Russia in the context of three crises

By Vestnik Kavkaza

The World Bank thrice worsened its forecast for the dynamics of Russian GDP for 2015 due to consistently low oil prices; it expects a decline of 2.9% instead of the previous 0.7%. “Consistently low oil prices weaken economic activity in exporting countries,” PRIME cites a report by the WB. For instance, the decrease in Russia's GDP in 2015 will be 2.9%. In 2016 the Russian economy “will return to positive indices with difficulties.” The WB expects growth of 0.1%. In 2014 economic growth slowed by 0.7% in Russia. According to the WB, tense relations with Ukraine, sanctions and falling oil prices coincided with a structural decline, even though in the last quarter of 2014 – after a drastic fall in the middle of the year – devaluation of the ruble and a growth of budget expenditures supported exports and industrial production.

Meanwhile, according to Vladimir Mau, Rector of the Academy of National Economics and Public Administration, countries which rely on exports of natural resources usually cannot achieve a high level of industrial development. At the same time, he says there are two countries which are exceptions: “There is a resource-based economy with strong institutions – this is Norway; it got resources, being already a very industrially developed country. There were modern, developed institutions. Another example is Saudi Arabia, but this is an absolute monarchy where future generations have certain names of members of the ruling family.”

“A country which has rich oil and gas resources usually has weak institutions, as the weakness of the institutions is compensated for by unearned profits; it is a kind of trade-off which is real. One can complain that he cannot use unearned profits to build a strong institution. Nobody can use it to build a strong institution. It can be explained economically, through “Ditch disease”, or psychologically – why should we fly to space if everything is alright, as the Soviet joke went,” Mau states.

However, he thinks that the crisis will encourage Russia to carry out the necessary reforms: “All serious reforms have been provided in Russia in conditions of low oil prices.”

According to the expert, the current crisis situation consists of several separate crises which have happened simultaneously – internal Russian and international ones. The global structural crisis of Europe, the crisis of deep systemic transformation of leading countries, the external shock of sanctions and falling oil prices, and the situation of a low phase of the investment cycle.

“These are three different crises,” Mau says. “The complicated nature of the crisis makes decision-making to settle it more difficult. For example, if it is a low phase of the cycle, Keynesian methods are usually used for extension of state investments. If there is external shock, the economy should be balanced, extra expenditures should be avoided, and the situation should be consolidated. We have both. It makes the situation double difficult.”

The expert says that in this situation “monetary encouragement shouldn’t be provided, as we are not Europe. We have the opposite situation to the European one – a rather good budget and a very bad monetary situation. We have stagflation which leads to deflation. And it demands contrary decisions. We cannot stimulate the economy with money.”