Sergey Drobyshevsky, Principal Researcher at the Gaidar Institute, shared his views on the complex relationship between the cost of credit, the key rate, and long-term economic growth. In the commentary, he explains why a direct comparison of current high deposit rates with the returns on long-term investment projects is inaccurate, and points to the true, fundamental drivers of economic growth: productivity growth, healthy competition, and business initiative.
Dr. Drobyshevsky said that the relationship between the cost of credit, the key interest rate, and economic growth—especially long-term growth—is highly multifaceted and cannot be resolved with simple solutions. Indeed, at present, the key rate and deposit rates are high, but a direct comparison of these with the expected returns on investments in long-term projects is incorrect. The key interest rate reflects the current cost of money; while current deposit rates are high, the term of such deposits does not exceed six months, whereas when making investment decisions, companies typically consider a horizon of at least 1–2 years, and over such a horizon, a deposit is not a viable alternative to investment. According to statistics, credit resources finance about a quarter of fixed capital investments in the Russian economy, while the main source of investment is companies’ own funds. Loans, on the other hand, are mainly used to finance working capital and companies’ current needs; therefore, interest rates on loans may affect current, short-term growth rates, but have no impact on long-term growth. The example of subsidized mortgages is very illustrative in this regard—they fueled a housing construction boom in 2023–2024, yet this had no affect whatsoever on technological development in the construction sector, increases in labor productivity, capital expansion, or automation. When discussing long-term growth and the implementation of long-term investment projects, it is essential to compare the expected return on investment (which must exceed the target inflation rate, typically by 4–5 p.p., i.e., no less than 8– 9% per year; otherwise, the project is simply uncompetitive) with the average interest rate in the economy over the entire implementation period, rather than just the current rate.
Productivity in Russia lags behind that of the world’s leading economies and leading developing countries in virtually all sectors, from the aforementioned construction industry to the oil and gas sector; therefore, there is room for improvement across the board. In our view, the sectors with the greatest potential are those that currently have the opportunity to grow by supplying the domestic market with goods—manufacturing, petrochemicals, metallurgy and metalworking, construction, the electric power sector, and housing and utilities. It is important to understand that increasing productivity is not just about investing in new, expensive machine tools or equipment, but often involves changing management systems or improving production processes by optimizing working hours, equipment utilization, and logistics solutions.
Increasing the long-term growth rates of the Russian economy amid a shrinking labor force is possible both through capital accumulation and increased capital-to-labor ratios (including through automation in manufacturing and the service sector) and through growth in total factor productivity. According to our estimates, the contribution of total factor productivity to long-term growth currently amounts to no more than one percentage point, whereas in the 2000s, its contribution reached 3–4 p.p. Doubling productivity (to 2 p.p. of growth per year) could raise Russia’s long-term GDP growth rate from the current 1.5–2% to 2.5–3% per year.
Protectionism, however, has a limited impact—again, primarily on current growth rates rather than long-term ones. Competition should stimulate the emergence of competitive industries in the future, which will have a positive effect on long-term growth rates. Otherwise, protected sectors will remain uncompetitive and production in those sectors will decline every time import protections begin to weaken.
When discussing structural reforms capable of boosting productivity in the economy, it is important to note that the only solution that works in the long term is fostering the initiative of business owners (the state as an owner is no exception in this case, and depending on the talent of managers, productivity growth is possible even at state-owned enterprises) and competition among companies for market share. Most of the other measures under discussion are either not directly related to productivity—affecting instead the labor market or investment in fixed capital—or have short-term effects aimed at achieving higher indicators in the current period but do not influence the economy’s long-term growth rates.