How can the Russian economy be saved?

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Of course, it’s an exaggeration — to say that our economy needs saving, but the situation is really difficult, to put it mildly, both in connection with the pandemic and due to the fact that another, very complex, deep economic crisis has hit the world and, of course, did not bypass the Russian economic system either. The discussion analyzes the tasks and the national plan of economic recovery.

Panelists:

Aleksey Leonidovich Vedev, Head of the Financial Research Laboratory of the Gaidar Institute, Doctor of Economics 

Dmitry Evgenievich Sorokin, Vice-President of the Free Economic Society of Russia, Head of the Department of Economic Theory of the Financial University under the Government of Russia, Corresponding Member of the Russian Academy of Sciences

Roman Sergeevich Golov, Member of the Presidium of the Free Economic Society of Russia, Head of the Department of Management and Marketing of High-Tech Industries of the MAI, Member of the Expert Council on Higher Education under the State Duma Committee on Education and Science, Editor-in-Chief of the journal «Economics and Management in Mechanical Engineering«, Doctor of Economics, Professor

Sergei Dmitrievich Bodrunov, President of the VEO of Russia, President of the International Union of Economists, Director of the S.Yu. Witte INIR, Doctor of Economics, Professor

Bodrunov: Alexey Leonidovich, the Government’s plan is only about stabilizing the situation but also about supporting individuals, enterprises, and businesses at the stage of overcoming the crisis, achieving long-term structural changes in the economy. And it is clear that there are certain stages of this plan. Can you tell us if you have analyzed the results?

Vedev: I took a small part in creating this plan, analyzed it a lot and, in general, criticized it, in part. What I like about this plan, and we are now referring to the plan as of July 30, which was announced by Prime Minister Mishustin, and so far it has not been changed to any significant degree. I liked this plan because it contains a fairly large number of various activities. And it is important. It is not only about financing the economy. It also includes tax holidays and grace periods — completely different measures that, in my opinion, are very useful, and I think it is very important to monitor how effective some of the measures will be and how ineffective others will be. 

Now the things I didn’t like. We have black swans arriving this year. And I would still divide those black swans into two flocks, because they are different. One black swan is the coronavirus. It is, in fact, a force majeure circumstance. This means that we just have a crisis, we dropped down, and someone has to pay for it. Better, of course, if it comes from public money. Because our sources are either the state, businesses or households, the population.

Bodrunov:  Actually, there are no other sources.

Vedev: Yes, we have no other sources. Therefore, since this is a force majeure, it is better, of course, to compensate for it from some savings, from public money. In this regard, I believe the recovery program is quite a compromise, because it provides both grace periods and benefits, i.e. it somehow mitigates the consequences, compared to America and Germany which simply spend colossal amounts of money directly. 

The second flock of black swans is, firstly, a drop in oil prices, and, secondly, a slowdown in the growth of the global economy and, accordingly, a decrease in demand for Russian exports. And the third problem, which, in fact, has never left us and which was discussed in the fall of 2019, is the low GDP growth rate. And as soon as we restore our economy — I mean, when we reach the level of the year 2019 — the problem of entering the trajectory of sustainable growth will not go away. And from this point of view, I believe the main flaw in the government’s economic recovery plan is that it is necessary to divide the measures into two categories. The first ones are recovery measures which will then go away. And the second ones are incentives. They are different. For example, I do not believe that the coronavirus black swan will bring any structural changes to the economy. Perhaps those changes will arise due to the fact that the population will be more cautious because, frankly, I do not see any other stimuli for restructuring the economy.

Bodrunov: If you look at the plan for economic recovery, to some extent you can agree, because it is cautious, and it is very good that there are many complex things that make it possible to make financial injections more effective. But at the same time, there is no focus on a more or less rapid take-off after the economy recovers. The plan has a stabilization of the situation by the end of the 20th, and then recovery at the beginning of 2021. Then a transition to sustainable growth, but this does not mean to rapid growth. On the one hand, it is clear why this is so. Because we cannot predict what will happen next, how the situation in the global economy will develop in the next month, two, three, five or six months, because that black swan called the coronavirus continues to flap its wings. And who knows if there will be a second wave, a third wave, if it will mutate, if it will further influence people’s decision-making: to work or not to work, to invest in business or not to invest: our entire economic life depends on many things. And the society is waiting for a decision from the government, and such decision must be made. Therefore, of course it clear where the caution comes from. But, on the other hand, a crisis is still an opportunity. It would be nice to foresee those opportunities so that they could still allow us to proceed a little faster than just a snail’s pace. You know, risks are also a very important thing. He who does not take risks, as the famous saying goes, does not drink champagne. I would like this champagne to come to our economy at least by the 2020s. So, under these conditions, is it realistic to expect specific results from the implementation of this plan in any areas, industries, perhaps even sensational results? Or are we going nowhere or just sitting there and waiting?

Vedev: I think we just sit there and wait. And I would also like to draw your attention to a particular problem. It’s the problem of statistics and short-term forecasting. And in this connection, of course, I have a lot of questions that need answers. Because, I believe, it is an extremely important problem: we must correctly measure the patient’s temperature, blood counts and so on in order to effectively apply treatment. According to estimates, this year the Russian economy will contract by 4-4.5%, while the American and the European economies are predicted to contract by about 12-20%. Most likely, this forecast is based on the state of large and medium-sized enterprises. Russia’s small businesses will most likely be additionally taken into account using some coefficients in mid-2021. That is, we have a picture that everything is fine. But few people believe in this picture. At the same time, if we have, roughly speaking, a 100 trillion worth of GDP, then a 4% drop equals 4 trillion, which is well within the compensation offered by the government plan – so there is no problem. 

But, most likely, a situation may arise, and it is a structural one, when all compensation goes to large and medium-sized enterprises, which are well off anyway, and small businesses, of course, will suffer. With each crisis, the share of state-owned enterprises is growing in Russia. Many specialists understand that one of the key tasks of ensuring a high growth rate is, of course, privatization, i.e. a decrease in the presence of the state, a decrease in the number of large state-owned, clumsy, low-performing companies of which there are quite a few. But the situation is now developing in such a way that the positions of state-owned banks are strengthening in Russia, the positions of state-owned corporations are strengthening and, in general, the plan is largely aimed at supporting them.

Bodrunov: You know, this trend fits into the general understanding of the situation, which I would consider not particularly promising, although it seems to be understandable in the short term. Probably, the Government proceeds from the assumption that it is necessary to stabilize the situation, steadily increase the pace and, in this regard, remove anything that may cause fluctuations. Therefore, let’s give more state control over the banking system, more state control over the economy as a whole, over industry, in particular, especially in the infrastructure sectors, and so on and so forth. On the one hand, yes, there is something in this. At the same time, they often nod at China and say: look, the largest Chinese corporations — they are all state-owned. But I can say China also has a powerful non-government sector, and it is, as it were, the second leg on which the Chinese economy stands. This second leg allows them not only to stand, but to walk. This second leg, i.e. the non-government sector, should also be stimulated, of course. Granted, we always turn to the government in a crisis situation, but we do it perforce, because there is no second leg.

Vedev: Back in the day when I was an official with the Ministry of Economic Development I worked with the Center for Strategic Research, and we prepared our proposals for entering the growth trajectory. Most of those proposals were not accepted. And in this context, it seems to me that those proposals should now be taken into account in terms of further recovery. Because according to my forecast, we will reach the level of 2019 at the end of 2022 or at the beginning of 2023. We are experiencing a typical protracted crisis. And I don’t expect any quick rebound, particularly due to the situation abroad, not only the domestic situation, plus a change in the behaviour of the population which will become more cautious, and so on. This is a very sticky crisis.

Bodrunov:  Yes, not only business is cautious in this situation, not only the government is cautious, but also the population, because, on the one hand, there is no certainty about what will happen next, on the other hand, people are not sure about the future economic situation. First, there has been a reduction in income, already the Ministry of Economic Development announced that incomes fell by 8%. Given the fact that there was a 5% decrease over the previous 5 years. And the Government measures should have included, among other things, decisions aimed at moving forward, at development. It would give optimism to both business and the population. Therefore, it seems to me that the next adjustments to the plans will need to show those decisions at the very first signs of stabilization. And, perhaps, we should allocate some funds to it, actual funds, we do have certain reserves.

Vedev: The first signs of stabilization have already appeared …

Bodrunov:  Yes, they have.

Vedev: Our foreign exchange reserves exceeded $600 billion — also a bizarre record…

Bodrunov:  In spite of the difficult situation.

Vedev: Yes, despite the rainy day — a bizarre record. And what is probably also important, compared to the fall of 2019, the positions of the economic ministries have become more alike. You will remember that the Ministry of Finance insisted on a surplus budget. This meant that the Ministry of Finance was going to extract more money than it was prepared to spend. Accordingly, the Central Bank insisted on 2-3% actual rates, now, of course, they are already talking about a zero percent rate. The rhetoric has also completely changed in favor of a policy of budgetary and monetary incentives, which is probably also quite important. And the Ministry of Economic Development, and I would praise them for that, has proposed a set of various measures to regulate the economy. How all this will work is not known yet, because the key issues have not yet been included in the plan.

Bodrunov: Alexey Leonidovich, how do you assess the measures included in the plan from the point of view of the planned expenses? Let me see: Europe spends about 10% of its GDP; according to all the estimates we have we spend about half that. Can you tell if those funds be enough to solve the priority tasks if not to stabilize the economy?

Vedev: Nobody knows it yet. But I’m optimistic in that I see the government’s willingness to increase those expenditures. And to increase direct spending and combine support measures – maybe tax holidays will be extended to the 3rd and the 4th quarters. I think that such measures will be promptly considered after analyzing the effectiveness of each measure.

Bodrunov: So, then maybe we should consider this situation with expenditures as follows: let’s not assume that if, relatively speaking, we have sent 5% of our GDP, then nothing else is needed. We should consider it as a first confident step, that we are spending the money now, but there are some other tasks as well, we have just talked about it, for which more money will be required. And there’s no room for any reduction. Recently, the President gave an instruction, and probably a very logical one, to reformat the national projects. A new government was appointed, we had great hopes that everything will be fine from now on, and then, like they say in that movie, bad things happened again, and black swans flew in. It was logical to issue an instruction for reformatting the projects. However, we are now pondering how to do it taking into account the national plan for economic recovery, taking into account the need to accelerate the economy further and taking into account the fact that in terms of time, the goals of national development should be achieved within the same timeframe as before. How could the reformatting have been achieved?

Vedev: Everybody seems to partly misunderstand the key goal of the national projects. 27 trillion rubles for the national projects seemed like a lot for a 6 year period. But it’s 3-4 trillion a year. And investments in fixed assets are worth 20-21 trillion, many times higher. And the main role the national projects should have played, in my opinion, was the role of a multiplier to stimulate investments, private and otherwise. It is wrong to think that the national projects will solve problems. There is simply no money to solve all the problems. I think that the national projects, like infrastructure projects, they should have been implemented in the most important areas, maybe the riskiest ones, maybe the least risky ones, but in any event the most important ones and the least recoupable, that’s what public money should have been spent on. For example, roads are usually always public and not private.

Bodrunov:  Yes, and the state of our rather powerful businesses is such that only the government can be the driver and the main financial agent which would spend its own money and attract private investment for this public task. Neither the Russian budget nor the private sector have such funds as the US budget, so it is necessary to choose what to spend on. You definitely noticed that the national project is not a panacea, it is a trigger. Imagine I’m an entrepreneur. I need hope as an entrepreneur, I need an understanding of where to invest. I need an understanding of the general economic situation, the exact situation. If we are talking about returning to the goal of going further than 3% growth, then this goal can be achieved only when hope is revived in people, when there is confidence that we are investing correctly. And if we are, it means that the economy is growing and I am investing in the right sector. And then businessmen will ask the following questions: what does the government think about the national projects, where does it direct its gaze, what does it pay attention to? And maybe there will be investments, maybe there will be some kind of support, maybe there will be some benefits, and so on and so forth. What do you think about it?

Vedev: At this point I’d like to make a short comment on growth. I would like to remind you that from 2008 to 2019 we had the average growth rate…

Bodrunov:  Of 1%.

Vedev: 0.8%. And taking into account 2020, it will be even lower. Therefore, when we talk about reaching a 3% growth, can you imagine that our ultimate goal is to quintuple the growth rate.

Bodrunov:  Yes. But what else can we do?…

Vedev: Yes. One needs to understand that this is a difficult task. From the point of view of the government, I think that there is probably a clear understanding that growth will be driven by investments in human capital…

Bodrunov:  As a matter of priority.

Vedev: As a matter of priority. I think that the success in vaccine development will be an additional incentive to increase investment in education, health care and so on. I don’t like campaigning, but you might recall we’ve already had a biotechnology campaign, a nanotechnology campaign, now we are in the middle of a digital economy campaign. But, objectively, it is generally a worthy goal in which you can invest, you can dole out benefits, create conditions for the growth of IT companies. I do not expect any revolutionary reformatting of the national projects. But, without a doubt, it will be taken into account that a number of industries have suffered greatly, all our oil production is moving to a different price category, and the $45-55 per barrel corridor is here to stay, including all the other prices associated with it, I mean gas and everything connected with it. A new reality has emerged. And the fact that the demand for Russian exports, commodities will potentially decrease is also a reality.


Bodrunov: It is an objective situation, yes.

Vedev: And, of course, we also need some money, apparently, to reformat those industries. Oil production dropped 15% in July.

Bodrunov: Yes, and not only because of the OPEC+ deal, the deal was made for a reason.

Vedev: Demand is shrinking, of course.

Bodrunov: Yes, global demand for energy resources is shrinking. And I would like you to listen to the opinion of another of our experts, Dmitry Evgenievich Sorokin, and yet another expert from the aviation industry, Roman Sergeevich Golov.

((врез))

Golov: Of course, we consider the reindustrialization of the economy to be the main driver. The fact is that since the Soviet era we have formed a solid groundwork. And our task, as economists, is to try to use this groundwork effectively. This reindustrialization should be based on the 5th and 6th technological modes. Unfortunately, at present the share of those technological modes, the 5th and the 6th, in the Russian economy it is not high enough. The digitalization of the Russian economy can be considered as the second driver. The digitalization process has been going on for quite a long time. And the pandemic served as a kind of another impetus, an impetus for the intensification of the digitalization of the economy in all areas. And the third driver, which, in my opinion, is also quite important and relevant, is the increase in the energy efficiency of the economy.

Sorokin: At this point we need to talk about drivers that will help overcome stagnation, which is much a more difficult task, because in science it is easier to get out of a crisis than to get out of stagnation. Nowadays they say that in order to solve the problems facing the economy, the economy needs to be retooled. They have been saying it for years, our entire history points to it: Peter the Great, Stolypin, Witte, GOELRO (the state commission for electrification of Russia) celebrates its 100th anniversary this year — those are all leaps in technological makeover. It is no coincidence that the well-known May presidential decree proclaims from the outset that we need a technological breakthrough. I’ll say it again: we have everything for it. But there is also a fourth factor — the factor of trust and the factor of honesty. It is not an economic problem, it is a broad social science problem, and it is impossible to solve it in six months or in a year. But util it is solved, until the factor of honesty and trust comes into play — no other drivers will work. This has been proven by the history of Russia and other countries.

Bodrunov.  As you can see, dear viewers, opinions differ, but generally we can probably say that everyone is waiting for the recovery of our economy, we hope that it will stabilize on a decent level in the coming years and will continue to grow because economic growth means higher incomes of the population. It is something that can be invested in human capital, in development, in solving social problems. And it’s the most important thing for the national development goals which our President spoke about and which are set before the Russian society today. I thank you, Alexey Leonidovich, for participating in our program. All the best and see you again.

  

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