19.12.2014 – The Discussion Club Academia's First Meeting: The Economic Challenges and Risks in 2015

On 19 December, the Discussion Club Academia held its first meeting, where the challenges faced by Russia's national economy in 2015 were discussed.

The Discussion Club Academia is a joint project launched by the Gaidar Institute and the Russian Presidential Academy of National Economy and Public Administration (RANEPA). Its goal is to share with the academic, expert and media communities the various existing viewpoints concerning the hottest issues arising in society and the national economy, to make known the most painful social issues, and to try to offer, in a free discussion mode, some approaches to dealing with the most complex problems, if not the ultimate solutions.

Apart from representatives of the expert community and journalists, the Discussion Club's first meeting was attended by Chairman of the Committee of Civil Initiatives, Chairman of the Board of Guardians of the Gaidar Institute Alexei Kudrin; Rector of the Russian Presidential Academy of National Economy and Public Administration (RANEPA) Vladimir Mau; and Dean of Moscow State University's Faculty of Economics Alexander Auzan. The Gaidar Institute was represented by its Executive Director Sergey Prikhodko, its Scientific Director Sergey Drobyshevsky, Head of the Center for Macroeconomics and Finance Pavel Trunin, Director of the Center for Real Sector Georgy Idrisov, and Head of the International Trade Department, Alexander Knobel.

The mass media community was represented by Russia's leading information agencies and publications - ITAR-TASS, RBC daily, Bloomberg, Vedomosti, Kommersant, Gazeta.ru, Forbes, Slon.ru, etc.

The meeting was moderated by Andrei Kolesnikov and Vladimir Gurevich, Advisors to the RANEPA's Rector.

According to Alexei Kudrin, Russia is currently entering a real economic crisis, which in 2015 will already be in full swing. The rate of economic growth will be falling - 2 to 4%, depending on a particular scenario. If price of oil should be $ 80 per barrel, we will lose between 1–1.5% and 2%; if it amounts to $ 60 per barrel – we will lose up to 4%. Nothing like this has happened since 2000 - even in 2009 the situation was easier because, due to budget 'injections', some GDP growth was observed, at a rate slightly above 0%. In 2015 we are going to see negative growth, and the next year 2016 will also be a year of declining GDP. Any further prospects will depend on a specific combination of circumstances, including the 'risk of uncertainty within the economic model'.

Alexei Kudrin also offered his estimates of the various factors behind the decline in the exchange rate of the ruble. In his opinion, only 25% of the ruble's depreciation could be explained by the plummeting world oil prices; economic sanctions can be responsible for between 25% and 35–40%; 5–10% can be explained by the USD's strengthening against the other major world currencies. All the remaining negative factors have to do with 'risks, expectations and fears', including lack of trust on the part of marker participants in the government measures designed to improve the investment climate and sustain economic growth.

Mr Kudrin saw among the main threats that the economy could be faced with over the next year the persisting military conflict in Ukraine and the toughening of the economic sanctions introduced against Russia. Besides, he warned against the threat of escalating public protests in response to deteriorating living standards of the population.

Alexander Auzan spoke at length of the external and internal environment of the current crisis. He admitted that 'in the spring, the situation got out of control and resembled the pre-war situation of 1914'.

Dr Auzan noted that the time had come when economic growth in Russia was to halt, independently of any sanctions or other factors. This halt could have occurred even earlier but for the massive spending campaign like the Olympic Games in Sochi.

There can only be two possible ways of triggering economic growth and starting the 'investment engine': either to create a very favorable investment and business climate capable of attracting private investors, or to implement large-scale government investment. Judging by the current situation, Dr Auzan had come to the conclusion that the second scenario ('the mobilization scenario') would be more likely.

Speaking as an expert, Dr Auzan suggested the following likely scenario for 2015: most probably, in spring social tension will be on the rise, triggered primarily by mounting inflation, which will have to be kept under control by some or other means; besides, there may be unemployment issues. Dr Auzan believes that, in all likelihood, social support measures and indexation will be implemented by the government. Attempts to 'restart' the economy will involve the launch of large-scale investment projects designed to ensure economic growth of up to 2% by the pre-election period and the 2017–2018 election campaign. But later on, once that stage is over, we will experience a deep slump resulting from exhausted financial potential, human capital, and general lack of resources.

Dr. Vladimir Mau believes that the present situation is indicative of a systemic crisis similar to the crises of the 1970s, not the 1930s. More particularly, while the developments in Russia are more similar to the situation in the 1970s, the West is experiencing something more closely resembling the 1930s. As it always happens, the curative measures applied at the very outset of a systemic crisis are the same that have been applied over the preceding 50 years, and so the situation only worsens; then a search for some new models begins. Now we are witnessing attempts to find and elaborate a new regulation model; the emergence of a new model of this type is another typical feature of a systemic crisis.

In 2009 at Davos, President Vladimir Putin used the term perfect storm to describe the then evolving global economic crisis. Now we have an even stronger reason for applying that term to the current developments in Russia. This country is faced with a complex conglomerate of problems working as contiguous factors: oil; geopolitics; economic sanctions; the bottom of the current investment cycle; demographic problems; the exhausted potential of the growth model relied upon over the previous decade. The complexity of these problems requires that they should be dealt with by applying a variety of methods, which are often mutually exclusive.

Dr Mau also pointed to a number of risks - and first of all the temptation to apply an 'acceleration policy'. However, as shown by existing experiences, economic stability can give way to economic disaster within a span of only 4 years, and for the first two years of that 4-year period the economy will be accelerating.

Russia possesses three economic advantages: substantial foreign exchange reserves; a well-balanced budget; and a low sovereign debt. Any worsening of any one of these three parameters would be very dangerous in terms of the market's response.

Speaking as an expert, Dr Mau also noted that we underestimate the social risks (the consequences related to inflation and unemployment surge). The unemployment rate in Russia is rather low due to the effects of demographic factors. However, a conflict is brewing: on the one hand, the army of retirees is on the rise; on the other, there are young people who are unwilling to fill the jobs being vacated. According to Dr Mau, at present we must keep occupied those people who can work in the real economy. For this goal to be achieved, a careful and balanced social compensation policy is needed, which should not be oriented only to the support of companies; instead, its priority should be the support of people.