Investors Are Scared by the Institutional Problems Plaguing the Russian Economy

Today, RF President Vladimir Putin opened the annual press conference by saying that in 2013, Russia’s budget deficit will amount to approximately 0.5% of GDP.

According to Mr Putin, the reserves created by the additional revenue resulting from the favorable situation with regard to prices for energy carriers, given the practically zero deficit achieved in 2012, will make it possible for the government to maintain stability in its social policy. At the same time, the previous target for the 2013 budget was more pessimistic, being set at 0.8% of GDP. Meanwhile, as noted by a number of experts, the budget deficit index (similarly to the amount of government debt) cannot be the only indicator of fiscal sustainability because it does not take into account some hidden budget liabilities – namely expenditures over future periods.

One of the indicators that, given certain preconditions, may make it possible to estimate only some aspects of a budget’s sustainability is the presence of a fiscal gap. A fiscal gap is essentially an indicator of misbalanced budget policy, it reflects the value of future government expenditure that is not properly set off against future revenue. As noted in a recent study conducted by the Gaidar Institute’s International Department for Budget Sustainability Studies in cooperation with the RANEPA, under a basic economic development scenario the Russian Federation’s fiscal gap in the long run will amount to 8.4% of the net present value of Russia’s expected GDP. Such a high figure can be explained, on the one hand, by the increasing budget expenditure caused by population ageing, and by the shrinkage of oil and gas revenues, on the other. There is no doubt that that resulting figure must be interpreted only with due regard for the preconditions taken into account when making the relevant calculations. Nevertheless, we believe that it deserves some consideration when drawing relevant conclusions as to how well-balanced the current budget policy is, and making decisions in that sphere.

It has become evident that, if Russia does not depart from its current economic growth model, budget deficit will continue to increase, even if oil prices remain at their present high level. It should be noted that GDP growth in 2013 in the Russian Federation will be at the rate of 1.4-1.5%. With the exception of the ‘disastrous’ years 1998 and 2009, this growth rate will be lowest it has been since 1997.

Source: Rosstat; RF Ministry of Economic Development
Fig. 1. Russia’s GDP Growth Rate (As a Percentage of the Previous Year) in 1996-2013

In this connection, criticism of the RF Central Bank’s monetary policy has been expressed with increasing frequency. For example, Andrey Belousov, Assistant to the President of Russia, believes that high interest rates ‘kill investment’, so it is necessary to address the issue of their possible reduction.

However, in our opinion, investors are discouraged not so much by expensive bank loans as by the institutional problems of the Russian economy (corruption, lack of investor legal protection mechanisms, etc.).

First, the real value of borrowed resources is reflected not by the rate of refinancing, but by the interest rate on short-term interbank loans, which throughout the 2000s was fluctuating near the bottom margin of the RF CB’s interest rate corridor (in real terms, its value was negative), except during the peak of the crisis when it surged above 6%. At the same time, the inflation rate never dropped below 6%.

Secondly, when set against the situation in other countries, the real interest rates on bank loans in Russia are by no means high, and in the pre-crisis period they were among the world’s lowest.

Thirdly, the economic growth rate in Russia is not declining due to high interest rates – the real reason is the lack of internal sources of economic growth. In conditions when the pre-2008 economic growth model has fully exhausted its potential, the continuing dependence of the Russian economy on the movement of world prices for energy carriers acts as the main factor determining the actual GDP growth rate (just as it did during the economic recession of 2008-2009); given the current low level of oil prices, we believe that this rate could have been much lower. 

Thus, the presently observed low rate of economic growth has by no means been pushed down by monetary factors. In our opinion, the focus of attention now must become reforms aimed at boosting economic growth factors – in particular, in the social sphere (education, healthcare, the pension system) – the sphere responsible for human capital quality which, in its turn, is one of the main triggers of economic growth, and interest rates are only a factor of secondary importance (unless there occurs a threat of a serious business cycle contraction).

M.V. Kazakova – Candidate of Economic Sciences, Head of the Economic Development Department, Deputy Head of the International Budget Sustainability Department