ALEXEY VEDEV ON PROSPECTS OF DOMESTIC ECONOMY
Alexey Vedev, Head of Financial Studies Department of the Gaidar Institute, sized up prospects of domestic economy in an interview with ”Kommersant.”
The current Russian crisis is fundamentally different from previous ones. This time it is not related to the problems of the global economy, but resulted from coordinated impact of Western countries. The Bank of Russia analysts note that "Russian economy faced strong negative supply shocks: restrictions on receiving and paying for imported raw materials, supplies and components, as well as on the supply of finished goods and delays in receiving payment. The latter are both about export deliveries and deliveries to the domestic market".
“The situation is changing quite rapidly: while recently it seemed that businesses would not be able to withstand the challenges faced by the economy, today about 50 retail chains have announced the resumption of their activities in Russia, albeit under different names. This is a successful example of resisting sanctions,” said Alexey Vedev.
The expert identified three scenarios for countering sanctions pressure. The first option is to put everything in the hands of business. The second is to promote exports at a discount while accepting imports at a mark-up. The third scenario could be developed if Russia experiences difficulties with import substitution and an acute shortage of components and investment. “If we follow the first and second models, we expect a drop in GDP of about 9-11% and investments will fall by 14-17%. However, there is no particular inflationary threat. The acceleration of inflation was largely due to a sharp ruble fall and a rush in demand for goods based on fear of their disappearance. Now, amid falling household incomes, inflation will slow down. We will probably face inflation at 4-6% by the end of the year,” he forecasted.
The government is actively trying to cushion the impact of sanctions on the economy, having presented an anti-crisis program amounting to Rb 8 trillion. Alexey Vedev considers such support to be quite logical.
“The role of the state is really growing in a crisis, especially when the crisis is atypical,” he agreed. The state has a safety cushion in terms of National Wealth Fund and reserve balances that have not been frozen. Now it is rightful to talk about a fiscal stimulus policy, run a deficit budget by raising spending and supporting businesses and households. However, in his opinion, there are no inflation risks with the economy monetary pumping, as the incomes of both the households and businesses will obviously be limited.
According to Alexey Vedev, the first thing to do in the current situation is to maintain stability and support the "tone" of business. “In the short term, the key task is to ensure economic and food security, as well as uninterrupted supplies of critical components,” says the Gaidar Institute expert.
In the medium and long term, the globalization issue needs to be addressed, argues Alexey Vedev. “Either we will develop our own production and produce worse and more expensive goods, or we will somehow try to diffuse the impact of sanctions and return to the international division of labor. Under sanctions, the key task is also to develop the private economy, the expert added. Up until now, we have seen the sluggishness of state-owned enterprises, which were almost immediately hit by sanctions; they are less efficient than the private sector during the crisis.”
Analysts at the Bank of Russia, commenting on the consequences of disrupting the usual economic ties with Western companies, predict a long and significant economic downturn with the expected “structural transformation” of the Russian economy.
"Structural transformation will mean the simplification of the economy, and it will be a forced measure. In the course of the recent history we have been moving towards cooperation and globalization, as it is more efficient, better quality, cheaper. If we produce everything ourselves, finished products will undoubtedly be greatly simplified. Let me give you an example of Moskvich, from which no one expects a breakthrough in car production. However, for further predictions, the following question requires a response: are we retreating from the global economy or shall we still support international cooperation?”-concluded Alexey Vedev.
“The situation is changing quite rapidly: while recently it seemed that businesses would not be able to withstand the challenges faced by the economy, today about 50 retail chains have announced the resumption of their activities in Russia, albeit under different names. This is a successful example of resisting sanctions,” said Alexey Vedev.
The expert identified three scenarios for countering sanctions pressure. The first option is to put everything in the hands of business. The second is to promote exports at a discount while accepting imports at a mark-up. The third scenario could be developed if Russia experiences difficulties with import substitution and an acute shortage of components and investment. “If we follow the first and second models, we expect a drop in GDP of about 9-11% and investments will fall by 14-17%. However, there is no particular inflationary threat. The acceleration of inflation was largely due to a sharp ruble fall and a rush in demand for goods based on fear of their disappearance. Now, amid falling household incomes, inflation will slow down. We will probably face inflation at 4-6% by the end of the year,” he forecasted.
The government is actively trying to cushion the impact of sanctions on the economy, having presented an anti-crisis program amounting to Rb 8 trillion. Alexey Vedev considers such support to be quite logical.
“The role of the state is really growing in a crisis, especially when the crisis is atypical,” he agreed. The state has a safety cushion in terms of National Wealth Fund and reserve balances that have not been frozen. Now it is rightful to talk about a fiscal stimulus policy, run a deficit budget by raising spending and supporting businesses and households. However, in his opinion, there are no inflation risks with the economy monetary pumping, as the incomes of both the households and businesses will obviously be limited.
According to Alexey Vedev, the first thing to do in the current situation is to maintain stability and support the "tone" of business. “In the short term, the key task is to ensure economic and food security, as well as uninterrupted supplies of critical components,” says the Gaidar Institute expert.
In the medium and long term, the globalization issue needs to be addressed, argues Alexey Vedev. “Either we will develop our own production and produce worse and more expensive goods, or we will somehow try to diffuse the impact of sanctions and return to the international division of labor. Under sanctions, the key task is also to develop the private economy, the expert added. Up until now, we have seen the sluggishness of state-owned enterprises, which were almost immediately hit by sanctions; they are less efficient than the private sector during the crisis.”
Analysts at the Bank of Russia, commenting on the consequences of disrupting the usual economic ties with Western companies, predict a long and significant economic downturn with the expected “structural transformation” of the Russian economy.
"Structural transformation will mean the simplification of the economy, and it will be a forced measure. In the course of the recent history we have been moving towards cooperation and globalization, as it is more efficient, better quality, cheaper. If we produce everything ourselves, finished products will undoubtedly be greatly simplified. Let me give you an example of Moskvich, from which no one expects a breakthrough in car production. However, for further predictions, the following question requires a response: are we retreating from the global economy or shall we still support international cooperation?”-concluded Alexey Vedev.