ALEXEI VEDEV: WHO IS TO BLAME FOR THE FUTURE WHICH HAS NOT COME?

The Forbes magazine published an op-ed column by Alexei Vedev, Leading Researcher of the Gaidar Institute, on the scenario forecasts of economic development.
The Ministry of Economic Development vs. the Central Bank of Russia: who is to blame for the future which has not come?

The scenario forecasts released almost simultaneously by the Central Bank of Russia and the Ministry of Economic Development differ greatly by the degree of optimism: according to the forecast of the Central Bank of Russia, the goals specified in the President’s Executive Order No.204 (“May Decrees”) will fail to be achieved.

The forecast of the mid-term social and economic development prepared by the RF Ministry of Economic Development and the Russian Central Bank’s Main Guidelines for the Single State Monetary Policy till 2020 and in the 2021-2022 Period have been released almost simultaneously. In those documents, a wider range of issues ranging from consumer lending (bubble or not bubble?) to more system-based aspects is discussed.

The RF Ministry of Economic Development believes that the worsening of macroeconomic indices is related to the simultaneous tightening of the budget policy and the monetary policy.  “The monetary policy creates crucial conditions for economic development, but it cannot be a source of sustainable economic growth”, argues the Central Bank of Russia in its program document. The Central Bank of Russia actually rejects the quantitative easing policy which is being carried out with varying success in the US, the UK, Japan and the EU.

The Ministry of Economic Development and the Central Bank of Russia provide the mid-term scenario forecasts. Earlier, the RF Ministry of Economic Development used to consider quite a logical set of scenarios, in particular, the baseline, conservative and target ones.  The baseline scenario is presented as the most likely one. The conservative scenario like the pessimistic one is aimed at the administration of the budget as regards its social part in unfavorable conditions.    Finally, the target scenario includes the necessary conditions for implementation of the RF President’s Executive Order No.204 “On National Goals and Strategic Objectives of the Development of the Russian Federation in the Period till 2024”. Presently, the RF Ministry of Economic Development united the target and baseline scenarios together. So, it is suggested that the failure of meeting the targets is just excluded.

The set of scenarios considered by the Central Bank of Russia is even more exotic. Apart from the baseline scenario, they consider the scenario with high prices of oil and the risk-related one.  The latter two scenarios differ by the level of prices of oil in the forecast period.   It is to be noted that the implementation of the objectives set in the RF President’s Executive Order No.204 is not expected in any scenario considered by the Central Bank of Russia.

According to the version of the Central Bank of Russia, the baseline scenario is worse for 2019 and 2020 than that based on the calculations of the Ministry of Economic Development and much worse for the 2021-2022 period. However, the assumptions of both the authorities are identical: additional investment expenditures within the frameworks of national projects, upgrading of the investment climate and the standard of administration at all the levels, diversification of the Russian economy as a whole and reduction of its dependence on raw materials.  

The Central Bank of Russia believes that its contribution to formation of favorable conditions for sustainable economic growth should consist in “introduction and upgrading of incentive-based control over the banking sector, promotion of the competition on the financial market, development of the segment of long-term financial resources,  upgrading of the standard of corporate governance and protection of the rights of investors and development of the insurance sector, trust management, pooled investment, as well as macroprudential policy measures”.  It is quite a big list of measures. It is to be reminded that 60%-70% of the banking sector is currently controlled by the state, 80% of non-government pension funds are affiliated with state banks and state-run companies and nearly 40% of the market of asset management companies is associated with state banks. The prospect and timelimits of reduction of the share of the government’s participation in the financial sector have not been determined. In addition, the Central Bank of Russia believes that growth in state investment expenditures is going to make a major contribution to the economy in 2020.

The tactics of the Central Bank of Russia within the frameworks of the scenarios in question are quite extraordinary. In case of the baseline scenario, the Central Bank of Russia maintains the key interest rate at the neutral level of 6%-7% (2%-3% per annum in real terms). It is obvious that interest rates on financial instruments will be higher.

The Central Bank of Russia expects the slowdown of “the growth rates of retail lending, particularly, owing to the measures aimed at limiting growth in the debt burden of households as a whole and individual borrowers, in particular, as well as the saturation of the retail lending market”. If one believes in efficiency of measures aimed at limiting consumer lending, it is obvious that in the current situation the market cannot become saturated because households’ short-term and long-term debts to banks will need refinancing.

With the key interest rate amounting to 6%-7% within the framework of the baseline scenario, the Central Bank of Russia expects sustainable growth in corporate and mortgage lending. “The nonprice conditions of lending will be smoothed over gradually reflecting the preservation of banks’ conservative approach to credit scoring and risk-taking”. However, it can be expected that interest rates on corporate and mortgage loans will remain at the level of over 7%. As regards mortgage loans, it means that the interest rate throughout the entire forecast period will be exceeding growth in households’ nominal income, thus increasing the share of expenditures on servicing of loans in households’ expenditures. As regards corporate loans, no growth in their contribution to investment activities should be expected with such interest rates prevailing.   

Within the frameworks of other two scenarios, the tactics of the Central Bank of Russia are the same and it is unclear for what reasons the Central Bank of Russia considers them. Within the frameworks of the scenario with high prices of oil, “the pro-inflation factors will prevail somewhat over disinflationary ones”. A similar situation can be found in the risk-related scenario. As a result, in both the scenarios it is expected to increase the key interest rate.

In the prerequisites of the forecast, the Central Bank of Russia inputs that the NWF’s funds will be invested in liquid low-risk currency instruments. However, the Main Guidelines deal, in particular, with the prospective lines of investing a portion of the NWF’s funds.  It is quite reasonably specified in the document that in compliance with the Budget Code with the liquid portion of the NWF exceeding the level of 7% of GDP the government  can (but not obligated) utilize the surplus amount in other lines, rather than in liquid low-risk currency instruments. The expansion of the range of currency financial instruments is believed to be optimal. Such problems of the Russian economy as a drop in growth rates because of the shrinkage of domestic demand are not considered at all, while the statement: “the fiscal rule has proved its efficiency” appears to be  made quite in the Marxist fashion, the more so, it is the fifth one starting from 2004.

Eventually, the Central Bank of Russia showed that in any scenario (even in that with high prices of oil) the objectives specified in the President’s Executive Order No.204 would not be achieved. But the Central Bank of Russia is not to blame: it is responsible for maintaining the low rate of inflation and financial stability. Such issues as the future of the banking sector and non-bank financial institutions are left behind the scene.   In particular, it is unknown in what way their efficiency is to be promoted and how the share of the state participation is to be reduced to speed up economic growth.