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‘Russia’s Economy Has Almost Exhausted Its Opportunities for Catch-Up Growth’

What is happening in the Russian economy, how can its growth be boosted, and why can it no longer develop through inertia? These were the issues discussed at the plenary session ‘Prospects for the Russian economy’ that took place as part of the XIX April HSE International Academic Conference.

How to achieve growth

Alexei Kudrin, Chairman of the Board at the Centre for Strategic Research (CSR), says that the Russian economy and society are now at a stage where ‘there are big expectations, but the new policies haven’t been launched’, and that the new government will show what reforms can be expected. As of today, the official forecast in the three-year budget is sluggish; it predicts economic growth of 2%, and the CSR’s forecast is even more conservative – 1.5% growth. But growth rates could be increased if several key measures were implemented. Alexei Kudrin then elaborated on these.

Increasing total factor productivity is essential. New technologies should be implemented. The President said in his address that technological innovation should be implemented by 50% of companies, but today, only 8% of them do it, which means incentives are needed to facilitate innovation. R&D consortiums should probably be created to expand new markets and sectors, which can bring together manufacturers, consumers and regulators.

Digitalization will account for up to one-third of performance improvement. The main problem here is the lack of professionals. Universities should train more specialists in programing and digitalization management, including those in manufacturing. Today’s education does not meet this demand. The same is true for health care. Approximately 450,000 people of working age die annually, and 80% of them are men. A healthy lifespan is a resource to prevent a decrease in the able-bodied population (last year, the population shrank by 1 million).

Urban policy and development of mega metropolitan areas, or agglomerations, are also important. They will grow faster (5-7%) than the rest of the economy. The government should support agglomeration processes in various ways, including investment in infrastructure and transportation, which would help link territories to one another. Potentially successful mega agglomerations, according to Alexei Kudrin, are the Ural one (Ekaterinburg – Chelyabinsk – Perm) and the Siberian one (Novosibirsk – Tomsk – Barnaul).

Another policy is export diversification, doubling non-resource exports up to 250 billion dollars, especially in terms of machine-building production (now it accounts only for 8% of exports). Optimistic forecasts say that non-resource exports can equal resource exports only by 2035. But to achieve that, companies should be supported in entering global markets, and not only high-tech ones. For example, the next six years will see a milestone, with Russia’s food exports exceeding food imports.

But all these policies should be supported by the development of entrepreneurship in general. 64% of the population has a positive attitude towards entrepreneurship, but only 2% would like to start their own business, which is considerably less than in Europe and developing countries. Alexei Kudrin believes that this situation should be reversed. As of now, the share of the public sector in the economy is continuing to grow.

Alexander Shokhin, HSE President, Maxim Oreshkin, Minister of Economic Development, and Yaroslav Kuzminov, HSE Rector/ © Mikhail Dmitriev

From unemployment to investment

Maxim Oreshkin, Russia’s Minister of Economic Development, spoke about what has been done by the government in recent years and what has yet to be done. He noted that a transition to inflation targeting and floating exchange rates has been carried out in recent years, and a mechanism for long-term diffusion of price impacts on the economy has been created. In general, a macroeconomic system has been built that is resistant to fluctuation of global resource prices and fluctuation of capital flows.

The minister also noted that the natural unemployment level is slowly decreasing. This has to do with the changing age structure of the workforce. The share of people under 24 is decreasing, and this age group has had the highest level of unemployment. In addition, the situation is slowly improving in the two most problematic federal districts – the South and the Northern Caucasus – where unemployment has traditionally been higher than the national average: as compared to 2000, structural unemployment has decreased almost twice there.

Russia’s situation in the global context can be seen from different perspectives. On the one hand, economic growth of 1.5%, which Russia showed in 2017, is much lower than in developed (2.3%) and developing (4.7%) countries. But Maxim Oreshkin believes that this difference is largely related to demographic processes and workforce dynamics. When calculated per person aged 15-64, Russia’s economic growth was 2.3%, while globally it was 2.6%. According to the Ministry of Finance estimates, global economic growth in the coming years will be 3%.

If Russia is willing to demonstrate growth rates higher than the global average, the task is to double the growth rates in countries that have a similar development level. To do so, according to Oreshkin, Russia needs to ‘move forward in all the key areas, and to achieve maximum results in all of them’. Thse include the size of the economically active population, investment activity, and factor productivity.

The demographic load will grow: per each 1,000 members of the able-bodied population, there will be over 850 dependent persons

The generation of late 1990s, born during the biggest decrease in birth rates, is entering the job market, and numerous people from the post-war generation are leaving it. This means that up to 2025, the average annual decrease in the working-age population will be 500,000. The demographic load will grow: per 1,000 able-bodied members of the population, there will be over 850 dependent persons. This is worsened by the problem of high death rates among men of working age. All of these factors ‘beat the job market’s ability to respond to the task of improving economic growth rates’.

Meanwhile, the government is capable of promoting a decrease in structural unemployment. In particular, Maxim Oreshkin said, the government is developing a new regulatory regime for self-employed people: ‘an easier and more convenient one, which will promote part-time employment for those who are willing to have it’. Another area of activity is continuing education and retraining programmes. An important factor is increasing life expectancy, especially active life expectancy. Today, we see a rapid decrease (by several times) in economic activity as people reach the age of 60.

According to the minister, the factor of migration should be used more actively. The government is looking at two mechanisms: a simplified procedure of granting citizenship to graduates of leading Russian universities (about 250,000 foreign students are studying in Russia today), and a compatriots’ relocation programme. In addition, simplified procedures for obtaining residence permits and citizenship should be introduced for highly qualified international professionals.

The Russian economy ‘has almost exhausted its opportunities for catch-up growth’: per capita GDP in Russia is 60% higher than the global average. The only way for Russia to considerably increase economic growth rates in the coming years is to accumulate capital and increase the share of investment in GDP (this share is about 21% today). GDP grew in 2017 as compared to 2016, mostly due to increased consumption (by 3 trillion roubles), and fixed capital accumulation added almost half as much: 1.6 trillion roubles. From 2017 to 2021, this ratio should be brought to a point where the two are virtually equal. This can be achieved if household and public savings will grow, which will mean ‘a change in budget spending structure from operating costs to investment’. But if this isn’t accompanied by general improvements in the investment climate, the accumulated savings will simply flow abroad. Speaking of investment distribution by areas, 20 to 30% of the total investment surplus should be spent on infrastructure. ‘We have been actively working on these programmes over the last few months’, Maxim Oreshkin added.

Economy for three

Natalia Akindinova, Director of the HSE Centre of Development Institute, presented some points of the HSE report ‘The Russian economy: from transformation to development’. She noted that Russia has formed an economic model that combines three macro sectors, which have different behaviour, different patterns of interactions with the state, and different reactions to changing conditions and economic policies.

The first sector is big resource-based companies. It saw almost no losses as a result of the 2014–2015 crisis, and only strengthened its position in the Russian economy. It gets a considerable share of profits, but the profits lead to growing investment.

The second sector is big non-resource companies. They are often closely related to the state and receive state subsidies. But additional profit there does not lead to investment activities and the development of this sector.

The third sector is small and medium-sized enterprises, which are mostly in service industries and trade (not wholesale). According to Natalia Akindinova, this is ‘probably the only sector of the Russian economy which behaves as a real market sector, and invests the profits it earns’. At the same time, this sector is most sensitive to policies concerned with off-the-book wages. Measures in this area that are too radical would create ‘unreasonably bad conditions for small and medium-sized businesses’.

The prospects for Russian economic growth depend on relations between these three sectors. The inertia scenario would limit growth rates to 1-2%, which, according to Natalia Akindinova, ‘wouldn’t satisfy anyone’. The reform scenario involves a ‘radical’ growth in the share of small and medium-sized businesses in the economy. This would also increase the share of real market relations in the economy. Without such a structural shift, other solutions (related to the pension system, budgetary relations, and infrastructure projects) would have a limited and short-term effect, believe the authors of the HSE report.

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