Strategy of Development for Russia

On April 3rd the 13th April International Academic Conference on Economic and Social Development opened at the HSE Cultural Center. The topic of its first plenary session was the strategy of development for Russia.

How to promote economic growth? What qualities should it have? Who will pay for it? These were the key questions in the presentations by the first speakers at the conference, which included representatives from the Russian government and Russian economic science as well as the international expert community.

Elvira Nabiullina

The conference was opened by Elvira Nabiullina, Minister of economic development of the Russian Federation, who said that although the crisis decrease in the GDP growth rate was overcome by the end of 2011, ‘the factors defining the recovery growth of the economy are almost exhausted’. The Russian economy needs investment in new growth sources, and this cannot be achieved only by budgetary measures. According to the minister, ‘structural measures as well as institutional reforms’ are also necessary. Only such an environment can promote the transition to an innovation economy, which is one of the declared aims of the government.

One of the most important tasks is to turn Russia from a capital exporter to capital importer. Labour productivity, which is today a third of that in the U.S., should grow, as well as the per capita revenue level. The government believes that the size of the middle class in Russia will double by 2030.

What will be the sources of the Russian economy’s quality growth? And how much will the state budget, business and individuals pay for their activation? According to Elvira Nabiullina, public expenditure on scientific development should be increased and reach a level of 3%, for education 7.5% by 2030, together with an increase in the share of private investment in these areas. Public spending on health care should be increased and reach 7.3%, and in this case the state will remain the main investor.

The minister also paid attention to the future of the Customs Union and the Common Economic Space. ‘I know that many experts are skeptical about them’ she said. ‘But I’d like to mention that the growth rates in Belorussia and Kazakhstan will leave behind the global rates, and bringing together the efforts of our countries will allow us to increase the role of our region in the global economy’.

Alexey Ulukaev, first deputy chairman of the Central Bank of the Russian Federation, said that the market is waiting for an ‘optimistic signal’ from the new government, and Elvira Nabiullina’s speech can be considered such a signal. He spoke about the side effects of some positive economic events. It is likely that after the new government is approved, ‘we shall see an inflow of foreign capital into the Russian market’. ‘We shall probably face a situation similar to that of 2006-2007’, Alexey Ulukaev explained. ‘Short-term inflows of capital and orientation of the economic growth to foreign investment come with certain risks. Such a growth model created a situation when during the 2008 crisis Russia together with Mexico ‘fell’ harder than all the other G20 members’.

Alexey Ulukaev

Instead of the traditional fight with inflation, the Central Bank is moving ahead with inflation targeting – this approach will be fully implemented by 2014. ‘Our task is to try and smooth over those big surges which frighten investors’, Alexey Ulukaev said. ‘We shall broaden the limits of the currency band and this will mean a free floating of the national currency. We have made some steps to narrow the interest rate band’, Alexey Ulukaev added, ‘It is just recently that their dispersion was several times wider than in the developed countries, and today the width of the corridor is 225 basis points. We believe this is a comfortable band for market participants, and interbank rates are almost always guaranteed to be within this band’.

By the way, the Central Bank is not changing its current inflation rate forecast (5-6% by consumer prices). At the same time, Alexey Ulukaev admitted that in the second half of the year inflation pressure is likely to grow, due to the postponed growth of natural monopoly prices and the high level of prices for raw material and product markets.

Two Ministers of Finance spoke at this plenary session: the current, Anton Siluanov, and a former, Alexey Kudrin. Anton Siluanov said that ‘the budget is a tool to provide macroeconomic stability’ and emphasized that the Ministry of Finance will seek to implement a counter-cyclical policy in order to support long-term sustainability of the budget. In other words, the growth of oil revenues will be used to accumulate reserves, and if oil prices fall these reserves will be used to support domestic demand. At the same time, it is necessary to keep in mind that during the crisis the Russian budget became even more dependent on the raw material infrastructure: it will be impossible to achieve the pre-crisis level of non-oil-and-gas deficit in the near future, but introduction of the budget procedure will help to gradually decrease it’.

Another task for the government, according to Anton Siluanov, is to create incentives for business and innovation development. A special role in this process is assigned to the facilitation of tax administration. Currently, the minister said, the procedure of conflict resolution between entrepreneurs and taxation bodies has been arranged, and the practice of pre-trial settlements will be further developed. At the same time, it is planned to ‘implement some taxation innovations’ related to mining operations, alcohol and tobacco taxes. ‘There are many tasks for the government to realize’, the minister summarized, ‘The main thing is that there is an understanding of these tasks’.

Alexey Kudrin started his speech with the comment that ‘here during the speeches by top-managers of the Ministry of Economic Development, Ministry of Finance and the Central Bank a real battle has taken place which could only be understood by those privy to the topic’. The key problem for which the government has no final decision yet is, according to the ex-minister, determining the volume of the resources at hand and the sources of investment for the declared programmes.

Oil super profits, Alexey Kudrin believes, are not only a good thing for the Russian economy (a ‘safety cushion’ created from these sources helped to dampen the crisis blow), but also a sophisticated problem. From 1992 – 1999 Russia received only 200 billion dollars from oil export, during 2000 – 2007, 850 billion, and in 2011, a total of 2 trillion dollars from oil and gas exports. ‘When you possess such resources, this may cause two effects’, the ex-minister explained, ‘On one hand, if the Central Bank does not interfere in the situation, the rouble will get stronger. On the other hand, if the Central Bank starts buying petrodollars at the expense of emission, inflation will grow. Our Central Bank has been torn between two fires during the last ten years. But our inflation rate is still high’.

Alexey Kudrin said that high oil prices and, therefore, the inflow of petrodollars, increase the rouble’s strength. Last year’s increase in the average effective rate of the Russian currency was 4.7% and forecast for the current year is even higher: 5.4%. With such a rate, importing has become very attractive. ‘We are taking a risky way, which is created by our oil and gas wealth’, Alexey Kudrin believes, ‘Since as soon as the oil price drops, the rate will decrease and all export and import parameters will change’.

Alexey Kudrin still believes that the growth of budget expenses and allocation of part of the reserve funds for investments will not lead to the expected modernization effects. What is much more effective, in his view, is a ‘mechanism of creating stable fundamental indicators with low loan rate and a more stable exchange rate. This is a bifurcation in the country’s development which has not been resolved yet’.

Yaroslav Kuzminov

Yaroslav Kuzminov, rector of the HSE, agreed that ‘without a long-term budget equilibrium there will be no development’ and said that the focus should be on ‘development expenses’ which means investment in human capital and infrastructure, ‘since it is necessary to provide informational and transport consistency in the country, without which no institution and business entity will be able to work’.

Two international experts also made presentations during the plenary session: Justin Yifu Lin, Chief Economist and Senior Vice President of the World Bank, and Kenneth Arrow, professor at Stanford University and Nobel laureate in economics. Mr. Lin said that the global community, in order to maintain sustainable development, ‘needs to rethink approaches to economic development’, in particular, structural reforms in the financial sector are vital. Speaking about the Russian economy, Justin Yifu Lin highly rated its potential providing exports can be diversified, transaction costs cut, investment risks decreased, competition developed and infrastructure modernized. He also mentioned that the transitional countries during recent decades have tried to catch up with developed countries on the basis of market economy, but with active state efforts which are able to ‘fix’ the mistakes of an imperfect market mechanism.

Kenneth Arrow, in his turn, raised the eternal question ‘who is it to blame?’ when applied to the recent financial and economic crisis. The 2007-2008 crisis – was it a failure of the state or of the market? The expert community does not have a clear answer to this question. But Mr. Arrow particularly mentioned how surprisingly shortsighted  many American creditors were before the crisis, given the fact that the impact of their actions, as well as state policies on financial and mortgage markets were quite forecastable.

The plenary session was closed by a report from Evgeny Yasin, academic supervisor of the HSE, who described three possible scenarios of the Russian economy’s development.

Evgeniy Yasin

The first, ‘modernization from above’, means preserving the current economic and social processes, including its orientation towards oil and gas sector. The growth rates in this inertial scenario will be comparable to those in developed economies (0.5-1.5% of GDP), and by 2050 Russia will reach the level of 32-37% per capita GDP from developed countries, which means that actually no economic modernization will take place.

The second scenario, ‘breakthrough’, which involves radical liberalization and democratization of socio-political and economic life, was rejected by Evgeny Yasin as an unrealistic one. The majority of Russian society stays conformist, and this has been confirmed by the results of the presidential elections, which took place in the context of rallies and civil activity in Moscow and some other big cities.

The third, ‘moderately optimistic’ scenario, means a gradual liberalization of the economy and awakening civil activity. One of the first steps on this way may be participation in new elections according to the revised laws. This scenario includes an increase in local self-administration and the gradual growth of business activity. The results of such scenario depend on the terms of its launch. If its implementation starts in 2024, Russian per capita GDP can, by 2050, reach 40% of that in developed countries. If the implementation of this scenario starts during the next six years, this indicator may reach 54%. In this case, Evgeny Yasin believes, we shall be able to say that ‘modernization, Russian style’ has happened.

Oleg Seregin, HSE News Service

Photos by Nikita Benzoruk