As a Result, Accumulated Reserves Will Be Squandered

Within the frameworks of the St. Petersburg International Economic Forum, Vladimir Putin, President of the Russian Federation promised cheap long-term financing to speed up growth rates of the Russian economy which is close to the state of stagnation.

Also, a mechanism of project financing, primarily, in industry was proposed; the above mechanism suggests long-term provision of funds and flexible and easy terms of lending as regards the cost which does not exceed the level of the inflation rate plus 1%.    

However, there is a risk that instructions of Vladimir Putin, President of the Russian Federation to extend long-term cheap funds to the real sector may result in a situation where credit funds are either left on corporate accounts or stimulate the outflow of capital fr om Russia. A similar situation was observed both in the 2008–2009 period and Q1 2014.

The real sector experiences a shortage of credit resources. It is well known that any business in any country would like to receive long-term cheap financing. Funds cost as much as they cost. Loans cannot be cheaper than the rates on deposits. Loans can be extended at a price which is slightly higher than the cost of deposits. However, in Russia nobody is going to open a deposit at the interest rate of 3% per annum for the term of five years.

 

Such a situation may result in unjustified spending of funds and bankruptcy of the VEB because loans are to be extended at the rate which is lower than that on deposits. It is equal to throwing the money from a helicopter.

 

At present, it is more important to revive the economic situation: improve the business climate and stimulate investment activities. Russia’s main problem consists in low economic activities, rather than shortage of investment resources.  

As a result, there will be squandering of accumulated reserves, growth in the rate of inflation and instability of the exchange rate of the national currency.  

In addition to the above, promotion of consumer demand via reduction of the cost of loans to households is absolutely inadmissible in the existing situation.

Alexei Vedev, Director of the Structural Research Center

 

Within the frameworks of the St. Petersburg International Economic Forum, Vladimir Putin, President of the Russian Federation promised cheap long-term financing to speed up growth rates of the Russian economy which is close to the state of stagnation.

Also, a mechanism of project financing, primarily, in industry was proposed; the above mechanism suggests long-term provision of funds and flexible and easy terms of lending as regards the cost which does not exceed the level of the inflation rate plus 1%.    

However, there is a risk that instructions of Vladimir Putin, President of the Russian Federation to extend long-term cheap funds to the real sector may result in a situation wh ere credit funds are either left on corporate accounts or stimulate the outflow of capital from Russia. A similar situation was observed both in the 2008–2009 period and Q1 2014.

The real sector experiences a shortage of credit resources. It is well known that any business in any country would like to receive long-term cheap financing. Funds cost as much as they cost. Loans cannot be cheaper than the rates on deposits. Loans can be extended at a price which is slightly higher than the cost of deposits. However, in Russia nobody is going to open a deposit at the interest rate of 3% per annum for the term of five years.

 

Such a situation may result in unjustified spending of funds and bankruptcy of the VEB because loans are to be extended at the rate which is lower than that on deposits. It is equal to throwing the money from a helicopter.

 

At present, it is more important to revive the economic situation: improve the business climate and stimulate investment activities. Russia’s main problem consists in low economic activities, rather than shortage of investment resources.  

 

As a result, there will be squandering of accumulated reserves, growth in the rate of inflation and instability of the exchange rate of the national currency.  

In addition to the above, promotion of consumer demand via reduction of the cost of loans to households is absolutely inadmissible in the existing situation.

Alexei Vedev, Director of the Structural Research Center

 

Monday, 26.05.2014