Author affiliation: Deputy Chairman – Board Member, State Corporation “Bank for Development and Foreign Economic Affairs ( Vnesheconombank)”
Weak consistency between monetary (i.e. exchange rate), fiscal and structural policies is one of the key obstacles to economic growth in Russia. It particularly manifests itself during periods of negative cycle. Since 2013 the Russian economy has been facing a strong slowdown and stagnation, and this was attributable not only to structural factors but also to restrictive monetary and fiscal policies. Economic recovery and returning to the average world economy’s growth pace calls for a significant easing of the monetary policy. Structural reforms must be accompanied by a policy of exchange rate targeting and establishing of a new budget rule.
Keywords: crisis, structural impediment for growth, inflation and exchange rate targeting, budget rule.
Over the past 18 years, Russia has experienced three large-scale economic crisis. The crisis of 1998 drew the line under the transformational crisis of the 90s and cleared the way for the Russian economic recovery. In 2007, the economy exceeded a pre-crisis or pre-transformation level of 1990 and matured to meet new shocks that were not long in coming. The global crisis at the end of 2008-2009 changed the trajectory of the development of the Russian economy, and although the pre-crisis level was restored in two years, the transition to a new sustainable development pathway was not completed. A new crisis caused by external factors – sanctions and falling oil prices, delivered a blow at the end of 2014. The way out of the crisis may acquire a protracted character that is close to stagnation.
Crisis, as an explosive manifestation of all the accumulated contradictions and conflicts, serve greatly as the defining moment for both business and implemented economic policy. At the same time, it is, firstly, an opportunity to overcome, at least partially, the accumulated problems. Secondly, a possibility of the transition to a new, possibly improved development model, as well as the road to a new crisis.
Structural, institutional and conjunctural factors of the development
The slowdown in the growth of the Russian economy and sinking into stagnation in 2013-2014 has a number of reasons. Indeed, the chronic structural imbalances and depletion of the so-called energy-based development model based on increasing revenues from hydrocarbon exports.
Strong dependence of the Russian economy on the hydrocarbons extraction and export explains in many respects the inhibition of growth as oil prices stabilize and decline. However, this dependence cannot cause stagnation and economic decline. Record-setting oil prices in 2011 – the first half of 2014 did not prevent the Russian economy from sinking into stagnation. Oil-exporting countries, incl. our neighbor and partner in the Eurasian Economic Union Kazakhstan, demonstrate significantly higher growth rates after the crisis in 2009 than Russia.
Dynamics of Russia’s GDP and oil prices
(Vnesheconombank’s forecast since 2015)
The share of oil and gas in Kazakhstan’s exports is 78% versus 65% in Russia, the share of production in GDP is 15%, in Russia 9-10% (including extraction, distribution and exports – 22-26%), in the revenues of the budget system including extra-budgetary funds) – 40%, in Russia – 28-30%. The reason may lie in the higher diversification of the Russian economy in comparison with Kazakhstan, combined with the vulnerability of the non-oil sector of the Russian economy. This sector is aimed at consumption and investment demand for fluctuations in oil and gas revenues. The increased diversification of the Russian economy is based mainly on the investments and consumption of oil and gas revenues. Therefore, their savings by withdrawing to extra-budgetary funds, invested primarily in foreign assets, increase the stability of the economic system, but at the same time impoverish its structure.
In terms of demand, the sinking of the Russian economy into stagnation (since 2013) was most evident in stagnation, and then in the reduction of investments. These investments outstripped the slowdown in GDP, which only in 2015 was supplemented by a reduction in household consumption. Weakness of investment demand can be explained by an unfavorable investment climate, although it was during this period that its international assessments, increased. A more direct explanation for the weakening of the investment process is the relatively excessive increase in wages, the drop in the share of GDP (as well as the fall in the rate of return) and the fact conditions for access to all kinds of credit have become tighter. In other words, the reason is the income transfer from business to the population, and thus from investment to consumption, as well as the income transfer from the real corporate sector to the financial one.
The crisis of 1998 sharply transferred income to business – the share of gross profit rose in GDP to a peak level of 44.2%. The crisis of 2009, on the contrary, reduced the share of gross profit to 30.8%. The recession of 2015 through a decline in wages and a devaluation increase in profits leads to an increase in the share of profits in GDP. However, these changes in the revenue structure do not yet mean a turning from consumer-oriented economic growth to investment-oriented growth, as well as a general acceleration of growth rates. Much is determined by the structure of economy and the nature of the behavior of business and the population.
To what extent does the Russian economy act as a slave to profit and investment, and to what extent – as a slave to wages and consumption?
In the dynamic 2000s (or “years zero”, i.e. until 2009), the contribution of consumer demand to the growth of the Russian economy exceeded the investment contribution, despite a moderate increase in the rate of accumulation, which remained at a rather low level. The propensity of Russian business to invest is not too high and a significant part of the profit is under the capital export and is withdrawn to the budget. At the same time, about 50% of capital equipment is imported, which reduces the multiplier effect of investment demand for GDP growth. The positive effect of the redistribution of GDP towards business in 2014-15 did not turn into an increase in investments. That happened not only because of the increased capital outflows, but also because of transfer of profits from corporations to banks due to increased interest rates and service external debt costs.[i]
In household consumption, the share of imports is lower (36%), although it exceeds the level of countries with the same household incomes. Due to the greater relative share in the final demand, and the lower share of imports, the multiplier effect of the increase in consumer demand exceeds the investment effect. However, it is partially neutralized by the crisis increase in the population’s propensity to save. Both in the crisis of 2009, and in the crisis of 2015, after the short-term “flight of investors”, as the population were restoring their loyalty to banks, the population’s propensity to save, including bank deposits, has increased. At the same time, in crisis, the growth of the population’s savings has not also been transformed into investments, since banks invested these funds mainly in the growth of currency assets.
Thus, the leadership role of profits in the economic growth of the 2000s is largely limited by the imbalance between the financial and corporate sectors of the Russian economy, the high propensity of Russian business to currency investments instead of production ones. Under these circumstances, reduced consumer demand and the growth in personal incomes quickly turn into a decline in growth rates. Although a certain overheating of consumer demand, which was observed both before the crisis of 2009 and before 2015, also contributed to the beginning of crisis processes.
The balance between the growth of investment and consumer demand, profit and wages is determined not only by the behavioral characteristics of business and the population, but also by the comparative competitiveness of domestic and imported goods and services. Speaking about long-term outlook, by the efficiency of using the main factors of production.
These changes in the productivity (efficiency) of the factors of production are largely dependent on changes in the structure and level of private and public spending on the development of the relevant factors of production.
However, proportionally higher growth in expenditure on education, science and healthcare means also proportionally higher growth of wages in these spheres compared to the corporate sector, as well as growth in labor productivity. At the same time, the gap in the rates of wages and labor productivity in the long run as the implementation of structural adjustment should decrease. The growth of wages, linked to the improvement of the quality and efficiency of the services provided and the corresponding necessary structural changes, is a form of investment in the development of human capital. One can say that structural changes have their budget and monetary value.
The current course is still below the parameters of the conservative estimate in the forecast of the Ministry of Economic Development, however, capacity and, mainly, the need for acceleration still exist.
What pace of development can be balanced and competitive in the long term and what transformations and incentives are necessary for it? The level of loading capacity aberration from the norm (60% instead of 80%) and the unemployment aberration from the norm (5.5 instead of 3-4%, including the labor shortage), as well as the dynamics of total factor productivity make it possible to estimate the long-term balanced growth at 3-4 %. Its level may increase with a more intensive accumulation of capital and expenditures on the development of human capital and technology. If not for the sanctions and oil shocks of 2014-2015, then the growth rate of Russian GDP would hardly have fallen below 2% per year. Considering the sharp decline of GDP crash during the transformation crisis of 1991-1998, the average growth rate of Russian GDP for 24 years is only 0.7%. In fact, we are experiencing a period of quarter century stagnation, which means the accumulation of the huge delayed untapped growth potential. It can be claimed that Russia is doomed for a long period of dynamic development, but its implementation really depends largely on structural and institutional changes, no matter how differently they are understood in society and economics.
Taking into account the significance of structural and institutional problems[ii], we believe that the growth rate of the Russian economy can be increased in the medium term through monetary and fiscal incentives, while the balance of monetary and fiscal policies has long-term effects for economic growth[iii].
In the traditional analysis, the applicability of monetary and fiscal incentives is determined by the gap between potential and current GDP. According to experts of Vnesheconombank, the current Russian GDP gap from the potential in 2015-2016 will be 5.1-5.2%. However, monetary and budgetary considerations affect not only the cyclical deviations of the current GDP from the potential GDP, but also the dynamics of the potential GDP. Nevertheless, the profundity and duration of the crisis fluctuations depend not least on the degree of coherence (and misalignment) in monetary, fiscal and structural policies.
The impact of monetary and fiscal policy on economic growth is manifested in the following aspects:
- firstly, the effectiveness of the redeployment of resources between sectors and entities is largely determined by the level of development of the banking system and financial market (other things being equal, the increased financial profoundness of the economy, usually estimated by the ratio of money supply or credits to GDP, positively affects growth rates);
- secondly, the credit growth (as well as the ratio of interest rates to profit, changes borrowing terms) is a significant factor in the accumulation of capital and consumer demand;
- thirdly, the ongoing reforms in the spheres of health, education and science have their own budget price; the deficit of budget financing for the implementation of the main activities planned in the relevant state programs is estimated at a minimum of 1-1.5% of GDP, which is a significant barrier to total factor productivity gains;
- fourthly, the losses from crises relative to the growth potential of the economy increased significantly in the 2000s, and the profoundness of the crisis is largely determined by the misalignment of monetary, fiscal and structural policies.
If the 1998 crisis weigh down the economy in 1998-2008 by 25%, then the 2009 crisis led to a loss of 70% of potential growth in 2009-2014, and the crisis of 2015 may deduct 76% of the 2015-2018 growth potential.
Uneven economic growth in Russia in the 2000s *
The gravity of the crisis and the coherence in the different sides of macroeconomic policy
The crises of 1998, 2009 and 2015 are of a different nature. The 1998 crisis can be seen as a milestone that completed the transformation transition in the Russian economy, which with the help of shock-method, corrected the inflated ruble rate, swollen fiscal deficit and public debt.
The 2009 crisis was the first normal cyclical crisis in the Russian economy. In the 1998 crisis, there was a default and a significant portion of banks went bankrupt, while the industry quickly moved on to growth. In 2008-2009, on the contrary, despite the bankruptcy of several banks, the banking system strengthened its positions, while a significant number of industrial companies became bankrupt and were only saved due to the budget and debt restructuring. The crisis led to the reallocation of resources from the real sector in favor of the financial sector.
The crisis of 2015 was a specific structural crisis of the Russian economy, caused by the impact of sanctions and a significant decline in oil prices, while the world economy continued its growth.
At the same time, all these crises have common features. External macroeconomic factors that caused the crisis were a significant decline in oil prices and a drop in export earnings, as well as a sharp increase in capital outflows (which could occur relatively independently of fluctuations in oil prices).
Changes in macroeconomic parameters during the crisis of the 2000s
(2015, assessment of Vnesheconombank of Russia)
|The change in the external factors|
|The change in the average annual price of oil||%||-34,2||-36,5||-43,5|
|The export growth rate, billion dollars||%||-14,3||-36,3||-28|
|The change in the intensity of capital outflows (2008 and 2014 instead of 2009 and 2015)||pecentage point in GDP||7,1||14,9||4,4|
|The change in economic parameters|
|The growth rate of GDP||%||-5,3||-7,8||-4,3|
|The growth rate of investments||%||-6,7||-13,5||-19,1|
|The growth rate of retail trade||%||-3,2||-5,1||-9,1|
|The growth rate of real wages||%||-40||-3,5||-8,5|
|The export growth rate in real terms||%||1,9||-3,3||-1,2|
|The import growth rate, billion dollars||%||-19,4||-36,3||-36,2|
|in real terms||%||-17,4||-33,8||-30|
|Changes in inflation||%||66,1||-4,0||-0,7|
|Changing in the Macro-policies parametres|
|The decline in the average annual rate of the ruble (1999 instead of 1998)||%||-151,8||-27,7||-58,7|
|The rate of reduction of gold reserves (2008 instead of 2009)||%||-29,1||-11,1||-29,1|
|Interest rate change in the Bank of Russia||%||142,9||3,7||150,0|
|Varying the fiscal deficit||percentage point of GDP||-1,9||10,0||2,4|
Footnote. Turning points from growth to the fall and recovery of the economy, as well as changes in exchange rates, outflows of capital and other indicators usually do not coincide with the annual dimension. The most intensive change in reserves or exchange rate occurred either before the beginning of the GDP decline, or with a lag. To simplify the calculations, the change in indicators is given by the year when the main decline in GDP occurred.
The reduction in export revenues is characterized by high elasticity in the reduction of oil prices. The crisis of 2009 was marked by a record increase in the intensity of capital outflow, which occurred mainly at the end of 2008. Furthermore, its net inflow was observed especially as in 2006-2007.
External shocks lead to a crisis in the real sector of the economy, which is characterized by a significant decline in GDP, while investment is declining at a faster pace. In 2015, not only the investment decline, but also the contraction of consumer demand exceeded the overall decline in GDP. The adaptation of the final demand to the sharply lowered ruble exchange rate in all crises was characterized by a reduction in imports (both in price and in real terms), which was faster than reduction in domestic production. In the 1998 crisis, the general reduction of imports occurred in 1999, when the economy was already growing, and for two years the total decline in imports was 45% at a cost (31.4% in real terms), which is comparable to other crises.
Inflation has most strongly reacted to the devaluation in the crisis of 1998, when it accelerated almost in seven times. In the crises of 2009 and 2015, inflation, on the contrary, despite the devaluation, slowed down. Along with the anti-inflationary effect of a sharp decline in the population incomes and a reduction in consumer demand, there were also special reasons. In 2009, the factor of the decline in world food prices was of great importance, and in 2015 – the exhaustion of the effect of counter-sanctions, realized mainly in 2014.
The reaction of the economy to external shocks largely depends on the changes in the characteristics of the monetary and fiscal policies. The change in exchange rate and foreign exchange reserves, the change in the interest rate for Bank of Russia operations, and the change in the level of the budget deficit may be used as the main parameters of the macroeconomic policy.
The 1998 crisis, with a moderate change in the budget deficit (it declined due to the default) was characterized by a sharp unexpected devaluation and a depletion of reserves. In the 2009 crisis, the budget parameters changed to the greatest extent (the surplus was replaced by a deficit), while the rate of change in reserves (despite their large reduction) and the exchange rate were, compared to the previous crisis and even to the 2015 crisis, rather moderate. The crisis of 2015 has not yet come to an end, however, with a moderate change in the budget deficit, it is characterized by a much higher amplitude of exchange rate fluctuations and interest rates.
Some structural characteristics of macroeconomic policy
|Dispersion of external factors||0,043||0,088||0,060|
|Dispersion of economic parameters||0,095||0,019||0,018|
|Dispersion of policy factors||1,463||0,028||0,858|
|Elasticity at the price of oil|
|Changes in capital outflows||-0,207||-0,409||-0,101|
|Increase in FX reserves||0,849||0,303||0,668|
|Elasticity at the rate|
|Elasticity at external factors|
In general, the following comparative characteristics of the three crises can be singled out:
the parameters of macroeconomic policy became more resistant to changes in external factors (elasticity decreased);
the reaction of the economy to external shocks, on the contrary, increased (the elasticity is higher than in 1998);
the unevenness of the change in macro-policy parameters (variance) has grown, whereas the economy in the 2000s as a whole has become more homogeneous in responding to external shocks (the dispersion is quiet and stable).
The increased volatility of monetary policy parameters of macro policy has probably made a significant contribution to improving the stability of the budget system. However, it could not prevent the strengthening of fluctuations (the magnitude of decline) of real economic indicators. This may indicate that monetary and fiscal policies are more focused on their internal balance and on supporting the sustainability of the budgetary system than on supporting the real economy and alleviating the fall. In other words, despite the anti-crisis measures implemented in 2009 and 2015, both monetary and fiscal policies are largely pro-cyclical rather than counter-cyclical.
In economics, unlike classical physics, invariants are not so easy to find because of the complexity, multicomponent nature of economic systems, and their „openness“ to the influence of various natural and social factors. Although a certain exchange between financial and real parameters, apparently, still exists. The stricter the policy in relation to certain parameters of the economy is (for example, financial), the higher is the uncertainty of the others, real development parameters, and vice versa. It is possible that a peculiar kind of Heisenberg principle works out here- the definiteness of the spatial or real growth feature that is supplemented by the uncertainty of the financial or virtual characteristic, and vice versa.
Stringency of the rules, in particular fiscal or inflation targeting ones, can itself become a source of additional crisis fluctuations and can strengthen, rather than mitigate the impact of external shocks.
The budgetary rule, focused on limiting expenditure by revenues that correspond to a certain level of oil prices (average for three, and then up to ten years), is extremely unstable to exchange rate fluctuations. According to the existing rules, the current devaluation leads to the necessary increase in budget expenditure in 2016 by about 0.6-0.8 points of GDP, despite the falling incomes. An attempt to modify it by the effect of averaging the rate or adjustment for domestic inflation leads to an extremely rigid reduction in budget expenditure compared to the pre-shock period (up to 3-5% of GDP for 3 years, according to Vnesheconombank).
Along with the problems of quantitative adjustment of the budget rule, it raises the question of its applicability to an economy, characterized not only by a strong dependence on non-oil and gas revenues, but also on exchange rate fluctuations. The Russian economy, having both high and low oil prices, is unprepared for a significant reduction in the oil and gas deficit. It turns out to be quite stable within 10-13% of GDP, slightly increasing during periods of crisis in oil prices and economic recession. At the same time, the overall deficit shows high volatility, while the level of non-oil revenues collection has not increased during this time.
The dynamics of the general and non-oil and gas deficit of the federal budget ( in % of GDP)
The budget rule withdraws a part of oil and gas revenues from the economy, but it can not withdraw from the balance of payments and the exchange rate determined by it that part, which corresponds to these oil and gas, mainly export revenues.
The dynamics of general and non-oil and gas trade balance
(in % of GDP)
The level of non-oil and gas trade deficit has fluctuated in recent years in the range of 7-8% of GDP, which is comparable to the level of non-oil and gas budget deficit. Its decline is realized only through a sharp devaluation and the associated compression of imports. Fiscal tightening, therefore, faces the need for a balancing loosening of monetary policy, and primarily by depreciation of the ruble, and vice versa.
Under these circumstances, it makes sense, not so much to look for a new and a rigid formula of the budget rule, but to stick to a moderate budget deficit, determined by the possibilities of its internal refinancing.
On the other hand, the exchange rate of the national currency plays such an important budget-forming role and the role of a significant factor in the dynamics of interest rates, that its free floating can cause storms and become a serious threat to the economy.
The way out of this contradiction is related not only to the possible actions of the Bank of Russia in smoothing the exchange rate fluctuations, but to the formation of a certain exchange target rate, corresponding to a more sustainable development of the real sector of the economy, its competitiveness and the stability of the budget system.
Considering a high sensitivity of inflation to the exchange rate and the food component, the liquidity restriction is not so much driven down by inflation as it provokes credit crunch, imbalance in interest rates and profits, and thereby hinders economic growth.
Thus, a multi-vector monetary policy is necessary, which includes an inflation target, the targeting of the rate and real economy growth. At the same time, the exchange rate target should create the possibility of maintaining a sufficient level of foreign exchange reserves (talking about the current state of the Russian economy, this is about $ 500 billion). The target should also create the competitive level of dollar expenses (prices) of basic resources (energy, transport services and labor), taking into account the difference in the effectiveness of their use and structural differences in the economy.
The economic crisis of 2009, as well as the one of 2015 set the task not only of modifying the economic policy, but also of reconsideration, which could be compared to the Keynesian revolution of the 1930s. Reconsideration involves the following principles:
There is no self-sustaining balance; economic growth goes from balance to imbalance and to a new balance through periodic crises, including cyclical ones;
Re-distribution of income is important, and determines the growth of the economy depending on the behavioral and structural features;
Financial factors, and especially financial imbalances, are crucial for economic growth, i.e. there is no perfect competition and perfect interaction of financial and real sectors;
The inconsistency and incoordination of budgetary, monetary policies become a factor of cooling and deepening shocks of the crisis.
One of the lessons of the crises of 2009 and 2015, as well as stagnation, is the role of industrial and innovation policy, the stabilizing role of Institute for the Development and Strategic Management as a form of social coordination based on market self-organization, that does not go beyond it.
Challenges make weak people much weaker, however they make powerful ones much stronger. If we are able to draw the right lessons from the experience of the ups and downs of the 2000s, Russia will still be able to surprise the whole world with its dynamism and quality of development.
 Forecast of the economic development of Russia in 2015-2018 / www.veb.ru / Analytics / 2015
 A. Kudrin, E. Gurvich. A new growth model for the Russian economy. Issues of Economics, 2014, N12.
 Argumentation in favor of exceptionally short-term effects of monetary and fiscal incentives for economic growth, see E. Goryunov, S. Drobyshevsky, P. Trunin. Monetary policy in Russia: strategy and tactics, Economics issues, 2015, N4. On the importance of monetary factors for economic growth, see M. Ershov. What economic policy of Russia in terms of sanctions, Issues of Economics, 2014, N12.