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  • The Russian Economy’s Transition from Post-Crisis Correction to Growth and Technological Modernization – An Analysis and Forecast of Economic Dynamics

The Russian Economy’s Transition from Post-Crisis Correction to Growth and Technological Modernization – An Analysis and Forecast of Economic Dynamics

Priority areas of development: economics
2012
Department: Laboratory of Analysis and Economic Processes Forecasting
The project has been carried out as part of the HSE Program of Fundamental Studies.

The project was implemented within the framework of the HSE's Basic Research Programme.

1. Research Object: The Russian economy and its sectoral structure.

2. Research Purpose: To construct methods of analysis and forecasting for various economic processes (macroeconomic, financial, structural) at different time horizons and to apply them in a system of strategic economic policy advice.

3. Empirical Base of the Research: The data employed included that of Rosstat, Minfin, Bank of Russia, Ministry of Industry and Trade, Ministry of Economic Development, Federal Customs Service, industrial surveys compiled by IET, consumer surveys by ROMIR, newspaper articles, and official sources. The development of new and the modernization of previously developed methods for analyzing and forecasting economic processes played a major role in the research.

4. Research Results: We conducted regular monitoring of and research on the development of the Russian economy in 2012 on topics in industry, external trade, and budgeting, as well as macroeconomic, monetary, and social policy topics. Russian economic development was studied on the basis of trends in growth components that contributed to the deceleration of growth in 2012 while the external background for growth was favourable. We illustrated deficiencies of the current mechanism of economic rebound (consisting mainly of consumer credit overheating, exploiting the potential of budget reserves, etc.). This mechanism is apparently unsuitable for generating higher growth rates.

An important element of the Russian "New Normal" is the fragmented rebound in industry. Some industry indicators are already at pre-crisis levels, however, the recovery of various sub-industries is highly uneven. Financial industry fundamentals still underperform pre-crisis dynamics, and the situation worsened in 2012. For example, liquidity ratios have dropped 15% in 2012 and are still one-half of 2007 levels.

We also closely monitored budget performance in 2012. The federal budget was fairly balanced in 2012, first because the actual price of oil was higher than budget forecast price while the rouble weakened considerably, and second because MinFin borrowed on both the internal and external market while the Reserve fund was replenished with oil tax revenues.

We analyzed "Achilles’ heels" of our banking system to outline risks in the medium term. We discovered that Russian banks lack the potential to rebound to pre-crisis levels for two reasons, the first being stagnation in net interest income, which still represents the main portion of bank earnings, and the second being the lagging recovery in the credit quality of bank loan portfolios, intensified by overheated consumer lending.
 
We regularly monitored developments in the world economy as a whole and in the largest economies in 2012.

We produced the monthly review and forecast report Outlook for the Largest Economies, outlining the main trends behind short- to medium-term performance for the economies of the US, Euro zone, and China. Each report included an occasional spotlight review of selected issues, such as the rebound in the US housing market or Japanese earthquake recovery. The final report summarized our forecasts for 2013-2014 and outlined the main trends and risks for the growth of the global economy, such as medium-term fiscal policy uncertainty in the US, a decrease in austerity support in Germany, and a second "soft landing" in China.

We developed scenarios for economic and social development in Russia both for the medium- (to 2014) and long-term (to 2030), while outlining the main mechanisms of growth for each prospective period.

For global economic development in 2013, we performed a scenario analysis based on policy approaches to the excess government debt burden problem (in the context of global imbalances). We analyzed the agenda for growth scenarios in Russia for the medium-term based on a lack of growth potential inside the current model. The search for a development strategy in a low-growth environment led us to conclude that stimulating investment (mainly through government investment) is the main mechanism for stimulating growth. We provide the estimates for such a scenario.

We outline three long-term trends that will change the global growth landscape in twenty years' time. Those are population ageing, the rise in household consumption for large developing economies, and the next phase of moving production to developing economies. Key long-term interests and structural problems for three key actors – the US, Euro zone, and China – are identified. We outline two long-term scenarios (inflation versus restructuring) of the excess debt and probable savings deficit (a part of the global imbalances problem). The analysis suggests that currently the world economy is on the path to gradual debt restructuring, implying a long period of low economic growth rates.

We define the main problems that form Russia's long-term policy agenda. The first concerns improving national competitiveness to counter more expensive production factors (mainly labour and energy) and increasing openness of the economy. The second is about a new governance formula based on effective government-private sector interaction. The third is about striking a balance between policy based on institutional (universal) policies and project (piece-wise) policies. We outlined an appropriate scenario and performed a macroeconomic forecast for this scenario.

During the year, we performed reviews of the main economic policy actions, scenarios, and forecasts made by the Ministry of Economic Development. In particular, our review of Federal Budget Law led us to conclude that in a high external-risk environment, fiscal policy has reacted by passing a "stability budget" while setting aside the idea to form a "budget for development". Federal budget expenses were formed so as to give priority to social and defense spending while government investment was the balancing article, which is why they will contract in the medium-term from 1.5% GDP in 2012 to 0.9% GDP in 2015. Budget austerity post-crisis has led to a decrease in government consumption contribution to growth in 2013-2015 to half of that in 2007.

We devoted special attention to topics on Russia's balance of payments structure and risks for banking and financial systems that are posed by volatile external conditions (especially in context of the April-July wave of external financial shock).

We conducted a number of research projects in methodology:

We performed an econometric study of bank efficiency – bank credit risk trade-off using the Arellano-Bond approach to dynamic panel analysis. First, we used a sample of 1,100 bank balances for 2004Q1 – 2012Q3 to test the hypotheses of "deficient management" and "bad luck". The estimated credit quality decline effect on future efficiency is approximately two times less the inverse effect. This leads us to conclude that cost control is a viable mechanism to insure the bank from uncontrollable credit-quality worsening during crises. A subsample of highly efficient banks' rapidly expanding credit portfolio (approx. 400 banks) was used to test the hypothesis of 'economizing on risk management'. Those banks artificially lowered the costs (cutting the costs of borrower screening), which drastically affected their loan portfolios in the future (especially during the crisis of 2008-2009) and significantly increased the probability of bank insolvency.

We developed a set of models for estimating and medium-term forecasting of the tax burden for business. We applied it to the Russian case and found that tax policy for 2007-2011 entrenched imbalances of the industry tax burden. The reforms for the period led to a decrease in taxation for high-profit industries such as chemical metallurgy, while the tax burden on machinery production (the highest in manufacturing) remained virtually unchanged.

Several steps to a better methodology of non-stationary time series analysis were taken. We offered several methods of non-stationary economic dynamics based on modified cycle-extraction procedure. We have shown that "spectral" approach to cyclical indicators allows for extraction of the most important cycles which define both seasonal and genuine cyclical dynamics

The main research results were presented at various conferences and roundtables (21 presentations), including two at a Krasnoyarsk economic forum in 2012, at the Gaidar Forum International conference on Russia and the World: Challenges to Integration (co-hosted by Gaidar Institute, RANE, and Gaidar Foundation), XIII April International Academic Conference on Economic and Social Development (Higher School of Economics), and at the 32nd Annual International Symposium on Forecasting (Boston, USA, 2012)
 
CMASF research fellows participated in an annual Project LINK (co-hosted by Toronto University and UN\DESA) meeting and submitted a medium-term economic forecast report to the Project LINK. CMASF is a regular LINK member, and part of the LINK work was co-financed by the project. The LINK website http://projects.chass.utoronto.ca/link/ publishes conference materials twice a year.

The main research results were also presented to the media by the participants (over 200 articles, interviews, comments, and citations in 2012).

The results were also published in over 13 scientific articles, including articles in VAK-approved journals.

5. Implementation of the Research Results:  The results may serve as a basis for policy advice in preparing long-term, strategic official documents, including State programmes, sectoral strategies, and long-term forecasts of social, economic, and science and technology development. The materials prepared during the realization of the project were accepted by officials in thr Office of the Government, Ministry of Economic Development, Ministry of Industry and Trade, Ministry of Education and Science, and were used in the work of expert groups for upgrading Strategy-2020.

6. International Partners: None.
 

Publications:


Pestova A. Leading Indicators of the Business Cycle: Dynamic Logit Models for OECD Countries and Russia / NRU Higher School of Economics. Series WP BRP "Economics/EC". 2015. No. WP BRP 94/EC/2015.