Despite some positive indicators in the Russian economy, it badly needs structural reforms to resume stable economic growth.
From left: Central Bank of Russia Governor Elvira Nabiullina, Alexey Kudrin, a member of the Moscow Stock Exchange's Supervisory Council, and Alfa Banking Group CEO Pyotr Aven attend the Stock Exchange Forum 2016. Photo: RIA Novosti
For nearly two years, the Russian economy has been in recession. During this time, domestic and foreign think tanks have competed with each other to see who could predict the most dramatic decline of the Russian economy against the backdrop of falling oil prices and international sanctions.
However, by the end of spring 2016, the situation has changed. Many figures that measure economic performance of the country have changed from negative to positive. That, in turn, has also changed the nature of the forecasts, which no longer sound so apocalyptic.
On the contrary, many experts quite confidently see the proverbial light at the end of the tunnel, and predict that the Russian economy will resume its growth.
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Signs of hope for Russian economic growth
Economic officials within the government insist that the downturn in the Russian economy has been stopped. In the second half of May, the Minister of Economic Development Alexey Ulyukayev announced that the Russian economy had emerged from recession in the third quarter of 2015, and there is no reason to believe that it will re-enter it.
Earlier, the Ministry of Economic Development reported that, according to preliminary estimates, Russia’s gross domestic product (GDP) in the first quarter of 2016 decreased by 0.2 percent (excluding seasonal factors), compared to the fourth quarter of 2015. According to Rosstat (Russia’s state statistics agency), Russia’s GDP fell by 1.2 percent in the first quarter of 2016 on a year-over-year basis.
Of particular significance is that these indicators are significantly better than analysts expected, and even better than the government officials predicted. Initially the Ministry of Economic Development predicted that Russia’s GDP would contract by 1.4 percent in the first quarter of 2016. Similarly, the consensus forecast produced by Bloomberg predicted a negative GDP growth rate of 2 percent for the same period.
Given that, it can be argued today that if such a trend continues during 2016, GDP growth rate could be zero, or even it can see a slight increase by the end of the year. After the Russian economy contracted by 3.7 percent in 2015, this would be a big step forward.
Many independent experts have also started to give positive forecasts for the Russian economy. For example, analysts at Capital Economics are saying that the Russian economy has already passed through the hardest period, based on their evaluations of the first quarter of 2016.
What to expect for the rest of 2016?
The current dynamic of Russia’s macroeconomic indicators allows making very optimistic forecasts given the trend of the last two years. Economists at Sberbank CIB Yevgeny Gavrilenkov, Anton Struchenevsky, and Sergey Konygin have noted that, “The local economy has reached its bottom.” Even if GDP remains at the current level, its annual dynamics in the period from April to December 2016 will fluctuate around the zero mark, they said. It is very likely that GDP in 2016 will not be negative.
Moreover, some analysts are expecting that “the actual results will be even better.” There are several reasons for that. Among the major sectors of the Russian economy, only the retail segment contracted in the first quarter of the current year (compared to the year-earlier period). Construction and transport sectors remain unchanged, while manufacturing and agriculture growth rates increased, compared with the previous quarter.
So, if the decline in retail trade will stop and the current dynamic in other sectors of the economy remains the same, quarterly GDP might start growing.
For its part, Russia’s Ministry of Economic Development believes that industrial production for the year will deliver positive results. Rosstat data for the first months of the year shows that a number of industries in the real sector of the economy are already showing positive results, such as food processing, chemicals, gas and petrochemical industry, production of fertilizers, and certain types of equipment.
In general, industrial production rose by 0.5 percent in April of 2016, compared to the same month in 2015, according to Rosstat. However, this is not yet growth, but already not a decline.
IMF and EBRD forecasts for the Russian economy
According to the recent assessment made by the International Monetary Fund (IMF) mission in Russia, the country’s GDP should grow by 1 percent next year. The IMF expects stabilization of oil prices and improvement in the country’s financial situation, which will help to resume economic growth.
According to the report, the economic contraction was smaller than in the previous periods, due to the package of measures implemented by the government – including the transition to a flexible foreign currency exchange rate, increasing liquidity in the banking sector, limited fiscal stimulus, and the abandonment of strict regulation. The IMF mission noted a significant slowdown in inflation, due to the weakening of economic activity, and tight monetary policy designed to limit the growth of incomes.
The European Bank for Reconstruction and Development (EBRD) is also looking with optimism at the Russian economy. The head of the EBRD Suma Chakrabarti recently noted that the decline in the Russian economy might well be replaced by growth in the next eighteen months.
Four percent GDP growth by 2020?
Meanwhile, the Ministry of Economic Development has finalized the draft of its macroeconomic forecast for 2016-2020. According to the ministry’s estimates, GDP is expected to grow by 4 to 4.5 percent annually by 2019. The government version of the forecast was presented by the Chairman of the Council of the Center for Strategic Research, ex-Finance Minister Alexey Kudrin and Minister of Economic Development Alexey Ulyukaev.
Both economists believe that, given the lower oil and gas revenues, the government expenses should be cut. The goal is to achieve an annual reduction of federal spending by a minimum 5 percent in real terms through 2019. Simultaneously, wages will rise at 50 percent of the inflation level.
Additionally, the mobilization of all possible additional resources must be accomplished, such as attracting domestic and foreign credit financing, and privatization of state property.
As always, implementation of all those steps is quite challenging.
Where to get money for investment?
The key question remains: Where will investments into the Russian economy come from, given that the government is running out of budgetary funds while international sanctions are restricting financial activities of domestic companies and banks in the global markets.
Alexey Kudrin confidently suggests using the internal resources of the companies. According to him, Russian companies have accumulated free capital in their bank accounts comparable with their annual investment needs. “That money is even cheaper than bank loans, because they belong to the companies, but they are not invested,” he says.
Kudrin’s opinion is shared by presidential aide Andrey Belousov, the well-known economist Abel Aganbegyan, and many other economists, who all agree that companies have enough funds to allocate for needed investments.
In 2015, the net financial result (profits minus losses) of Russian domestic enterprises (excluding small businesses, banks, insurance companies and state budget institutions) increased by 53.1 percent, climbing to 8.4 trillion rubles (about $127.3 billion at today’s exchange rate). Thus, in fact, a reserve of several trillion rubles has been created in the Russian economy. This year the trend continues.
But will this money be directed to business development, or remain in bank accounts earning interest? The answer depends on how business leaders will evaluate the near future. Today, judging by expert comments and the state of mind of businessmen, bankers and investors, their expectations are becoming more positive.
Structural reforms are badly needed
For the Russian economy to move to sustainable growth, the IMF recommends carrying out structural reforms, in order to ensure the necessary inflow of investment.
According to IMF experts, the necessary institutional improvements should be made, aiming at reducing the administrative burden on business and the protection of property rights.
The IMF also considers it would be beneficial for Russia to improve the structure of the domestic labor market, by increasing the mobility of the population and achieving a balance between supply and demand, as well as raising the retirement age. Besides, the IMF recommends continuing investing into the innovative sectors of the economy, into energy systems and the transport infrastructure.
Talking to Russia Direct, Nikita Maslennikov, adviser to the Institute of Contemporary Development, also mentioned the need to carry out structural reforms. “Quality not quantity of the growth is important for economy. If we do not implement structural reforms we will be locked in the 1.5-2 percent GDP growth rate for many years,” he argues.
“Should oil prices remain at $45-50 per barrel, while the country launches structural reforms to improve investment climate and stimulate investment growth, the Russian economy could show positive growth even this year,” suggests Yaroslav Lissovolik, chief economist of the Eurasian Development Bank. According to him, the improved expectations have become possible not only due to a rise in oil price to $50 per barrel, but also thanks to certain success achieved in the government’s declared policy of import substitution, especially in agriculture and food production.