Why Russia’s lag behind the global average growth rate is growing, and what are the main shortcomings of Russian economic policy? Invest-Foresight discusses these issues with the director of the Institute for Economic Growth named after Stolypin, Anton Sviridenko.
Russia amid global trends
— What is in focus of your institute now?
— In general, our focus is on the economy and everything that happens there. The Russian economy, its comparison with the parameters of the world economy. Does Russia come closer in Its economic indicators with other similar countries, whether there is convergence or vice versa, Russia is in some kind of countertrend? I will immediately say, it turns out both answers are correct in some way.
Our other task is to study issues of administrative and business climate. In partnership with the Commissioner for the Protection of the Rights of Entrepreneurs, we prepare an annual report. We conduct analytical, expert studies; meetings that let determine what happens in Russia from the point of view of the business environment, what rules and laws negatively or positively affect the business conditions, what changes are needed. We “highlight” areas that deserve special attention.
Our third task is contact with the public, work with public organizations, institutions, interaction with society. To do this, we annually hold Stolypin forum. This year it will be held for the fourth time: September 9-10.
— It is very interesting what you said about trends and countertrends. Could you give an example?
— Indeed, there are many interesting things here. We recently made a comparison
how countries went through the pandemic. I must say, according to external signs, Russia seems to handle it more easily. Our scale of the fall was not as large as in some foreign countries, especially Europe. Our fall was comparable to the United States: Russia — minus 3.1%, and they — minus 3.4%.
In the same time, it should be noted that over eight years, from 2008 to 2020, Russia’s GDP grew in constant prices by only 5%. Moreover, on average, the world growth was 41%. And for developing countries, now Russia belongs to this group, the growth was 68%. This is the so-called Herschenkron effect — when catching up development is faster than advanced one due to the effect of a low base. We are far behind the developing countries. At the same time, we also have an effect of a low base.
By purchasing power parity, our relative rates are more or less decent, but still we are far behind. And by nominal indicators in dollars — the lag is very, very strong. In 2014, we ranked ninth among all world economies in terms of nominal GDP. According to the results of 2020, we will probably drop to 11th place. If pandemic year 2020 discarded, then from 2008 to 2019 we grew by 11%, and the world — by 45%. By purchasing power parity, we wanted to be in the top five countries, but now we take 6th place. Here Indonesia is catching up with us. It used to lag far behind Russia in development in terms of such indicators as GDP per capita of GRP, by population income, and now it is picking up closer.
— But after all Russia handled the pandemic easily?
— Yes, but due to the effect of a low base: we had nowhere to fall much. We went through a pandemic more or less against the background of developed countries, worse than commodity countries, although conditions were the same for everybody; oil, gas and other commodity prices fell equally. Moreover, we no longer hold world-first place in oil production. We are inferior in gas to America.
And in general we are growing worse than commodity countries. We have less investment in fixed assets — 22.8%, and in commodity countries, the same indicator is 28%. In addition, this allows us to conclude that our raw material basis for development needs to be changed. Despite the fact that the commodity sector is a good airbag, and, in principle, we could live well using this because we have a constant influx of foreign exchange funds. However, excessive concentration on the commodity sector leads, firstly, to the strongest dependence on it, and secondly, the fact that we have underdeveloped other industries. We live on imported, consumer goods, we export few such goods.
Because of this we must always focus on our future situation with raw materials. If our economy was more diversified, we could produce consumer goods to replace imports, and export to level off foreign exchange flows. Then our standard of living would have risen a lot. The raw material airbag would give additional bonuses. And we would live, maybe, better than some other commodity countries, because we have great geographical opportunities for development.
Economics and the struggle of departments
— In this regard, what do you consider the main drawback of our economic policy in terms of the development of non-primary industries?
— There is no public focus on these tasks. There is no single center, who would follow everything and make adjustments. Politics we get is a little bit multidirectional. Various blocs within the government pursue their departmental interests, and it turns out that decisions that are made in favor of development are compensated by decisions taken against development.
We are all in favor of reducing the costs of small and medium-sized businesses, for reducing administrative pressure, reduction of fines. And there are decisions that are aimed at achieving that. On the other hand, constantly some new acts worsen the situation of business. For example, a new drainage fee has recently appeared. Without any reason, now half of the small businesses in the country have to pay 1.5 or even 3.5 times more. This is completely incomprehensible.
We are all in favor of the small business, we give subsidies to SME, in 2020 we realized that SME contribute to employment, but at the same time from nowhere arise such decisions. Why? All the pros that the authorities and the president constantly talk about are suddenly offset by such small point decisions. That is, the main thing is contradictory policies. We do not have a single strategy for how we should grow.
— In terms of growth strategy, who in the world could we focus on?
— Within the framework of world experience, countries used different growth models. For example, Asian countries, those called “new tigers,” and China after them, worked on the low costs model. Low costs were an advantage in world trade. These countries grew at the expense of their export. At the same time, domestic demand was very limited, because of low salaries. This is a model of growth at the expense of patience, when people endure low costs and understand that in the future, in 20–30 years, their children will receive a return.
So, for example, it happened in South Korea. Initially, the domestic market there was very narrow, and now they have repeatedly exceeded our Russian level of GRP per capita. China is implementing a new concept too. There the level of well-being increased greatly due to work, which they have done in 20–30 years. And they already often have incomes nominally exceeding Russian salaries. Accordingly, now they have the concept of “double circulation”: they work both on the external and on the internal market.
But there is another way that was developed, for example, by the post-war countries of Europe and Japan — when domestic market immediately acted as the driver of development. Then a policy of high productivity and high salaries was adopted.
— How should Russia develop?
— We have neither of these two models, to be honest. We now have labor costs, for example, very low when compared to the world, but the unstable situation and uncertainty of the exchange rate do not let move with low cost policies. We can’t do this because we have the administrative environment that is not ready to accept business and raise investments. We would like to grow, of course, within the framework of the concept of high incomes and a productive economy. But here we have a whole block of solutions that are not implemented.
This is monetary policy too. Although in last year there was a serious easing, this did not always make it easier to get a business development loan. High barriers remain in financing, in control and supervision activities in the form of unnecessary requirements. Although the regulatory guillotine is working now, we are not yet surely understanding its results. We do not have tax incentives that stimulate high-performance economics, innovation and the arrival of entrepreneurs in regional technology parks. For this, special tax, rental and other conditions are necessary that suggest that the person will reach breakeven point.
We do not have all this to the right extent. We have certain economic zones, where individual, successful projects are really implemented. But they do exist since the 90s, despite general trends in the economy. These islets of efficiency could not raise economy. And now there are islands of efficiency: beautiful factories, beautiful entrepreneurs, even islands of effective public administration. But this is not a massive trend.
— And what is the trend?
— The trend is that there is no understanding of how we realize growth. We have a tax policy that is confusing, disproportionate. Everyone wants to be an IP (“individual businessman”), because there are no taxes on dividends. As a result, everyone is trying to split their big business between several individual entrepreneurs. This is very difficult: to comply with the business structure, in the same time properly transferring the assets.
Everyone chooses between modes, looking for tax benefits and forgetting about development. There is still a problem of the “tax pit”: if you cross the turnover border laid for a simplified taxation system, your taxes increase by 2–3 times.
The judicial system is also provoking complaints. Criminal prosecution of business is excessive. Although, I must say, the general work of the authorities, of the prosecutor’s office and of the commissioner for the protection of entrepreneurs’ rights, the creation of the “Забизнес.рф” platform helped to equalize the situation a little. Now the most criminal cases against business are initiated by public procurement. The trends are — less arrests, less pressure on ordinary business affairs. But in procurement, too rules are not fully understood. The problem has become smaller, but it remains.
A separate problem is the tariffs of natural monopolies. They grow faster than inflation. They are often incomprehensible. Why is the investment component exactly that? In general, there is some opacity.
Looking for the perfect economic policy
— You still think that Russia should develop according to the model, approximately similar to the European post-war one?
— There is a feeling that it is closer to our path than the Asian path of prolonged deprivation. Even in a pandemic, when there was a shortage of jobs, Russian citizens still did not accept the jobs, which were not paid very well. They tried to live with state benefits, staying at home. And still, migrants were involved in these jobs. There was a problem: as pandemics have suspended cross-border movements, our citizens did not want to take jobs, but there were no migrants to replace.
In certain areas, despite the fact that unemployment increased, there was a shortage of labor force, for example, in trade. Russia has historical experience, we have good personnel, we have a memory of our technical breakthroughs, there are universities. Therefore, we are closer to the high path performance. With our oil pillow, we can implement it even without radical transformations in the global financial system, achieving sfor the ruble a reserve currency status.
China has achieved this for the yuan, we have not yet been able to do this. Now we face already era of crypto finance. Perhaps here we should look for a solution. A new world system where our ruble, our currency or maybe the single currency of the Eurasian Union will have more weight, it will be easier used in world payments. Something could be realized here already on the crypto financial basis, because the ruble, with its fluctuations in the exchange rate, even by formal criteria does represent the reserve currency, not to mention political pressure.
Therefore, we are forced to use third parties’ currencies. Plus our ‘oil pillow’ allows us to use the funds going into budget reserves just on investment goals. We need foreign exchange reserves to buy equipment and machines abroad. But the state does not provide incentives for the mass import of investment goods. And to grow with high performance, it is certainly necessary.
— If you imagine that the economic policy of the state is changing for the better, what would you propose as priority reforms to the government?
— First, project financing for business, when under special project financing the company is given simple or syndicated loans at favorable conditions, at least 5.5%. Now there is a program at 7%, also not bad, and it works, but collateral requirements are unbearable for our business, you’ll have to gather up to 42 documents, so only sole production projects are lucky to get credit.
As a result, the business is unable to start project because there is no normal long-term funding. We are now preparing program “Economics of simple things,” it provides for standardization for production projects. For such projects you should open technology parks, provide financing conditions, give people money for specific projects, which are already known and calculated – there will be a result!
— So, the first one concerns financing?
— The second one concerns taxes. More equal tax system when everybody has got the same regime, let rates vary for small, medium and large businesses, but there will be no ‘running’ between different modes. It is not clear what to do with the pension system: you need to think about how to change it. Taxes on our labor are very high. The rate is 30%: business can’t stand it. And the most interesting thing, now they have done a single social contribution of 15% in excess of the minimum wage – and more contributions began to arrive at this rate, and wages began to rise more amid the crisis, that is, people stopped to hide them strongly. Third is the reform of the judicial system, reduction of criminal and control — supervisory pressure. And the fourth one concerns land, buildings, rent. Preferential rent for a developing business.
— Any proposals that are formulated by your institute are now in discussion somewhere in government?
— We work in partnership with the institution of the Commissioner for the Protection of the Rights of Entrepreneurs, our proposals were repeatedly reported to the President of Russia, there was a program “Growth Strategy,” then a roadmap for the growth of the non-resource economy. A lot of its content was actually implemented. For example, national goals. Now specific guidelines are set, and monitoring is underway, how national projects affect achieving national objectives. And we talked about it 5 years ago.
— And in terms of project financing?
— There is a factory of project financing in VEB (Vnesheconombank), but this is not what we wanted: we talked about small and medium-sized projects, and they have only large ones. Nevertheless, the lending program at 7% reflects the fact that we once asked for a soft loan at 5%, this is already close to what is needed for small and medium businesses.
Last year, the state held, for the first time in our history, direct demand stimulus, which was often used in Western countries. In fact, this was helicopter money to families and businesses. Sometime before we offered, too, such a stimulation of demand, but then it faced great fears. The President of Russia has already said: we need to check everything related to monopoly tariffs, we talked about this 3 or 4 years ago. In the field of tax regimes, the discussed offers (for example, about a special regime for catering) seem similar to what we offer. Control and supervisory reform and regulatory guillotines were already brought into action.
We had our own approach, nevertheless reform occurred, new laws on control and supervision were passed. There have been many changes in criminal legislation regarding business arrests, criminal case investigation, seizure of evidence. Perhaps there are trends that show: what the institute once worked on is gradually being embodied. Not quickly, but it should be so: there can be no quick solutions. The only thing we cannot do yet is creation of development management system.
— Administration of growth?
— Yes, a separate body that would deal only with development, moving away from current issues. Because in current issues, administrative weight disputes always begin between various officials. Current agenda does not leave time to deal with development issues. The development bloc should not participate in this; it should not encounter departmental opposition. One minister has one wish, another has a different wish, and controversy begins. You can drown in disputes; the truth can be lost over the years. The growth administration has not yet been created, but it would be good.
Interviewed by Konstantin Frumkin