Two scenarios of Russian economic development

Experts of the Higher School of Economics presented two scenarios of Russian economic development for the next three years to the government. Some say “one is realistic and another is bad,” others – “one is bad and another is very bad.” Both of them predict a drop in GDP, devaluation and capital outflow.

Sergey Aleksashenko, Head of Macro-Economic Studies of the HSE

One of the ugly political-economic trends of recent months was the fact that our authorities – the President, Prime Minister and ministers – speak about the crisis too often. If everyone keeps saying “crisis, crisis, crisis,” the crisis will come. We depend on the situation in the world, but the Russian economy has its own fundamental potential, and the economy should develop relying on this potential.

If we compare the situation with previous crises, the world economy is overcoming the crisis much slower, it is much weaker. The blow to the world financial system turned out to be quite strong, and revival of the financial sector will be slow. The pace of industrial production in the developed countries is becoming slower. And here we can see a balance: the eurozone is losing a bit, the American economy is gaining a bit, and economic growth in China is dropping. Unemployment is slowly growing in the eurozone, because the crisis phenomena in Italy, Spain, and Portugal are improving, while the German economy is slowing down. In other words, the Russian economy will face a not very favorable situation. That is why we should pay attention to the Russian economy and try to understand its reaction to the various consequences of the crisis.

Natalya Akindinova, head of the Institute of Development of the HSE

If we look at the pace of the Russian economy from year to year, it seems to be adequate. In the first quarter there was GDP growth of 4.9%, in the second quarter – 4%. But if we exclude the seasonal factor and look at the pace of growth from quarter to quarter, it becomes clear that the Russian economy is shifting into low gear. In the last four quarters the pace of growth from quarter to quarter decreased, in the first quarter down 1%, 1.1% in the fourth quarter, in the second quarter there was only 0.1% growth. The sources of growth in the Russian economy do not approve themselves. In the context of such an unstable foreign situation, this is crucial. First of all there is a negative dynamic of investments. Investment growth also slowed after the first quarter of 2012. A growth pattern relying on investments has not been implemented yet. We still rely on consumption. We have good enough results in the first quarter due to monetary policy, increase of expenditure and shifting a major part of expenditure to the beginning of the year. At the moment these effects haven’t been exhausted, but the growth in consumption is explained by a rise in loans, rather than by growth of population income. At the moment, the pace of loan growth has reached 42.3%, which is close to the indices observed ahead of the crisis in 2008. Therefore, we can speak about an overheating of the consumer lending market. In the context of weak dynamics of the economy, this sector is growing rapidly. At the same time, the population prefers to consume than to save. It means banks and the economy get few resources for investment financing. In the first half we observed low inflation. For the first time in a long time, natural monopolies’ tariffs were not indexed at the beginning of the year, but from July this default will be corrected. In July annual inflation began to speed up, and the effect of a devaluation in May contributed to this. Basic inflation is speeding up, i.e. the price growth for a consumer basket. Also the growth of world prices for food is important. This will also influence inflation.

Sergey Pukhov, Senior Scientist of the institute of Development Center of the HSE

I expect a devaluation of the ruble by the end of the year. It seems the Bank of Russia is preparing for this: it has extended the limits of the currency band by 50 kopecks in each direction and has decreased the volume of accumulated interventions which led to the change of currency band limits from 50 million up to 450 million. The key factor which can lead to devaluation are the premises connected with oil price stagnation. If oil prices are at the level of $100, we will see a seasonal decrease in exports and a seasonal increase in imports. Against the background of trade deficit growth, this tendency will lead to the fact that currency inflow will decrease to simple numbers. In the first and the second quarters they were about 50 billion in total. If capital outflow remains at the same level, this will lead to a decrease in reserves of $30-40 billion. To change the scale of the outflow we should remember the principle of the currency band – every 9 billion the reserve decreases is one ruble of devaluation of a currency basket.