Sergei Drobyshevsky: “At year-end Russian economic recovery turned out to be faster than expected”

In his interview to the Interfax, Sergei Drobyshevsky, Academic Director of the Gaidar Institute summed up the economic results of 2021 and told about the main challenges to the Russian Economy in 2022 and government measures which needed to be taken to minimize risks and speed up economic growth rates.

Sergei Drobyshevsky noted that the Russian economy was recovering faster than expected in 2021. “The factors which facilitated recovery included a more favorable external environment (high prices of oil, gas, coal and agricultural products) and the release of Russian consumers’ pent-up demand on the domestic market: the money saved for trips abroad was probably spent inside the country as the prospects of spending holidays abroad any time soon largely diminished. So, almost all sectors saw higher-than-expected growth rates: some owing to exports, while others, to domestic demand,” the economist said.

In 2021, the main global challenge was record-breaking price rises in many years – in different countries the target was surpassed either by 100% or 200% or even more. In 2021, the Russian inflation rate exceeded 8%, though in the beginning of the year both the government and economists believed that it would be somewhat less than 4%. What was so wrong with their inflation forecasts?

“By our estimates, with such trends of global prices, the ruble exchange rate, Russian GDP and inflation expectations prevailing, it was necessary to raise sharply the key interest rate (up to 6.5%-7.5%) as far back as Q1 2021 in order to mitigate the inflation pressure; in doing this the negative effect on growth (with the release of pent-up demand accounted for) would not have exceeded 0.1 p.p.-0.2 p.p. of GDP increase, that is, growth would have been equal to 4.3%-4.5% instead of the expected 4.5%-4.7%. However, at that time it was impossible to predict precisely how the situation would unfold and take such an ex-post optimistic decision,” Sergei Drobyshevsky notes.

Inflation momentum raises the question of how and when to slow it down and whether the RF Central Bank should do its utmost to bring the inflation rate back to the target as early as late in 2022 or leave it till 2023 for the sake of economic growth? So far, the RF Central Bank has declared confidently that it intends to bring it back to the target as early as the end of 2022, thus trying by means of verbal interventions to reduce somewhat households’ strong inflation expectations.

“With the RF Central Bank carrying on this policy, I expect the key rate to be raised again by 0.25 p.p.-0.5 p.p. in February. This permits to achieve the rate of inflation of 5%-6% at year-end (and reduce the key rate to 6.5%-7.0% by the year-end). Consequently, in my view, the return of the inflation rate to the target is feasible only in 2023. A more aggressive upward adjustment of the key rate (or keeping it at a high level) in 2022 is unlikely to make it possible to achieve the target (by December 2022 – January 2023 in the best-case scenario), but will affect much more GDP growth rates with taking into account the absence of the recovery component and pent-up demand reserves,” Sergei Drobyshevsky predicts.

The weak ruble has become a typical thing in the past few years. In Sergei Drobyshevsky’s opinion, it can be largely explained the tense geopolitical situation.

“In our view, the current ruble exchange rate is Rb3-Rb4 below the fundamental one (with the current account balance and foreign exchange purchases within the framework of the fiscal rule taken into account). The main factor here is the sovereign risk premium amid increased geopolitical tensions and speculations about possible new sanctions against the Russian economy and its financial sector. From a fundamental point of view, even with depreciation of oil prices in 2022 (by our estimates to $60-$65 a barrel) the ruble exchange rate should tend to the level of Rb71-Rb72 per $1,” Sergei Drobyshevsky notes.

In terms of economic growth, the year 2022 will be difficult for Russia as lots of risks related to the pandemic and geopolitical environment persist. The tightening of the monetary policy will undoubtedly affect economic growth. The post-COVID recovery stage is over and growth rates will tend to the potential ones.

At the same time, in 2022 the global economic growth rates (by estimates 4.5%-5%) are most likely to be higher than Russia’s (2%-3%), which situation will create additional discomfort for the government in terms of the mismatch of this outlook and the national goals and urge the authorities to take additional growth-stimulating measures.

According to Sergei Drobyshevsky’s forecast, in 2022 Russian economic growth rates are expected to slow down to 2.2%-2.5% provided there are no external shocks and global risks to the economy.

“The main risks include a new aggravation of the coronavirus pandemic and, consequently, a new slowdown of the global economy or an outbreak of financial and debt crises in one of the world’s leading economic centers (the US, Europe or China),” Sergei Drobyshevsky believes.