A lot of pessimistic forecasts for 2023 have not come true. The Russian economy has adapted to new geopolitical challenges. It has become more flexible, stable and for the second quarter in a row shows results higher than expected even by the Central Bank of Russia, relevant departments and ministries. But what comes after this adaptation?
Sergey Dmitrievich Bodrunov,
President of the VEO of Russia, President of the International Union of Economists (IUE), Director of the Institute of New Industrial Development named after S.Yu. Witte, Corresponding Member of the Russian Academy of Sciences (RAS)
Alexander Alexandrovich Shirov,
Director of the Institute of Economic Forecasting of RAS, member of the Presidium of the VEO of Russia, member of the Presidium of the IUE, corresponding member of RAS
Andrey Nikolaevich Klepach,
Chief Economist of the State Development Corporation VEB.RF, Member of the Board of the VEO of Russia, Member of the IUE Presidium, Honored Economist of the Russian Federation
Bodrunov: Traditionally, we open the new season of Abalkin Readings with discussing a consensus forecast, as forecasting is an important part of our work as economists. We will analyze the situation at the moment, as well as results as we approach the end of the year, and discuss what awaits us beyond the horizon. So where are we now? I’ll say a few words when opening today’s event.
According to preliminary estimates by Rosstat, in the second quarter of this year, Russia’s GDP accelerated by 4.9%. This is a higher number than previously predicted. The Bank of Russia expected 4.8%, the Ministry of Economic Development put 4.6%. Recently, as you know, Vladimir Vladimirovich Putin, the President of our country, stated that the restoration of the Russian economy to the level of 2021 has been generally completed.
Rosstat records low unemployment and even an increase in wages, which is very remarkable. Wage growth in the first half of 2023 was 6% compared to the same period last year. Consumer business activity is growing in the regions; according to a report by the Bank of Russia, it has especially increased since September. Small and medium-sized businesses are doing well. For the first time in 2 years, sales of SMEs were in the growth zone in accordance with the Russia Small Business Index. At the end of the second quarter of this year, almost all sectors of our economy turned positive. In particular, growth in agriculture is about 4%, construction is 11.5%, and the manufacturing industry grew also more than 10.5%. As for industrial production, a number of analysts point to an increase in output in the defense industry, which naturally affects the overall indicator, that is why it is worth paying attention to other sectors.
Thus, the second quarter of this year showed a 38.6% growth of the computers, electronic optics production, the production of finished metal products increased by more than 36%, vehicles and equipment showed an increase of 28.5%, coke, petroleum products grew by 8.4%, metallurgical production – 8%. All the data are by Rosstat data on September 8, 2023. So, not only the defense industry, but also other important sectors of our industry contribute to the growth of industry. And this suggests that the economy is diversifying a little bit and is entering a more reliable, more stable state. I would say that the storm clouds hanging over our Russian economy did not cause a powerful thunderstorm. It is a fact.
The overall picture, however, is far from rosy; serious challenges remain for the country’s socio-economic development.
In particular, we are talking about a drop in export revenues, and a potential reduction in investment in the private sector. These risks are highlighted by our colleagues from the Institute of National Economic Forecasting of the Russian Academy of Sciences in the release of their quarterly forecast. Therefore, today it is important to conduct a detailed analysis of the factors constraining the growth of the Russian economy and the conditions for maintaining and developing the emerging positive trends. We need assessments of the country’s economic potential, proposals for scientifically based measures to overcome the limitations of scientific, technological, socio-economic development of Russia. It is very important that the assessments of our experts are verified, since they then fall into the programs of the authorities, and today we have one of the opportunities to do this in the Free Economic Society. The Abalkin Readings is just one of the platforms for comparing positions, discussing, and so on.
Shirov: Since today we are talking about a certain general view of how the economy will develop in the near future, I think it is correct to build my speech on what we saw in the forecast of socio-economic development for 2024 and for the period 2025–2026 published by the Government of the Russian Federation on September 22, 2023. This is important because, by analyzing this document, on the one hand, we can talk about some of our own views on economic development and correlate them with the government forecast, and, on the other hand, we can analyze the economic policy that the Cabinet of Ministers intends to implement in the medium term. The main task of an economic forecast, in my opinion, is to substantiate economic policy.
If we look at the Government’s forecast, we can say that the approaches to the formation of economic policy have changed in some sense. What are we talking about? If we look at the economic growth figures, which are 2.8% this year, 2.3% next year and approximately the same for the next years of the three-year forecast, we will see that the boundary of the expected rates has shifted to the growth area, and if so, this forecast should be seen as justifying more active economic policy. Even though the budget is quite conservative and there have been cuts.
What does this mean in terms of budgeting? If earlier we often proceeded from the fact that a more conservative forecast gives the government the opportunity to concentrate resources during the year and then redistribute them depending on how the economic situation changes, now, in fact, the budget deficit becomes the balancing factor of economic dynamics. What does this give? This raises the ceiling on government spending in the current time period and simultaneously implies a tighter fiscal policy. This, in our opinion, if we understand the logic correctly, is a serious change in position regarding how budget spending mechanisms should be structured.
Speaking about the formation of economic dynamics, it should be noted that a certain tension has formed in the economy associated with high growth rates in manufacturing industries. In essence, we are experiencing a forced structural shift. We have always said that such a structural shift is positive for our economy, but when machine-building production and other activities related to final production are growing at double-digit rates, then one way or another the question of how we should expand capacities arises. Here we have two options: the first is investment, the second is import. Accordingly, in the first case, we must understand how quickly these investments will be transformed into funds; in the second case, this will be an attempt to relieve this tension through imports, and it will preserve the problems of import dependence in our economy.
Of course, the most important issue is exchange rate policy. On the one hand, if we have a weaker ruble, we create more favorable conditions for competition with imports on the domestic market, more favorable conditions for exporters and more favorable conditions for nominal budget revenues, but at the same time we create conditions for demotivating part of the investment investments, because imports are, to one degree or another, related to investments, since machinery and equipment are largely imported. And with such a weak ruble exchange rate, additional pressure will be on public investments, the ability to increase them within the framework of a rather rigid budget structure will be extremely difficult.
If we assume that the exchange rate will strengthen, then another problem arises, as imports begin to become cheaper, and in conditions of shortages of both intermediate products and investment goods, we can get an increase in imports and an increase in dependence on them. At the same time, it is clear that in the current conditions, with a tight monetary policy and a decrease in enterprises’ resources for investment in fixed capital, the problem of the enterprise’s own funds exists. How we balance investments in terms of funding sources is a serious question. I would like to note that next year, in accordance with the forecast of the Ministry of Economic Development, the growth rate of investment and gross fixed capital formation is only 1.4%, after 6% this year. In our forecast the dynamics are similar. And this, of course, is probably the most serious challenge that we see, because if there is no support from investment demand, then the entire structure, which is focused on using the potential of the domestic market to create acceptable economic dynamics comes into question.
Of course, the key risks in the medium term are, of course, the external economic environment. This includes tightening sanctions, unfavorable changes in global commodity markets, and factors related to domestic demand, including government consumption. So far we see only high-level values, and there is stagnation of government consumption in real terms. Moreover, we are talking primarily about spending on activities such as education and healthcare, which, of course, on the one hand, is a deduction from economic dynamics, and on the other hand, hits sectors that are priority for our country. And how this conflict will be resolved remains a serious question given the increase in cost efficiency and redistribution.
We can say that the serious impetus that the economy received as a result of both the actions of the Government and the adaptation measures of business continues to have a positive impact, but next year there is a whole set of risks, as I already said, both external and internal character that will seriously hinder development. And the possibility of overcoming these risks, including through a more active economic policy, is what the Government translates to the society in this forecast. On the other hand, it is clear that in order for the numbers to be the same as we see in the government forecast, quite serious efforts are required. It cannot be said that this situation will definitely be resolved positively. Indeed, we can say that we are moving to another stage of economic development, that is, the adaptive, protective, I would say, model that we have been implementing in the last 2 years should be replaced by a more active policy that would allow us to overcome these limitations related to tensions in the manufacturing sector.
The last thing I want to say is that decrease in the number of unemployed that we see is, of course, the result of a large-scale structural shift, when most of our manufacturing industries, primarily machine-building, began to work with a fundamentally different intensity, seriality, and shifts. And, of course, this leads to a flow of employment, including from the service sector, to the processing sector. And all this seems to be not bad, but now we need to think about what will happen when the situation, firstly, somehow stabilizes, and on the other hand, when there is a need for a significant amount of goods that the machine-building complex is currently producing (it is clear that I mean) will begin to decline. And this is a challenge for our economy, perhaps in the longer term, nevertheless, we need to think about how we will complete this high level of workload and high level of mobilization of both the defense-industrial and machine-building complexes now.
Klepach: One way or another, our economy is highly dependent on the price of oil. The forecast of the Ministry of Economy, and this is also the opinion of the Ministry of Finance, includes a downward trajectory of oil prices. If for this year Brent is estimated by the Ministry of Energy at $84, which is probably quite realistic, given the peak price increase in recent months, then by 2026 it is predicted to be $76. There is no need to talk about the stock exchange price, because now everyone is looking at the so-called contract export prices. At the same time, we have a big difference between what goes through the ESPO pipeline, where the price of oil is even higher than for Brent, and the sanctions discount that we are forced to give from the Baltic and Black Sea ports is about 6-8 dollars per barrel, and not 20-odd, as it was at the beginning of the year. Therefore, revenues are high, but, nevertheless, I think that the price of oil will most likely be higher in 2024.
But as for 2026 and beyond, there is a big question about it, because underinvestment in the oil complex in recent years, including under the “green” flag, will result, and is already resulting in an oil shortage. But if the economy grows and the capacities that currently exist are introduced, and not only in Saudi Arabia, then perhaps in 2026 prices will begin to decline, although I don’t think it will be as sharp as is currently included in the forecast and draft budget . But this is, rather, some kind of conditional figure put in order no one expects high incomes, and reserves are kept large, as the Ministry of Finance traditionally does.
I think that the dynamics of oil exports, and especially oil products, unfortunately, will be more conservative than expected by the Ministry of Economy and the Ministry of Energy, although we must give them their due: the expectations of a sharp decline in exports that were both for 2022 and at the beginning of 2023-th were not justified. However, only one India is unlikely to be able to flood itself with our oil. And here the question is not even that it is impossible to sell and export so much there, but that last year our exports to India were approximately 72 billion dollars, and imports were about 6, respectively, the trade balance was more than 60 billion, which largely consists of rupees, which we cannot convert normally. And so far a solution to this issue has not been found. Therefore, the point is not that we cannot sell more oil, but who will pay for it and how. If a mechanism is found, then perhaps the optimism of the Ministry of Energy and the Ministry of Economy will be justified. We stick to more conservative figures here, but I will not comment on them in detail now.
It is important that the export of gas, except for LNG, which is growing and will continue to grow, and which Europe is actively purchasing, despite anti-Russian actions, hardly has bright prospects. If previously we exported more than 200 billion cubic meters of pipeline gas, then for this year our estimate is about 97 billion cubic meters. I think that this volume will not change soon. Rather, in 2025-2026 there will be growth due to China and the expansion of the Power of Siberia pipeline. However, we will not be able to fully compensate for the fall in exports to Europe in the foreseeable future, and given the dynamics of the global economy, which has slowed down, it is difficult to expect a boom in non-oil or non-resource exports, although our grain exports are high and breaking records. We must pay tribute to the authorities: our policy creates self-limitation of grain exports. The state increased the duties, plus de facto the Ministry of Agriculture takes action to target prices which breaks some of the contracts that were with Egypt. Perhaps the idea of increasing supplies to Africa will, of course, increase exports, and it will apparently be about 50 million tons, but so far our regulatory mechanisms have not stimulated an increase in exports.
The second point regarding the forecast.
Despite the sanctions, we have a strong capital outflow. According to our estimate, for this year it is 90 billion, maybe more, and then will stay at approximately the same level. That means that the capital is shoved abroad, into any offshore, so that no one finds it. It is difficult to comment on the situation now. The following must be said about the exchange rate: the problem is that here macroeconomic factors and export dynamics do not play the determining role that the Central Bank talks about, because trading volumes, if we take exchange trading, are scanty, non-exchange ones are larger, but, in fact, a normal mechanism for influencing the exchange rate and regulating has not been yet developed, so even a few large transactions can either push the rate up or strengthen it. What is included in the forecast, which has already become official, is a tendency towards a slight strengthening of the ruble. If we take the average annual value (at the Ministry of Energy it is 85 rubles per dollar, we have approximately the same value), this means some strengthening by the end of the year, to about 92-93 rubles.
But what’s next is more important. The Ministry of Energy envisages 90 rubles per dollar for next year and 92 for 2026. I think that if we proceed from the dynamics of exports and maintain a sufficiently high trade balance, the ruble will strengthen and not decline. The average annual value for next year will be lower: according to our forecast, around 89 rubles. However, further, if you do not take into account various black swans, the rate will go to 85–86, and maybe even stronger. If most of the currency of Rosneft or some other large company were sold in Russia, it would again be somewhere around 60 or 70. But there is no one to sell it to, or the import mechanism needs to be structured differently. This, in fact, is a different industrial policy, where imports are coordinated, because it is clear that those who have foreign currency must hide it so as not to be arrested; they are not interested in such massive imports, and therefore the redistribution mechanism does not really work here. Strictly speaking, the higher the share of exports and imports in rubles, the more balanced the situation will be, but we will not restore imports as it should be in order to cover the 90 billion positive balance on current operations. Neither Gazprom, nor Rosneft, nor chemistry need $90 billion in additional imports. Our imports have already recovered this year and reached pre-crisis levels. But making a leap simply means a fundamentally different industrial policy, so there are no such solutions now.
Regarding investment, our estimate is also quite low at 1.3% for the next year, that is, on the one hand, we have a declaration of very ambitious plans, and I am glad that the time has come for them, because 15 years are in our strategic high-speed railways appeared in the documents, but we did not build a single kilometer. It is stated that all this costs more than 10 trillion rubles. No one knows exactly how much it will cost. But I assume that at least one road, between Moscow and St. Petersburg, will begin to be built, because the railway junction of Moscow and St. Petersburg is now being reconstructed taking into account the high-speed line. Technologically, even from the point of view of rolling stock production, we will be ready for this by 2027, so I think construction will begin. I don’t know whether traffic to St. Petersburg will be opened by 2027 or not, but it has been announced. In principle, everything can be done. As far as I remember, the first time this was recorded in plans in 2008. Since then, the Chinese have built 40 thousand kilometers, and we have built 0, as you know.
However, with such a high rate and a high degree of uncertainty, it is quite difficult to expect an investment boom, although there is potential for investment growth. The driver both this year and, apparently, in the coming years may be the growth of household incomes. It is record-breaking because of both an increase in wages and an increase in military monetary allowances. One of the problems is that the growth rate of real incomes may slow down sharply, because there are no clearly defined indexations for state employees and pensioners, especially for 2025–2026, so I think the parameters may change significantly.
As for the budget, our forecast does not show record revenues. In 2024 we see 35 trillion rubles with expenses of 36 trillion. I doubt it will be possible to make a jump in spending by almost 5 trillion in 2024. If anyone remembers, in our budget law for 2023 the expenditures were 27 trillion, then 32, which actually means that about two trillion rubles are the balances that will creep into 2024. I do not rule out that we see a similar picture in 2024, even taking into account the increase in defense spending. In the budget configuration there is no increase, even nominal, in spending on health care, education, and science. If I remember correctly, the nominal value even shows a reduction for 2024. Therefore, on the one hand, the budget is optimistic and stimulating, but, on the other hand, the real macroeconomic effect of these additional expenses still needs to be analyzed taking into account the structure. Apparently, this will be something in terms of investment in housing construction, but as for the rest sectors, except for the defense industry, I think there will be a rather tough and conservative policy. However, according to our estimates, this will anyway provide growth rates. To tell the truth, regarding its size we have big differences with the Ministry of Economy. According to our estimates, our growth this year is 2.7%, not 2.8%; next year we see a slowdown in growth, based on more conservative estimates for hydrocarbon exports.
In our opinion, there is a lot of uncertainty in terms of reserves, given the picture that the Ministry of Energy gives. Further we foresee growth of 2.2% and maybe a bit more.
To reach the indicators that we have in various target documents which require growth rates at or above the levels of the world economy we need fundamentally different policies and structural changes both in terms of investment and the development of sectors of the social complex. I mean education and healthcare. So far, no such decisions have been made, although they are being discussed, in particular, at the Foresight 2040 group discussions, in groups on strategic initiatives. If these decisions are made, even with lower incomes and larger deficits, the economy could grow 3.3-plus percent a year, even higher. These calculations do not fully take into account the fact that, in one way or another, almost 5 million people are citizens of Russia in the new constituent regions. From there many people migrated, partly to us, and mostly to Ukraine, in total, another 3 million. These people work, moreover, this already affects our harvest and its prices. There are also machine-building capacities there. And in fact, this is a significant factor in the additional acceleration of the development of the Russian economy, which we have not yet fully taken into account. There are some closed figures, I cannot comment on them, but this effect will potentially be greater than when Russia retook its Crimea region.