Industrial manufacturers hope for a stronger ruble and lower taxes

Russia's industry entered 2015, facing totally new conditions. A double digit inflation, the sweeping devaluation of the national currency and the drastic increase in the central bank key interest rate can be distinguished among the "crisis-driven surprises" late in 2014. It is worthwhile noting that the Russian authorities were also responsible for all those "innovations".

Our monitoring shows that "the tax burden ease" remains the apparent leader in Russia's industry among the anti-crisis measures. This anti-crisis factor has been ranked 1st five of the six times, while the monitoring has been launched since 2010: it is only in 2011 that the industry's top demand was "limited growth of regulated tariffs".

However, it looks like manufacturers shouldn't recon upon positive response from the Russian government on this subject matter. The Ministry of Industry and Trade has recently put forward a revolutionary initiative of lowering taxes in exchange for intensive investment and growth in the industrial output. The principle of "cutting taxes in exchange for investment" looks totally reasonable in 2015, if the state's financial problems were disregarded and investment growth were focused on. However, a drastic cut of budget revenues and statements of cutting most of the items of expenditure earlier in 2015 "spell the death" on even slim chances that the real sector's tax burden will be eased.

Moreover, a new leader – "the appreciation of ruble's exchange rate" – has emerged in the ranking of anti-crisis measures. Fifty eight percent of domestic manufacturers "voted" for this measure in February 2015, as many as those who "voted" for the tax burden ease. Only 2% of the respondents favored a further devaluation of the ruble. That makes sense, indeed.

First, the monitoring of 2012–2014 showed that the industry, in contrast to some economists, didn't consider the ruble devaluation as positive measure, including any sharp devaluation similar to that in 1998, or a gradual one like that in 2008–2009. The former option was always supported only by 1–4% of enterprises, the latter by 10–13%.

Second, the Russian central bank exchange rate policy in 2014 and the shocking ruble's depreciation in December had turned the devaluation from the anticipated anti-crisis measure into the implemented one and allowed all to assess the actual effects thereof. The response of individuals who actively snatched up imported products in November–December, showed that households depend largely on imported electronic products, cars, apparel, etc. Industrial enterprises shared the same viewpoint, according to the data of IEP's survey in January (2015). While asked about obstacles to import substitution, most of the enterprises (62%) pointed to "the lack of domestically manufactured analogues of equipment and raw materials of any quality". Consequently, the overwhelming majority of enterprises will have little choice but purchase imported products, regardless of whether they wish (or not) "to purchase Russia-made products".

Hence the industry needs a "roll back " of the ruble's exchange rate. And such a "roll back" was seen, fortunately for manufacturers, in February–March 2015. Perhaps, the ruble's exchange rate would reach by the middle of 2015values more adequate for Russian manufacturers, along with crude prices and subject to a reasonable policy of the central bank. However, the ruble's depreciation in December and the replacement of the "modernization" slogan with a call for import substitution (which one of our respondents described as "storytellers and contortionists") have already entered the contemporary economic history of Russia. Perhaps, this would convince all the parties concerned that the support to domestic manufacturers shouldn't be linked much to the ruble's depreciation.
The demand for a stronger ruble is also supported by the increase earlier in 2015 of the Russian industry's demand for "exemption from VAT on imports of the equipment, materials and components which are not manufactured in the Russian Federation". One third of the enterprises have recently pointed to this factor, which can help them cut costs on imported products. The demand for this measure was 3-4 times less after the relatively small devaluation of the ruble in 2008–2009.

The ruble's depreciation weakened the industry's demand for other anti-crisis measures concerning "the import stranglehold in the Russian commodity markets": for example, only 9% of manufacturers favored a raise of import duties, against 26% in 2014.

IEP's multiyear monitoring of the efficiency of anti-crisis measures saw its logical end earlier in 2015: the Russian industry, according to the government and most of analysts, has finally entered a new crisis and needs government support. However, enterprises and government authorities differ in viewing most efficient measures.

First, most popular among enterprises and most universal anti-crisis measures have least chances to be implemented. One shouldn't recon upon tax cuts, the ruble's exchange rate isn't capable enough to get much stronger, because the government authorities have neither sufficient resources, nor the will to do it.

Second, the solution of credit problems for the real sector of economy resembles more a "correction of the mistakes" committed late in 2014. The cut of the central bank key interest rate may ramp up inflation which seems to have started to decelerate. Selective decisions on interest rates subsidization, state guaranties and project financing are limited in many ways and driven by bureaucratic subjectivism. The stimulation of demand for products has ceased to be necessary for a majority of enterprises.

Sergey Tsukhlo, Ph.D. in Economics, the Head of Business Surveys Laboratory.

The commentaries are based on Sergey Tsukhlo's article written for RBC.