Central Bank makes disappointing forecasts

The Bank of Russia has published its Monetary Policy Guidelines until 2024 suggesting several scenarios for Russia’s economic development over that period — frankly, all of them quite disappointing.


Let’s start with the beginning. According to the Central Bank’s baseline scenario, “the Russian and global economies will expand in 2021, provided that the epidemic situation improves gradually as countries achieve their national vaccination targets.” If this scenario, presented as the most realistic, comes true, the Russian economy will grow by 4.0–4.5% this year, and will “stabilize on a balanced growth path at 2–3% beginning from 2022.”

The figures are not bad at first glance, although they don’t look too promising either. But this is only at first glance. The Central Bank actually predicts that global GDP will grow by 6.6% in 2021, by 4.7% in 2022, and by 3.2–3.3% annually after that. This means Russia will lag further behind the global economy. If anything, the gap will continue to grow, while the starting point is extremely low — the Russian economy has been adding an average of 0.5% since 2014, when the West imposed sanctions on Russia after the annexation of Crimea, while the global economy has been growing by about 3% annually.

This suggests the government’s plan of achieving economic growth that would exceed its potential in the next few years is hardly feasible.

The next alternative considered by the Central Bank is the Worsening Pandemic scenario, which suggests the pandemic situation worldwide might worsen drastically as early as the first quarter of 2022. In this case, GDP growth will be close to zero in 2022 (against + 3.2% worldwide), accelerating to 3.5–4.5% in 2023, and will “return to the rate nearer its potential by the end of the forecast horizon.” That is, the Russian economy will be even farther behind.

However, a sharp increase in the number of the coronavirus cases does not seem like a real possibility, not when a steady progress with vaccinations is improving the general situation and reduces the severity of infections even with new strains.

The Financial Crisis scenario does not sound probable either. This scenario, according to the Central Bank, involves the risks associated with a tightening of the US monetary policy; as a result, 2023 may begin with massive sales of risk assets in the financial market and exacerbation of “debt problems worldwide.” This basically means a classic stock market crash, which will certainly affect the real economy.

The financial crisis will drag the Russian economy down 1.4–2.4% in 2023. The recovery will be protracted and will take several quarters, but by 2024, the growth rate will reach 3.0–4.0%,” the regulator predicts.

The US Federal Reserve System understands well the danger of a new financial crisis. Most of its members do not expect the first rate increase — by 0.25 percentage points — earlier than in 2023.

In the meanwhile, the Federal Reserve System will begin to cut on the repurchase of public and mortgage-backed securities from the market. It is expected that a relevant announcement will be made in September. The experience of the 2008 crisis showed that this measure only leads to increased volatility, but the trend on the American stock market was ascending right down to broad hints that there could be an increase of the key rate.

The Global Inflation scenario with growing global prices on almost all goods looks more realistic.

“It is anticipated that inflation in the advanced economies is temporary. However, factors contributing to an accelerated price increase might be more stable than it is currently estimated,” the Central Bank notes.

These concerns are truly serious. Since the beginning of this year, the prices of the main commodities have grown by tens of percent. Rather sooner than later, the growing commodity prices will lead to growing prices on finished goods. At the same time, the continued money injections into the global financial system do not suggest that commodity prices will stop growing.

Under this scenario, the Russian economy will continue to grow at an accelerated rate in 2022, supported by the growing demand for Russian exports products. The country’s GDP will grow by 2.4%–3.4% in 2022. The further decrease in external demand will lead to a slowdown in GDP growth to 1.8%–2.8% in 2023.

Thus, under all scenarios, the Russian economy will fall behind the global average level. In any case, the Central Bank promises to bring inflation to the so-called target level of 4% no later than in 2024. It will be achieved by the preservation of a high key rate, which will be lowered to 5%–6% only in 2023.

Any Western economist would be baffled by the Central Banks’s statement that the increase of the key rate by 2.25 percentage points in March-July does not hinder “the sustainable growth of the Russian economy.” The low interest rate leads to cheap loans, promotes the growth of industrial production and the lower price of finished goods by partially compensating for the increase in commodity prices. At the same time, citizens can take super cheap loans, often at an interest rate lower than inflation, which will in turn promote demand.

But that’s what happens there. Here, the lion’s share of GDP is formed by commodity exporters and relevant companies. Given the huge profitability that companies have when exporting commodities, the increasing price of loans by several percentage points will not lead to any negative consequences.

Therefore, there is little doubt that the Central Bank will reach its main goal to reduce the inflation rate. The question is, is it worth the continued degradation of the Russian economy? Especially given that the inflation rate calculated by the Central Bank and the Federal Service for State Statistics does not correspond with the rising consumer prices.

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