It Cannot Be Realistically Expected That under Current Conditions Russia’s Economy Will Be Able to Achieve a 5.5% Recovery Growth Rate in 2017

Yesterday the Bank of Russia published the December 2014 issue of its Monetary Policy Report, which contains a revised version of the 'stress scenario' for the development of Russia's economy, previously developed by the Bank's experts.

The Report envisages that global oil prices will decline to 60 USD per barrel and that other negative factors (including the tense geopolitical situation, the sanctions imposed on Russia, and the absence of the major factors that form the foundation of modern economic growth) will retain their influence. According to the RF CB, under this scenario, Russia's GDP can drop by 4.5-4.8% in 2015, compared with 2014, while in 2016 it can dwindle by 1% on 2015.

The consequences of such a dramatic fall in oil prices will be mitigated by specially introduced reactive budget policy measures: thus, in accordance with the budgetary rule, the sharp decline in federal budget revenues (and the insufficient availability of deficit financing sources) will be compensated for at the expense of Russia's sovereign wealth funds.

The Report notes that Russia's economic downturn will be short-lived: it can give way to recovery growth at a rate of 5.5-5.8% as early as 2017, even if oil prices remain at low levels. Such a growth rate can be achieved if the Russian economy properly adjusts itself to the harshly deteriorated external economic environment by promoting import substitution and making use of the rise in the competitive capacity of Russian exports, resulting from the ruble's weakness.

The new version of the RF Central Bank's 'stress scenario' is more pessimistic than the previous one. It should be reminded that the CB's 'worst case scenario', issued in early November 2014, envisaged that oil prices would decline to 60 USD per barrel by the end of 2015, which would result in Russia's economy shrinking by around 4%.

The Report's pessimism is well founded: the GDP decline expected in 2015 will be caused by both the absence of internal resources for growth and the deterioration of the external economic environment (trade conditions) and the geopolitical situation. Thus, according to Gaidar Institute expert estimates, in 2015 the growth rate of the Russian economy will be negatively affected to a considerable degree primarily by the foreign-trade and market-situation components of GDP growth. The foreign-trade component's departure into negative territory can be explained by the ongoing sharp drop in world oil prices, which has pushed the actual price of oil below its multi-year average.

It should be mentioned in this connection that Russia managed to exit the 2008-2009 crisis after having suffered only a small loss in her economic growth rate purely because the drop in oil prices accompanying that crisis was short-lived, and their average annual level during that period remained high (above its multi-year average). However, as has been repeatedly stated by experts, it is unlikely that a new future equilibrium on the global oil market can actually emerge at a level as high as that observed over recent years. The Russian economy can indeed exit the current recession by resorting to import substitution and relying on the growing competitiveness of Russian exports. However, it should be remembered that unless Russia undertakes serious economic policy measures designed to stimulate economic growth, her escape from recession will be due exclusively to the weakening of the ruble, and so it will be short lived, because the afore-listed factors cannot be seriously viewed as fundamental drivers of Russia's long-term economic growth.

Moreover, it is indeed difficult to imagine how the growth rate of Russia's GDP can be increased to 5.5% per annum by 2017, even if this increase will be a purely recovery growth resulting from the economy's adaptation to new conditions. The aim of achieving a 5.5% GDP growth rate by 2017 seems especially utopian against the background of today's decision of the main financial regulator to increase its key rate to 17%, which would automatically deprive the banking and real sectors of access to loans at a time when their own finances are at a low ebb. According to RF CB Chairman Elvira Nabiullina, 'We have to learn to live in a different zone, to orient ourselves more towards our own sources of financing, and to give a chance to import substitution'.

There can be no doubt that Russia's economy must find a new equilibrium in her palpably deteriorated internal and external environment. At the same time, it should be remembered that, for the time being, Russia has practically no internal impetuses for economic development. Therefore we believe that, in the current situation, import substitution alone cannot suffice for Russia to achieve a 5.5-5.8% economic growth rate per annum over the course of the next two years.

All these observations emphasize Russia's urgent need to develop an economic policy focused on reducing her dependence on raw-material exports and on promoting the advancement of the major factors that form the foundation of modern economic growth, including such new factors as human capital (to achieve this end, Russia will have to carry out major reforms in the social field) and diversification of the economy. Russia will also have to increase total factor productivity (according to our estimates, its growth in 2015 may be equal to zero), including the quality of her institutions (such as the judicial and law-enforcement systems, etc.).

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