Russian economy already in crisis. Source: ITAR-TASS
The latest developments in the Russian economy make it unmistakably evident that the crisis is already here and large-scale counter-measures must be taken now, analysts say. They believe that government investments, budget deficit and a reduction in military spending would help push up economic growth rates.
The Economic Forecasting Institute of the Russian Academy of Sciences has published a quarterly macroeconomic preview to offer its vision of the causes of the slow-down of economic activity in Russia. The experts believe that “the ongoing developments in the economy can already be described as a crisis – of mechanisms of growth and economic management.” They blame the crisis on shrinking foreign demand and on harsher monetary, credit and budgetary policies.
“The current developments already require large-scale anti-crisis measures and an active economic policy,” the document says. The resource base of Russia’s commercial banks should be increased in order to maintain the current overheating of the retail loans market and provide credits for companies. The other growth mechanism that should be employed is a build-up of government and quasi-government investment (companies that are entirely or partially owned by the state provide up to 40 percent of capital investments).
As a matter of fact, the institute’s experts believe that the macroeconomic postulate price stability should enjoy priority over quick economic growth is very wrong, says the daily Kommersant. The authors of the analysis warn that today is not the right time for more monetary experiments.
The Economic Forecasting Institute expects a growth of oil prices to $122 per barrel in 2015, but at the same time it predicts a slowdown of economic growth to 2.2 percent and a stable inflation of six percent in the same year. In other words, the think tank foresees no forthcoming changes to the structure of the economy or the quality of the business and investment climate. They point to the likelihood of a reduction in the accumulation of capital assets, low growth in labour productivity and lack of an influx of direct investments. This is precisely what they describe as the crisis of economic management.
Experts at the Development Centre of the Higher School of Economics see eye to eye with their EFI colleagues. According to their estimates, the quarterly rates of the GDP growth in Russia have been steady on the decline since the middle of last year. The bad investment climate and slowly growing demand has caused investment to shrink since the beginning of the year, while the rate of capital flight has been soaring. The next outflow of capital has already exceeded 90 billion dollars and no end of this trend is in sight.
The macroeconomic forecast contained in the draft budget for three years to come is unrealistic, experts at the Higher School of Economics said. Economic growth in the country may grind to a halt by the end of this year. Even if the world economy keeps rising slowly and oil prices stay high, Russia will show a GDP growth rate of no more than 1.3 percent in 2015.
The Higher School of Economics sees four ways in which economic growth can be accelerated. An improvement in the institutional environment and Russia’s rise in the annual rating of global competitiveness IMD by one point would surely guarantee an acceleration of GDP growth. Another proposed measure would be giving up the idea of a balanced budget by 2015 and preservation of the deficit at a level of 1.5 percent of the GDP till 2020. The funds released in that way would be invested in infrastructures, experts say. Investing one percent of the GDP into road construction would yield a double benefit – firstly, an increase in government investment, and secondly, a reduction in costs and a better image of the country’s economy. Also, it would be necessary to reduce the funding of spending on arms purchases by one percent of the GDP and to funnel the money into infrastructures.
As the macro-economic studies director at the Higher School of Economics, Sergei Aleksashenko, told the daily Nezavisimaya Izvestia, the medium-term prospects of the Russian economy do not look very optimistic at all.
“The Russian economy is in a very grave situation and at this point it is utterly unclear what can change things for the better,” he complained. “There is no increase in investment. In the meantime, no economy can grow without financial injections.”
However, as the proposals’ authors acknowledge, a greater part of their ideas – those of institutional reform, a reduction in military spending and others – are unlikely to be welcomed by the authorities.
The strategic analysis department director at the FBC Company, Igor Nikolayev, agrees with the conclusions of his colleagues at the Development Centre by and large.
“The spending on the development of transport infrastructures must be increased. This is absolutely correct. But it takes the political will to do that. The more so, since investments in that industry have a multiplicative effect,” he explained. “But there is another problem. The people have accumulated more than ten trillion roubles in this or that form and the question is what is the most sensible way of putting the money to use. I believe that individual housing construction should be promoted. The state must provide access to infrastructures – roads and gas and electric pipelines. The developers will then begin to spend money to buy building materials, furniture and equipment. This may give a powerful impetus to internal demand.”
First published in ITAR-TASS.
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