Growth Revival in the 2nd Half Year of 2015 Is Unlikely

On 2 December, the RF Ministry of Economic Development, represented by Deputy Minister Alexey Vedev, announced that it had revised its data on the results of Russia's economic development in 2014, as well as its forecast for the year 2015.

Thus, according to Mr. Vedev, the forecasted GDP growth rate for 2014 has been increased and now amounts to 0.6% on the previous period (vs. 0.5% before the adjustments to the forecast). The RF Ministry of Economic Development expects that, in 2015, Russia can be faced with decline at the rate of 0.8%, and the onset of recession will be seen as early as Q1 2015.
As Deputy Minister Vedev noted in his speech, this situation has been triggered by the continuing geopolitical tension (its manifestation being the economic sanctions introduced against Russia) coupled with uncertainty in investment expectations. As far as its general outlook is concerned, the RF Ministry of Economic Development has pointed out that the Russian economy is faced with 'three crises': a structural crisis (determined by fundamental growth factors growth), a situational crisis (the current trade conditions shaped by the recent movement of world prices of energy carriers), and a geopolitical crisis (associated with sanctions).

Indeed, our estimations demonstrate that, over recent years, the structural component of Russia's GDP has been shrinking due to the effects of fundamental factors, alongside the accompanying shrinkage of its foreign-trade and situational components (the latter responding, among other things, to the effects of accidental shocks and business cycles, and after 2010 remaining in the negative zone, which is the manifestation of the national economy's lapse into another, lower phase of the cycle).

At the same time, Deputy Minister Vedev agrees with experts' estimations and does not rule out the possibility that, after hitting the business cycle's rock bottom, the RF economy may, from the 2nd half year of 2015, make a U-turn towards growth as a result of increasing inputs of net exports and import substitution. In the medium-term perspective, the new trajectory of growth will be sustained by investment and consumer activity.

In our opinion, however, the prospects of growth with regard to net exports, investment and consumer demand in our present situation do not appear to be very realistic. It is not unlikely that after such a sharp drop in oil prices as occurred in the last few days after the OPEC's decision, they may once again begin to rise in the foreseeable future. But at the same time it has to be admitted that the world energy market is fluctuating in a frantic search for a new equilibrium, and in the current situation of increased supply on the oil market it is unlikely that the balance will be set at the same high level as before.

For Russia, the deterioration of foreign trade conditions means a strong blow to the national economy, and first of all to the federal budget. Therefore we believe that it would be overoptimistic to expect that Russia would return to economic growth as early as the second half of 2015, as energy carriers account for the lion's share of Russian exports.

As has been more than once noted earlier, import substitution - similarly to monetary factors (the ruble's exchange rate or interest rates) - cannot be a fundamental factor of economic growth, and so experts agree that its positive effect can only be short-lived.

As for growth in the medium-term, sustained by investment and consumer activity, such a prospect also appears to be too optimistic, especially in conditions of a worsening geopolitical situation, strengthening economic sanctions and huge capital outflow. Given the currently low quality of Russia's institutional climate, an inflow of new investment into the economy is unlikely even in the medium-term. Besides, one can hardly hope for a revival of consumer demand in face of a declining real income of the population as a result of inflation and depreciation of the national currency.
Thus - at least in the next 3 to 5 years - Russia can hardly be expected to move on to a new growth trajectory owing to the combined effects of the factors discussed above; we can only reiterate that this can happen only as a result of the emergence of some new growth factors (such as human capital), or the improvement of the quality of the already existing factors - something that can only be achieved through implementing in-depth structural reform of the national economy.

Maria Kazakova – Candidate of Economic Sciences, Head of the International Budget Sustainability Department