According to Central Bank Governor Elvira Nabiullina, the national economy has ample opportunities for sustainable development; she said so addressing the Federation Council. Invest Foresight asked Igor Nikolaev, Director of FBK (Financial and Accounting Advisors) Strategic Analysis Institute, about the opportunities she could have meant.
– Do you agree with the Central Bank governor that the Russian economy has ample opportunities for sustainable development?
– No, I can’t agree with this statement. In fact, stability is something the Russian economy is having a problem with.
– Why?
– Before one can claim that we have ample opportunities for sustainable development, they must first list sustainable economic growth factors.
Personally, my idea of steady development is consistent growth because, if we see zero growth rates, technically, it is also steady. Even if it is a one-percent growth, I’d rather call it stagnation. But is it steady? Yes, it is steady but with hardly any growth.
As concerns significant growth indicators (say, 2.5% or 3% of annual economic growth), my opinion is that the Russian economy currently has no such potential.
— What prevents the Russian economy from reaching these rates?
— Let’s consider growth factors. The conventional factors include exports, investment into fixed assets and consumer demand. Of course, there are others but these three are the primary factors.
— And what is their status?
— Clearly, last year, exports made a breakthrough due to the state of the oil market. This year’s export revenues will be significantly lower, hence the exchange rate we see these days: not 50 rubles per dollar but almost twice as much compared to the summer of 2022. The international pricing of major export products has changed. Also, the sanctions against our country mainly focus on restricting exports, to deprive Russia of its most important source of revenue. We can’t foresee the consequences yet.
— The second factor is investment into fixed assets.
— Yes, investment into fixed assets. The rate of investment was -1% as of early 2023 and, after a recent review, it stands at +0.5%. Still, it is not the growth rate that can ensure steady development.
— What rate should it be?
— If the investment into fixed assets grew by around 10% every year, steady development would be something worth talking about. But the 4.6% we saw last year were secured primarily by public investment. Maxim Reshetnikov (Russian Minister of Economic Development – ed.) says that investment from the state increased by 26%.
However, with the growing federal budget deficit shown by the Finance Ministry in its preliminary results, it is unlikely the public investment will be able to uphold the general investment dynamic this year.
— And there is also consumer demand.
— Yes. Last year, people’s real incomes slightly decreased and this year’s first-quarter results show more than a symbolic growth of 0.1%. It is not the same real-income dynamic when we can speak about consumer demand to become a steady driver of the economy’s development.
Therefore, my conclusion is, if we can’t rely on the main conventional drivers, what else can encourage optimism? I can’t imagine.
— Elvira Nabiullina mentioned that the active involvement of the finance sector is necessary.
— Involvement of the finance sector means that banks and other financial organizations should be investing in the economy. The finance sector ensures active borrowing of people’s funds.
Not without good reasons, Nabiullina repined at the fact that in the finance market, investors are not parting with their funds easily. But it is quite natural that the finance sector shows caution amidst the extreme economic uncertainty. This is the first point.
The second point is that we should not overestimate the capabilities of the finance sector as they significantly depend on the financial result that corporations show. If we look at the dynamic, their financial results this year are substantially worse year-on-year, by about 20% to 30%.
I believe we should not expect the finance sector to contribute largely to the steady economic development.
— Then what sector can do it?
— If by sustainable development we mean an accelerated growth of 2.5%-3% per year, there are no such growth drivers at the moment.
There can be, of course, budget stimulus. But we are talking about sustainability, and economic stimulus and growing expenses will indeed contribute to GDP but for a very short period of time. This is not what we call sustainable development.
We already have a serious budget deficit, we just spoke about it.
— So, there are no options.
— In the current conditions, we need to have a realistic view of the situation, and there are two approaches. Amid the strongest, unprecedented sanctions pressure and a rise in economic uncertainty, we should adopt the “less is more” approach.
That is, we need to focus not on ensuring an accelerated and steady growth, but on implementing a strategy of guaranteed survival. And when the difficult times are over, the economy will have the potential to reach strategic goals and provide for the economic prosperity of the country.
My point is that we should not overestimate the economy’s capacities; the main goal is to preserve them. There must be a survival and preservation strategy rather than attempts to reach sustainable development as it is presented now.