 2014 and from 2.7% to 1.4% in 2015. The Russian situation is even more regrettable with the growth rate not going above 0.5% in either year. Overall the latest forecast for growth in the global economy is 3.3% this year and 3.8% in 2015.

 Restrictions on exporting technology to Russia could bring about a decline in the already low productivity.

The fall in investment has been the biggest blow to the Russian economy and to other developing countries. Another factor which used to support economic growth was internal demand, the effect of which was almost exhausted by the middle of 2014. This is partly connected, in a situation of very low unemployment, with the fact that wages in real terms have not just stopped growing but have begun to fall. 

Retail lending rates which peaked in the summer of 2012 have been in decline since, and the structure of newly provided loans is changing - fewer and fewer of them are unsecured and more are becoming mortgages.  

Another cause for anxiety is runaway inflation. Bikas Joshi points out that the tendency towards inflation was noticeable even before the crisis in relations between Russia and the West. The subsequent sanctions and contra-sanctions have only fanned the flames of an already burning fire. 

And this is where geopolitics became the trigger for events in investment. A general feeling of uncertainty led to investors withdrawing not only from the parts of the economy hit by sanctions but from many other areas too on a ‘just in case’ principle. Russian companies in turn, although formally not under sanction are finding it increasingly difficult to refinance their loans in the West. (Russia’s banks and corporations have  more than 600 bln dollars in foreign debt). And restrictions on exporting technology to Russia could bring about a decline in the already low productivity.

The fall in oil prices is weakening the rouble (charts of changes in their value practically coincide) and the Central Bank is faced with a dilemma. On the one hand they need to raise the percentage rate and on the other cheap credit is needed to revive the stagnating economy. As a result, they have raised the rate to 9.5%. To support the falling rouble the Central Bank spent almost 30 billion dollars in October (70 bln since the beginning of the year) but in November the Bank of Russia decided to let the rouble go into ‘free fall’. There were sharp daily fluctuations but on average the exchange rate has stabilised over recent weeks.

 The Russian government might have other matters to deal with - reforming the pension system and attracting investment to develop infrastructure including logistics, for example

Bikas Joshi suggests that it is too early to lower the percentage rates in the current situation and target inflation is unavoidable. But target inflation shouldn’t be regarded as a mathematical problem to reduce inflation to a fixed mark. Targeting is primarily a way to develop an enduring and clear monetary policy which reduces uncertainty on the market and allows participants to plan their activities in advance for a relatively long period.

Bikas Joshi thinks that state involvement in the Russian economy - since 2003 the state has been an increasing presence in the banking and oil sectors - is a major problem. What this can lead to is evident in the sad example of several Latin American countries. The tasks of the Russian government could be quite different, for example reforming the pension system and attracting investment to develop infrastructure, including logistics. Something is amiss when bringing cargo from Kamchatka to Moscow is more expensive than bringing it from Ecuador.

Overall the Russian economy faces challenges (that’s what Bikas Joshi called his presentation) and time is running out to respond to them and stay competitive on global markets.

Photos by Mikhail Dmitriev 

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Martin Gilman the head of the HSE Centre for advanced studies comments on the Russian economy nearest prospective. According to Gilman, domestic producers are to benefit from the crisis.