Russia lacks financial policies to support economic growth

By Vestnik Kavkaza
Russia lacks financial policies to support economic growth

The Russian economy will go on heading downwards, and the recession will continue as well. The Bank of Russia published such a forecast. “The statistics on industrial production in December show that a reduction of production in the main types of economic activity will continue. This confirms concerns about a long-lasting recession in the Russian economy, which will be worse than has been predicted earlier… It seems the economy will go on heading downwards in the next few months,” RBK cites a note by the Department for Studies and Forecasts of the Bank of Russia. In the context of low oil prices, the Central Bank predicts “continuation of unstable dynamics in industries for the first six months of 2016.” As for oil prices, the note by the Central Bank stresses that oil prices might be “stuck” between $20-40 for a long time.

Sergey Glazyev, Academician of the Russian Academy of Sciences, a Presidential Advisor, says that without solving the problem of providing loans to the production sector, a way out of the economic depression is impossible: “With the interest rates that are currently available on the market, loans for the majority of industrial enterprises are unavailable. And it's a huge problem that must be addressed for economic growth, because from the standpoint of economic theory, loans are a mechanism for advancing economic growth.”

Glazyev says that a loan is primarily a function of economic growth, a mechanism of advancing economic growth that does not mean you have to fill the economy with money: “The Central Bank should create long-term loans for working capital and investment to build production plants. After all, the key to economic growth is a rise in investment. The lack of loans for most sectors of production is complemented by a serious technological backwardness. A growing technological backwardness of our economy is taking place, as well as low efficiency and productivity, hence the lack of competitiveness. All of this rests on a lack of investment, which is still half what it was during the Soviet period. That is, the volume of investments in the economy does not allow even simple reproduction to be provided, and without any increase in investments there cannot be economic growth. But the key to solving this problem again is connected with the creation of loans,” the expert is sure.

According to him, in a situation where the Central Bank maintains artificially high interest rates and, in fact, does not provide long-term money to the economy, everything is reduced to short-term refinancing operations for a week at high interest rates. “Manufacturing industries are forced to curtail production. They are under pressure from the loans. The share of loans for working capital of enterprises, according to various estimates, is up to half. So when interest rates exceed the rate of return, enterprises, in fact, have two options – either to curtail production or to raise prices. Therefore, without solving the problem of crediting the production sector within the normal conditions for a company, a way out of the economic depression is impossible,” Glazyev thinks.

He states that other countries are actively engaged in increasing long-term lending to their economies: “The amount of money has risen in the advanced countries of the world. Together, they have tripled their monetary base since the financial crisis. We attribute this to a new phenomenon that has emerged over the last 10 years with the so-called monetary and industrial policy… The monetary authorities of the leading countries of the world have gone the route of so-called quantitative easing, that is, they gave loans to the economy as much as it was able to swallow and even more. At the same time, they manage to keep inflation low. 20-30% of the cash flow goes to innovative technologies, allowing them to rise.”

“We began to work with LEDs simultaneously with the Americans. They produce 7 billion today, and we produce 7000, although we could take this niche. It's all due to the fact that there is no money for innovative projects. But there is no money because the country lacks the financial policies to support economic growth,” the economist says.