ALEXEY VEDEV: “FORMER ECONOMIC MODEL HAS REACHED ITS LIMIT, BUT A COMPLETE BREAK WITH THIS MODEL SEEMS EXTREMELY COSTLY AND INEFFICIENT”
Alexey Vedev, Head of Financial Studies Department of the Gaidar Institute and former Deputy Minister of Economic Development of the Russian Federation, shared his thoughts with “Nezavisimaya Gazeta” on how quickly Russia's economy will adapt to the new reality and what kind of structural adjustment it will require.
The RF economic policy has passed the point of no return: both the government and the Central Bank have agreed that there will be no "business as usual". At the St Petersburg International Economic Forum (SPIEF), one of the main discussion topics was the structural adjustment of the economy that would allow a turn in the right direction. So far, there is no clear-cut answer. The Urals oil costs 30% more compared to the previous year; commodities export still will play the key role for the new budget construction, however, at the same time, Elvira Nabiullina, Governor of the Central Bank raised a topic of rethinking the value of exports as such, as now it is "discounted", and indicates that Russia incurs losses from participating in the international division of labor. What will the forthcoming structural adjustment mean in practice, a domestic renaissance or isolation?
According to Alexey Vedev, “the former model of Russian economy used in the last 20 years, suggested development of transparent economy, participation in globalization and international division of labor.”
“There has been notable success achieved in industrial assembly, high-value-added products, agriculture and knowledge-intensive services. Developing such a model in the future is almost impossible due to sanctions," he believes. However, a complete departure from this model seems extremely costly and inefficient.”
Alexey Vedev noted that the government's economic bloc is now forming a new development model, which will be focused on the domestic market and "on new, unfortunately, less technologically advanced trading partners". Moreover, according to the expert, Russia incurs losses resulting from its non-participation in the international division of labor rather than from its participation, if it is evaluated in terms of what exactly Russia exports.
“Previously, non-resource exports have progressively developed along with commodity exports (although at a slower pace compared to targets). The value of exports, in my view, does not need to be reconsidered at all, rather, it is the external demand that is the key vehicle of the economic development," says Vedev. The point is that exports will decline in real terms and its value can be supported by rising prices for most Russian goods on the global market.”
Although Alexey Vedev did acknowledge that one of the current forced models of Russia's current economic development is "selling at a discount and buying at a premium." "In terms of raw material exports, this means a loss of $30-50 per barrel of oil. In terms of imports, 70% is made up of components and investment goods, and the reduction of foreign exchange costs does not even approximately compensate for the production losses. This is a forced model associated with high costs," believes the Gaidar Institute expert.
Generally assessing the statements already made at the forum, Alexey Vedev indicated that he is most concerned about the increasingly optimistic statements that we are successfully passing through the crisis and will be revising this year's forecasts towards improvement (such statement, in particular, was made by Maxim Reshetnikov). "Measures to ensure financial stability also remain unclear: the key issue today is to ensure economic growth, including through loans and budget spending, which may be severely constrained by the financial block," he added.
According to Alexey Vedev, “the former model of Russian economy used in the last 20 years, suggested development of transparent economy, participation in globalization and international division of labor.”
“There has been notable success achieved in industrial assembly, high-value-added products, agriculture and knowledge-intensive services. Developing such a model in the future is almost impossible due to sanctions," he believes. However, a complete departure from this model seems extremely costly and inefficient.”
Alexey Vedev noted that the government's economic bloc is now forming a new development model, which will be focused on the domestic market and "on new, unfortunately, less technologically advanced trading partners". Moreover, according to the expert, Russia incurs losses resulting from its non-participation in the international division of labor rather than from its participation, if it is evaluated in terms of what exactly Russia exports.
“Previously, non-resource exports have progressively developed along with commodity exports (although at a slower pace compared to targets). The value of exports, in my view, does not need to be reconsidered at all, rather, it is the external demand that is the key vehicle of the economic development," says Vedev. The point is that exports will decline in real terms and its value can be supported by rising prices for most Russian goods on the global market.”
Although Alexey Vedev did acknowledge that one of the current forced models of Russia's current economic development is "selling at a discount and buying at a premium." "In terms of raw material exports, this means a loss of $30-50 per barrel of oil. In terms of imports, 70% is made up of components and investment goods, and the reduction of foreign exchange costs does not even approximately compensate for the production losses. This is a forced model associated with high costs," believes the Gaidar Institute expert.
Generally assessing the statements already made at the forum, Alexey Vedev indicated that he is most concerned about the increasingly optimistic statements that we are successfully passing through the crisis and will be revising this year's forecasts towards improvement (such statement, in particular, was made by Maxim Reshetnikov). "Measures to ensure financial stability also remain unclear: the key issue today is to ensure economic growth, including through loans and budget spending, which may be severely constrained by the financial block," he added.