Note kindly translated by Anne-Marie de Grazia
We have indicated, both in a previous note[1] and the interview given to the Valdai Club[2], the geostrategic as well as the domestic stakes of the visit of President Putin to his French counterpart. The stakes are high for both men, even if they are not at the same level for both. It is fitting at this point to examine the present situation of Russia and of the Russian economy. Russia is emerging from the 2015-2016 recession. Yet, the circumstances of this emergence remain blurry.
The situation of Russia
Russia got itself out of recession during the second semester of 2016[3]. The relation between the creation of income and of demand (goods and services) on the domestic market, such as it was reached in the autumn of 2016, created conditions, which were very favourable for growth beginning to pick up again. And this is what has been noticed, in particular on this carnet, as early as the beginning of autumn. This situation began to become manifest in the manufacturing sector. We had noticed as early as the second semester of 2016 the relatively strong growth in industry, whereas the service sector remained far less affected by this process. The rhythms of growth during the fourth quarter of 2016 were at a level such that they could bring about a positive tendency for the year 2017, and they conditioned the forecasts made at the Central Bank of Russia and in the government services. These numbers explain the good results of the 2nd semester, as well as the re-evaluation of the results for 2016, for which the GDP is now being credited with -0,2%, whereas the first measurements, which had not yet integrated all the results of the 4th quarter, showed a recession at -0,5% / -0,8%.
However, at the beginning of 2017, this tendency to growth has not be sustained. We notice that the acceleration of growth all along the economic chain, with, in particular, effects of a transmission of momentum which should normally show up between industry and the service sectors has not yet taken place. If growth seems to be continuing in the manufacturing industry, exception being made for the fossil fuels extraction, and if the purchase of equipment goods (described as « capital » goods) are in strong growth in imports, there is not yet any diffusion of this state of affairs to be seen in the rest of the economy. As a result, economic recovery continues to be a critical point of the economic policy. This theme will go on to animate debates among experts as well as in newspaper columns well during this summer.
In a general way, this dynamic of the beginning of the year could put into question the growth in GDP, which is presently estimated at 1.5% by the Central Bank of Russia and by the Government for 2017.
Graph 1
Source : Institute of National Economic Forecasts – Russian Academy of Sciences
However, the Russian government has made a rapid return to strong growth (equal or above 2%) one of its political goals. We must therefore expect that the debate on the economic policy of the government will not be limited to experts and journalists, but will turn into a true political debate within the government itself.
The strong decrease in inflation, and its consequences
In the same time, the deceleration in inflation has been spectacular. Inflation fell in April at 4.2% in annual rate. The Central Bank of Russia (CBR) has therefore duly taken note of the very strong slowing down of inflationist tendencies, but also of the movement of appreciation of the rouble. It has decreased the CBR lending rate twice since March, one time by 25 base points (0,25%) the other by 50 base points (0,50%). The basis rate has gone therefore within a few weeks from 10.00% to 9.25%. However, taking into account the present rate of inflation, the decision of the Central Bank to lower its lending rate should not be interpreted as a softening in its monetary policy. The policy of the CBR remains in the present state of things extremely restrictive, with a real base rate at 5.05% (9.25% – 4.2%). We also notice, when looking at other rates[4], which, as far as they are concerned, evolve in the direction of a decrease, while still remaining at very high levels. The policy of the CBR will therefore remain restrictive not only in order to maintain the decreasing momentum of inflation, or at least to stabilize it around a goal of 4%; but also in order to forestall any new speculations on the exchange rate.
However, there is reason to explain the optimism, or what is viewed as such, of the experts of the CBR concerning the macroeconomic situation of Russia. This optimism can be verified in the case of the evolution of the rate of inflation, as well as of the evolution of the rate of growth. As far as the rate of inflation is concerned, these experts are relatively convinced that it will stabilize around 4% coming summer (estimates vary between 4.3% and 3.8%). As far as prices are relatively foreseeable, and companies control their costs well, these estimates remain robust, in the absence of any new blow from outside. It’s on growth that the optimism of the CBR appears to be most surprising. The CBR estimates at present that the growth rate will be above 1.5% in 2017, and advances a rate of 1.8% as being probable. Yet last januay, it was counting on growth being rather around 1% to 1.2%. This readjustment, without being considerable, is however sigificant. It has been said that it could be explained up to a point by the good results registered for the 2nd semester. Will the more mixed results of the beginning of 2017 lead the CBR to revise its estimates for 2017 once again?
The debate on this point between the experts of the CBR and those of the various research centers at the Academy of Sciences is important.
The short-term growth factors
The experts of the Academy of Sciences (many of whom work within structures in direct relation with government instances) insist on the necessity of maintaining the increase in the income of households, the increase in public spending, and the system of bonified credits which allows companies to return interest rates which remain extremely high. If we now look at the longer term, growth will only be able to be maintained at a relatively high level if progress is being made in the efficiency of the investment process, and if, more generally, the public powers (the Federal State, but also regional authorities) improve the efficiency of their economic interventions.
But short term measures, as far as they are concerned, imply an expansionist budgetary policy, and above all, that the State’s income remain in constant increase. It is true that the budget has been conceived for a price of oil around 40-44 USD per barrel (BRENT index), which appears at present to be excessively pessimistic. The expenditures of the consolidated budget have increased by 16.1% in year to year shift. The costs of social security (mainly connected to the payment of pensions) have increased by 67%. This increase is connected with a one time payment of a sum of 5,000 roubles to every retiree in January 2017. The financing of the costs of housing programs have also significantly increased (+ 29%) as well as subsidies to the national economy (+ 11%, 15% of which going to the road networks), whereas the increase in defense spending has been lower (+ 9%). We can see, in the strong increase of expenditures for maintaining economic activity, the weight not only of the programs of infrastructure, but also of the bonified credits. This system is indisputably efficient, and the companies which benefit from it obtain interests rates between 3% and 7%, as against 11% for the best credits in the « non-bonified » sectors, to be compared with the inflation rate at 4.2%. But it costs the budget dearly.
The factor with the most important incidence on the dynamics of the Russian economy in 2017 will indisputably be the expansion of domestic demand. From this point of view, the dynamics of real salaries is interesting. But it is exclusively carried by the private sector. The difference of incomes between the public sector (federal and regional government employees, semi-public companies) and the private sector is on the rise.
Graph 2
Dynamics of actual wages in Russia
Source : ROSSTAT
If the increase in pensions and retirement pensions is a good point in favour of the expansion of domestic demand, this raise remains insufficient for creating a significant impact on demand. Nevertheless, one notices sharp indications of the will of the population to increase its purchases of durable goods (automobiles, housing). What seems to be putting a break to this willingness is the cost of credits to consumption and housing credits. The extension to the general population of the system of subsidized credits being unthinkable, this implies that important pressures will have to be put on the Central Bank as well as on the banking system, so that the interest rates for households can be lowered to around 4%-5% in real terms.
The Russian government will not be able to do without a debate on the economic policy of the country. It cannot, at present, be content with following the slope of facility and of monetary orthodoxy, which it has been following for two years now. If it really wants Russia to find back to a strong growth, as it has indicated in many instances, it will have to take strong decisions in matters of monetary policy as well as of budgetary policy, but especially it will have to take its responsibilities and not hide behind the professed « orthodoxies » of various institutions, or behind the Central Bank.
[1] https://russeurope.hypotheses.org/6038
[2] See https://russeurope.hypotheses.org/6048
[3] See https://russeurope.hypotheses.org/5568
[4] Overnight loans; Lombard loan; REPO; Loans guaranteed with non negotiable assets or guarantees.
