Alexei Vedev, Head of the Financial Studies Department, the Gaidar Institute answered the questions of the Yango.Pro magazine subsequent to the important developments for the Russian market – the change of the Government and renewal of the economic bloc -- which took place in January. In the context of the latest political reshuffle, investors are looking for answers to the following key issues: Will the fiscal and monetary policy of Russia change? Will the authorities change the budget rule? What effect will it have on the rate of inflation? What interest rates and what situation on the OSZ market can be expected?
“In my view, a major problem of the former government was that they used to save funds well, but invested them unsuccessfully or did not invest them at all. In 2018–2019, the government was carrying out an exceedingly tough budgetary policy and accumulated a huge amount of funds through borrowings on the OFZ market and owing to the budget surplus and foreign currency reserves.   So, I believe the OFZ market will be developing at a much slower rate in the next two years. I do not think that the Ministry of Finance will be “vacuum cleaning” the market in such volumes and, no doubt, they will place OFZ at a lower rate of return. The Ministry of Finance does not need these funds in such big volumes and at such a high price.

In 2028-2019 period, the OFZ market was very prosperous both for foreign and domestic investors. Further on, it will be less interesting”, the expert believes.

Alexei Vedev doubts that “the monetary factor of the inflation rate will return in the short-term prospect. Actually, in the past two-three years the weak consumer demand was the main factor behind the low inflation rate. If the rouble remains stable and no depreciation of the national currency takes place, while the Central Bank carries out the moderate policy, the inflation risks will still be low”.  

The expert expects some changes to take place in the budgetary policy. “Just imagine what the budget surplus is like: it means that the Government withdraws from the economy more funds than it gives it. The year 2019 saw the surplus of Rb 1.98 trillion, while the economy grew actually by 1%. Certainly, this situation needs to be improved. I expect to see a moderate budgetary policy and growth in expenditures and, consequently, in domestic demand.  It will revive the economy to some extent”, Alexei Vedev says.

At the same time, the expert is almost certain that the budget rule will be eased. “We have advised to do it for the past two-three years. The budget rule is too tough.  In addition, the large volume of the currency which the Ministry of Finance buys  leads to an artificially low cost of the rouble, which  situation is unfavorable for investment purposes “.

According to Alexei Vedev, “at present the intellectual pressure on the Central Bank to ease the monetary policy will be higher. In any case, I expect another round of debates to be held on neutral real interest rates. The Central Bank dogmatically declares that the interest rates of 3%-4% are neutral to the economy.  This statement is unsubstantiated. Numerous experts believe that these interest rates are too high. There is no doubt that the interest rates will go down. But there will be no ‘paradise’ any longer for investors that used to prevail on the OFZ market and one will have to accept this reality”, Alexei Vedev concludes.