Goal of Research: the construction of methods of analysis and forecasting for various economic processes (macroeconomic, financial, structural) at different time horizons and applying them in a system of strategic economic policy advice. Construction of medium- and long-term forecasts of social and economic development allowing the evaluation of external conditions and government policy impacts.
Empirical base of Research:
The data used included databases by Rosstat, Minfin, Bank of Russia, Ministry of Industry and Trade, Ministry of Economic Development, Federal Customs Service, industrial surveys compiled by IET, newspaper articles and official sources.
The analysis includes the use of statistical and illustrative techniques, as well as other analytical methods (cluster analysis, ranking etc). The research includes an upgrade of existing and construction of new data analysis and mining methods.
Results of Research:
We regularly monitored developments in the world economy as a whole and in the largest economies (US, EU, China) in 2013.
We produced a monthly review and forecast report «Outlook for the largest economies», outlining the main trends behind short- to medium-term performance for 2013-2014 for the economies of US, EU/euro area and China. Each report included an occasional spotlight review of selected issues, from growth perspectives of Asian economies to probable impacts of fiscal consolidation in developed economies to assessing the effects of Abenomics. The final report summarized our forecasts for 2013-2014 and outlined the main trends and risks for the growth of the global economy.
We conducted regular monitoring and research on the development of the Russian economy in 2013 for topics in industry, external trade, budget, 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 near stagnation of the Russian economy. We illustrated the deficiencies of the current mechanism of economic rebound (consisting mainly of lack of production capacity and labour market slacks, imbalance between growth in wage and labour productivity, consumer credit overheating etc)
Growth in Russian industrial output and investment turned into stagnation in 2013, and the financial parameters of Russian companies also weakened significantly (decrease in profitability accompanied by a rise in debt burdens). The only quasi-positive trend was a growth in labour productivity based on a limited but steady decrease in industrial employment.
An important element of 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 became worse in 2012. For example, liquidity ratios have dropped by 15% in 2012 and are still half of the 2007 levels.
The transition to a new model of state innovation policy aimed at achieving technological breakthroughs started in 2013. In industry there were limited technological successes (except in actively modernizing the military sector), but in some sectors (Energy, IT) the government has implemented regulatory changes that may in the future provide a significant impulse to improve the technological level of these industries.
Analysis of the federal budget in 2013 showed the key feature was a significant reduction in non-oil budget revenues due to the macroeconomic slowdown and the corresponding tax base compression, which resulted in a deterioration of the federal budget balance.
The Russian rouble had a tendency to weaken during 2013 because of fundamental factors. The current account balance, while being above zero, reached its lowest since 2009, and this is perceived not as a one-off but as a medium-term trend.
Our research into retail bank credit led us to conclude that aggressive low-rate-based expansion capabilities are very limited for Russian banks based on the deterioration of loan portfolios at increasing rates (because of retail credits) and the record debt payments burden of households. In the medium-term we expect a new wave of credit deterioration because of bank credit tightening that will cripple retail loan refinancing – forming a vicious circle.
We developed scenarios for economic and social development in Russia both in the medium- (to 2016) and long-term (to 2030), while outlining the main mechanisms of growth for this period.
During the year, we performed reviews of the main economic policy actions, including scenarios and forecasts made by the Ministry of Economic Development.
We analyzed Government programs (results shared with the Ministry of Economic Development), we performed a review of Federal Budget Law and Main outlines of Monetary Policy, also we assessed various forecasts and forecast inputs and constructed our own forecasts based on official inputs.
We devoted special attention to topics on the balance of payments and the ensuing risks for monetary policy and the banking system.
We conducted a number of research projects into methodology with the following results:
1. We improved the methodology of the system of leading indicators of entry into recession and recovery from a macroeconomic crisis of Russia's economy. We estimated the increase in predictive power of the models as a result of taking into account the problem of post-crisis bias. Also we analyzed the out-of-sample predictive power of the constructed models.
2. We have developed empirical models to estimate how the interest rates on retail and corporate lending charged by typical bank in the Russian banking system react to the interest rates policy of competitor banks, including the largest state-owned banks and other banks among the top-50 in terms of assets. Our estimated results showed that, on average, the typical bank tends to increase the interest rate on its retail loans following the growth in rates charged by the state-owned banks and, conversely, to reduce rates in response to increasing rates of banks in the top-50. In the corporate segment, the typical bank always acts co-directional with both groups competing.
3. We found a direct link between low efficiency in separate groups of Russian banks before and during the crisis of 2008-2009 and significant volumes of non-performing loans on their balance sheets at the peak of the "bad" debts crisis. Estimation results, based on stochastic frontier approach, showed that in the group of 100 least efficient Russian banks, which controlled up to a third of the banking system total assets by mid-2010, the average share of overdue loans was significantly (by 1.3pp) higher compared to the banking system in average (4.6%).
4. We found out that regulating the concentration of different groups of banks in the Russian banking system and increasing the minimum capital requirements for existing banks are effective mechanisms that the Bank of Russia can exploit to reduce the exposure of banks to credit risk. Empirical models have been developed to estimate the safety threshold, first, for concentration buildups in groups of large and medium-sized banks and, secondly, for increases in minimum capital requirements.
5. We analyzed the sectoral structure of corporate demand for credit based on bankruptcy risks. We arrived at estimates of structural features of credit demand based on borrower bankruptcy risks. We show that in 2013, risks have grown significantly for all industries. The highest risks are in machinery and equipment, textile and wood industries, the lowest are in chemical, mining and quarrying.
6. We developed a two-tier system to estimate the macroeconomic effects of foreign direct investment (FDI) inflows. The first level is designed to estimate the role of FDI inflows and other factors of FDI "absorbing capacity" in stimulating of the technological progress. The second level estimates the influence of technological changes on GDP growth. The results of this showed that improvements in institutional quality and in firms accessibility to bank credit in the domestic market are the two most important factors for Russia which could increase the "absorptive capacity" of FDI inflows and stimulate additional GDP growth (up to 0.50pp and 0.12pp in response to 1pp growth of the two respective variables and FDI). Increasing the openness of the economy and deepening the stock market in Russia are two additional factors which could have some smaller impacts on GDP growth.
7. We outlined a methodology to estimate the structure of central government spending on national economy by economic activity. The methodology provides an opportunity to develop an industry view of fiscal policy and to identify the most effective types of economic activities to stimulate the Russian economy. Analysis showed that the most significant decrease in 2013 was observed in machinery, equipment and vehicles, which represents high and medium technology industries and has strategic importance for the development of the non-oil sector of the economy.
8. We offered an approach to distinguish different types of economic crises based on crisis vectors’ cluster analysis. Such vectors were derived according to the dynamics analysis of four macroeconomic indicators. Crises as considerable negative deviation in any of indicators’ dynamics are identified applying the moving average method. Seven clusters were derived corresponding to certain types of economic crises, as a result of carrying out such procedures.
9. We developed a methodology for estimating bankruptcy probabilities and loss of profitability at the enterprise level. We used both financial reports of companies and industry indicators and the panel data was for 2006-2012. We tested the fit of models and the tests gave agreeable results.
We published a number of regular research and outlooks, including “Trends of Russian Economy”, “Trends in Russian Industry”, “Trends in the largest economies”, “Technology monitor for Russia and the world”, “Key trends for Russian budget”, “Financial indicators” and industrial sector report series “On Russian industrial output”, “Investment activity in Russia” based on special index, “Flash report on the real sector”
The main research results were presented at various conferences and roundtables (31 presentations), including at Krasnoyarsk and Novosibirsk economic forums in 2013, at Gaidar Forum International conference (co-hosted by Gaidar Institute, RANE and Gaidar Foundation) in January 2014, XIVApril International Academic Conference on Economic and Social Development (Higher School of Economics) in April 2013 (6 presentations), at The Second Russian Economic Congress in Suzdal (8 presentations), International finance and banking conferences in Rethymnon in Greece (2 presentations), Istanbul in Turkey (2 presentations) and Goteborg in Sweden (2 presentations).
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 paper to the Project LINK (http://www.rotman.utoronto.ca/FacultyAndResearch/ResearchCentres/ProjectLINK/LINKconferences/Country%20Reports%202013.aspx, “Russia” part).. CMASF is a regular LINK member, and part of the LINK work was co-financed by the project. LINK website http://projects.chass.utoronto.ca/link/ publishes conference materials twice a year.
Main research results were also presented to the media by the participants (over 300 articles, interviews, comments, citations in 2013).
The results were also published in over than 13 scientific articles in VAK-approved journals, and a working paper in HSE working paper series «Financial Economics» (M.Mamonov «Bad Management, Skimping, or both? The Relationship between Cost Efficiency and Loan Quality in Russian Banks», «WP BRP 19/FE/2013»)
Field of application:
The results may serve as a basis for policy advice in preparing long-term strategic official documents, including State programs, sectoral strategies and long-term forecasts of social, economic and science and technology development.
The materials prepared during the project were accepted by officials in Office of the President, Ministry of Economic Development, Ministry of Industry and Trade, Ministry of Education and Science.