Official forecasts see long period of economic stagnation in Russia

The World Bank and Russian experts are unanimous in that the Russian government needs to focus closely on modernizing industrial production and creating a favorable investment environment. Source: Reuters

The World Bank and Russian experts are unanimous in that the Russian government needs to focus closely on modernizing industrial production and creating a favorable investment environment. Source: Reuters

However, Russians are rather optimistic — most of them expect a definite economic improvement in 2014, with 47 percent expecting stability and 12 percent envisaging growth.

Russians are believed to have spent more this New Year to take their mind off economic problems, while official economic forecasts are increasingly grim. Experts believe these predictions will become a reality if the presidential decrees to raise salaries are implemented without modernization of the economy and releasing it from excessive state interference.

Russia's middle class was expected to have spent 13 percent more this year on presents, the New Year table and entertainment — 19,200 roubles ($581) against 17,000 roubles ($515) a year earlier, the Vedomosti daily said, citing the annual survey of consumer spending conducted by accountants Deloitte.

For most of the respondents, (51 percent) the reason to spend more is the wish to enjoy life and not think about economic instability. A year before, 45 percent wanted to forget about economic woes for the time of New Year.

However, Russians are rather optimistic — most of them expect a definite economic improvement in 2014, with 47 percent expecting stability, 12 percent envisaging growth. Only 37 percent are afraid of a decline.

Meanwhile, the reality hardly allows for optimism. Russian GDP growth has been constantly decelerating since fourth quarter 2012 because of an almost zero increase in industrial production (0.1 percent), 1 percent growth in mineral extraction, and a decline in manufacturing and electricity generation. The outlook for 2014 and the following three years is increasingly dim.

In December, the Ministry of Economic Development (MED) dropped 2013 forecasts for the fourth time and cut estimates for 2014-2015, admitting stagnation will be deeper and last longer than expected. GDP growth estimate for 2013 has been reduced from 1.8 percent to 1.4 percent and from 3 percent to 2.5 percent and from 3.1 percent to 2.8 percent for 2014 and 2015 respectively.

Lingering stagnation will be accompanied by high inflation and further rouble weakening. The MED has also revised the unemployment forecast down from 5.7 percent to 5.8 percent in 2013 and from 5.7 percent to 5.9 percent in 2014.

While adopting the long-term outlook in April, the government opted for innovation as the basic scenario of the country’s development — the middle between the worst, conservative, and the best, augmented scenarios. By September, the government had changed its mind and chose the conservative version.

Another forecast adjustment is due in April but economists admit the situation will not improve by then. Russia's budget is based on a conservative scenario that suggests GDP growth at 2.5 percent a year.

All this raises doubt about the likelihood of implementation of President Vladimir Putin’s ‘May decrees’ that he signed, assuming office for the third time. The key guidelines were reforms of economic and social policies, healthcare, education and science, providing affordable housing, improving the quality of utilities and increasing remuneration for state-paid workers.

To make the social section of inauguration decrees — increasing wages — realizable, the economy needs to grow no less than 4 percent, and no less than 7 percent to implement all the parameters stipulated in the documents, Deputy Minister of Economic Development Andrey Klepach said on Wednesday. “Our forecast is lower than stipulated in the decrees,” he admitted.

“As for compensation of state-paid workers as a whole, this task is realizable but would become a heavy burden on the economy and regional budgets amid slack economic growth,” he added.

“There are certain clashes between the need to spend more on social programs and stimulating investments,” Professor of the Higher School of Economics (HSE) Mikhail Berger told Itar-Tass. “We shall face the choice — either to delay implementation of the decrees, or implement them and see the MED forecasts realize.”

The IMF (International Monetary Fund), the World Bank and Russian experts are unanimous in that the Russian government needs to focus closely on modernizing industrial production and creating a favorable investment environment.

Investments are increasing even now, but quality is too low, Alfa Bank’s chief economist Nataliya Orlova says. Capital is invested not in production but in creation of additional selling space. Unwillingness to modernize production conserves low labor capacity and unskillful use of human resources.

Besides, high employment persists in inefficient sectors. Twenty-three percent of those employed work in the public sector, 40 percent where state companies are included. State presence is also excessive in economic sectors (50 percent of infrastructure), which drags on competition but promotes monopolization.

“The field for reform is wide but the government will hardly take this advantage. It will prefer short-term social commitments to investing in long-term sustainable development,” Orlova believes. With such a policy, GDP growth will long fail to surpass the threshold of 1.5 percent, she says.

The process of fighting stagnation will not be a quick and easy one, believe Valery Mironov and Vadim Kanofiev from HSE Center of Development Institute quoted by Finmarket agency. “With a stable rouble, unit labour costs in foreign currency are continuing to rise and, accordingly, Russian goods are gradually losing in competitiveness,” they say.

“Only reforms may help to overcome this situation, namely transition to a new growth model based on de-bureaucratized economy and honest competition.

First published by Itar-Tass.

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