ALEXEY VEDEV: FISCAL POLICY SHOULD BE COUNTERCIRCULAR
Alexey Vedev, Head of Financial Studies Department of the Gaidar Institute, Deputy Minister of economic development in 2014–2017, gave an interview to business journal “Invest-Foresight” on January 24 and spoke about the most relevant issues of Russian economic and budget policy.
— Alexey Leonidovich, is it true to say that Russia no longer needs strict fiscal monetary policy?
— I think so, and I had the same opinion in 2015. At one time, in 2015–2016, Ministry of Economic Development made a proposal to reach a 3% budget deficit. Fiscal policy must be countercyclical. Of course, certain financial incentives should be mandatory for implementation. In my opinion, currently, situation is absolutely absurd fr om the point of view of global practices when economy is stagnating and at the same time, a budget surplus is planned for the next 3 years. I do not consider it as economically sensible. Why should the state withdraw more money than it give?
— Does it mean that purpose of expenditures is not that important?
— It has a social meaning in the context of social justice and inequality. I think that this is a very important matter: we talk about targeted social policy for decades and it is still relevant.
— Speaking at the Gaidar forum, Grzegorz Kolodko said that reduction of inequality would be a sign of economic development.
— Yes, no doubt. I can even refer to Organization of economic cooperation and development. They had many publications stating that reduction of inequality signifies one of the factors of economic growth. This is clear: when you stabilize final demand, it thereby grows. It is clear that in the period of crisis when households’ incomes drop, population simplify their consumption needs after six years of stagnation and demand goes down. Consequently, efficiency of investment is lost along with falling demand, and economy starts shrinking.
— Does it mean that neither national projects nor demographic initiatives expressed by the President present a significant factor of mitigation of our fiscal disease?
— Yes, of course, they are not and this is proved by the fact that budget surplus is planned for this year again… 3% of GDP surplus means extra Rb 3 trillion. At the same time, this entails that 400 billion clear have to be found somewhere for implementation of social policy. Well, this is ridiculous.
— We have just talked about budget. If we speak about Central Bank, do you think that credit availability does not present an important factor contrary to what entrepreneurial parties say, for example, “Party of Growth”?
— Yes, in my opinion, this is not an important factor, because in a growing market, growing demand, interest rates from 8% to 11% per annum look normal with low inflation. It is obvious that rates need to be reduced. I would make a reservation: at the same time, I believe that a mortgage rate of even 8% is prohibitively high. This is a slightly different issue. I believe that if we grant mortgages to population at 8% per annum while their nominal income grows by 3-4% (I emphasize, the nominal, not real income!), this means that mortgage increases the burden on expenses of population in the structure. This is a structural issue, which may lead to a bubble, bad debts, etc.
— One can sometimes hear that we are missing out such an important source of investment as pension money. For example, Anatoly Chubais said that pension money should be the main source of funding for venture and innovation. However, on the other hand, we know that our retirement savings are simply very little.
— Firstly, there are not many of them and secondly, if they exist they are at bank deposits, which means that they have already been placed somewhere. Therefore, we are not losing them: they are now invested either in Federal loan bonds or in any other assets. An additional source of money, structurally, again, may be the refusal of population from current level of consumption. Buying real estate for investment purposes is one option, buying foreign currency is option number two. It is these sources that should be used. Cash savings are generally small
All other money is placed in the banks. I do not understand the reason why Ministry of finance issued Federal loan bonds for population. This means only one thing that people withdraw money from their deposits and invest it in Federal loan bonds. In the context of economic logic and efficiency, this procedure is next to none because banking investments reduce due to reduction of funding base. Therefore, we lose nothing. Now, if there will be more pension money, then, of course, this money will become a source of investment.
- A few words about foreign investments. Do you agree with the statement that now the main factor that affects the amount of foreign direct investment in Russia is not economic, that it belongs to the sphere of foreign policy?
— Definitely, I agree. Foreign investments is a very important component for investment process. Besides the fact that this is an additional source of funds, as a rule, corporate culture, corporate governance, new technologies emerge along with direct foreign investment. This is very important but unfortunately, there are sanctions and that is why situation is rather difficult.
- Your colleague Sergey Drobyshevsky said that national projects can be considered as a kind of penetration force which private business can follow, that national projects can play a role of a multiplier for private investment. How do you rate this?
— They may play this role or may not. This is the main risk.
— What does it depend on?
— It depends on many things. Large amounts of money, i.e. Rb 27 trillion are collected for implementation of national projects. However, if we divide it by year, it will amount to Rb 4 trillion. Moreover, it includes not only investment but also consumption. In total, capital investment amounts to slightly more than 20 trillion in Russia annually. That is, in fact, the amount of investments from national projects is rather small. I believe, the multiplier effect of public investment may not be sufficient to stimulate private investment. Anyway, private investment figures up to 70% of all investments. They are focused on domestic demand and exchange rate and inflation and business climate. Therefore, public investment is a required but not sufficient condition. I agree with Sergey Drobyshevsky that importance of national projects for economic growth is clearly overestimated.
— Everything that we say about the economy now rests on the fact that we have chosen such a growth model that state-owned companies are the main driver. How long do you think this will continue? Do you observe any forces in the surrounding reality, prevailing opinions, lobbying efforts that could slightly change the situation?
— I think that this will not last long. In any case, I have already noticed in the rhetoric of the Ministry of Economic Development a clear move to reduce the state’s share. There were already several documents, which appeared in October-November 2019, wh ere privatization and decrease in the state share were put forward as a proposal. After the last 12 months, it became clear that economy is not growing and all indicators were revised downwards.
Interviewed by Konstantin Frumkin
— I think so, and I had the same opinion in 2015. At one time, in 2015–2016, Ministry of Economic Development made a proposal to reach a 3% budget deficit. Fiscal policy must be countercyclical. Of course, certain financial incentives should be mandatory for implementation. In my opinion, currently, situation is absolutely absurd fr om the point of view of global practices when economy is stagnating and at the same time, a budget surplus is planned for the next 3 years. I do not consider it as economically sensible. Why should the state withdraw more money than it give?
— Does it mean that purpose of expenditures is not that important?
— It has a social meaning in the context of social justice and inequality. I think that this is a very important matter: we talk about targeted social policy for decades and it is still relevant.
— Speaking at the Gaidar forum, Grzegorz Kolodko said that reduction of inequality would be a sign of economic development.
— Yes, no doubt. I can even refer to Organization of economic cooperation and development. They had many publications stating that reduction of inequality signifies one of the factors of economic growth. This is clear: when you stabilize final demand, it thereby grows. It is clear that in the period of crisis when households’ incomes drop, population simplify their consumption needs after six years of stagnation and demand goes down. Consequently, efficiency of investment is lost along with falling demand, and economy starts shrinking.
— Does it mean that neither national projects nor demographic initiatives expressed by the President present a significant factor of mitigation of our fiscal disease?
— Yes, of course, they are not and this is proved by the fact that budget surplus is planned for this year again… 3% of GDP surplus means extra Rb 3 trillion. At the same time, this entails that 400 billion clear have to be found somewhere for implementation of social policy. Well, this is ridiculous.
— We have just talked about budget. If we speak about Central Bank, do you think that credit availability does not present an important factor contrary to what entrepreneurial parties say, for example, “Party of Growth”?
— Yes, in my opinion, this is not an important factor, because in a growing market, growing demand, interest rates from 8% to 11% per annum look normal with low inflation. It is obvious that rates need to be reduced. I would make a reservation: at the same time, I believe that a mortgage rate of even 8% is prohibitively high. This is a slightly different issue. I believe that if we grant mortgages to population at 8% per annum while their nominal income grows by 3-4% (I emphasize, the nominal, not real income!), this means that mortgage increases the burden on expenses of population in the structure. This is a structural issue, which may lead to a bubble, bad debts, etc.
— One can sometimes hear that we are missing out such an important source of investment as pension money. For example, Anatoly Chubais said that pension money should be the main source of funding for venture and innovation. However, on the other hand, we know that our retirement savings are simply very little.
— Firstly, there are not many of them and secondly, if they exist they are at bank deposits, which means that they have already been placed somewhere. Therefore, we are not losing them: they are now invested either in Federal loan bonds or in any other assets. An additional source of money, structurally, again, may be the refusal of population from current level of consumption. Buying real estate for investment purposes is one option, buying foreign currency is option number two. It is these sources that should be used. Cash savings are generally small
All other money is placed in the banks. I do not understand the reason why Ministry of finance issued Federal loan bonds for population. This means only one thing that people withdraw money from their deposits and invest it in Federal loan bonds. In the context of economic logic and efficiency, this procedure is next to none because banking investments reduce due to reduction of funding base. Therefore, we lose nothing. Now, if there will be more pension money, then, of course, this money will become a source of investment.
- A few words about foreign investments. Do you agree with the statement that now the main factor that affects the amount of foreign direct investment in Russia is not economic, that it belongs to the sphere of foreign policy?
— Definitely, I agree. Foreign investments is a very important component for investment process. Besides the fact that this is an additional source of funds, as a rule, corporate culture, corporate governance, new technologies emerge along with direct foreign investment. This is very important but unfortunately, there are sanctions and that is why situation is rather difficult.
- Your colleague Sergey Drobyshevsky said that national projects can be considered as a kind of penetration force which private business can follow, that national projects can play a role of a multiplier for private investment. How do you rate this?
— They may play this role or may not. This is the main risk.
— What does it depend on?
— It depends on many things. Large amounts of money, i.e. Rb 27 trillion are collected for implementation of national projects. However, if we divide it by year, it will amount to Rb 4 trillion. Moreover, it includes not only investment but also consumption. In total, capital investment amounts to slightly more than 20 trillion in Russia annually. That is, in fact, the amount of investments from national projects is rather small. I believe, the multiplier effect of public investment may not be sufficient to stimulate private investment. Anyway, private investment figures up to 70% of all investments. They are focused on domestic demand and exchange rate and inflation and business climate. Therefore, public investment is a required but not sufficient condition. I agree with Sergey Drobyshevsky that importance of national projects for economic growth is clearly overestimated.
— Everything that we say about the economy now rests on the fact that we have chosen such a growth model that state-owned companies are the main driver. How long do you think this will continue? Do you observe any forces in the surrounding reality, prevailing opinions, lobbying efforts that could slightly change the situation?
— I think that this will not last long. In any case, I have already noticed in the rhetoric of the Ministry of Economic Development a clear move to reduce the state’s share. There were already several documents, which appeared in October-November 2019, wh ere privatization and decrease in the state share were put forward as a proposal. After the last 12 months, it became clear that economy is not growing and all indicators were revised downwards.
Interviewed by Konstantin Frumkin