New shocks in the New Year: Economic forecast for 2019

What awaits Russians in 2019 in terms of the economy and economic legislation? What important events will happen? We talked to several reputable experts and here’s what they said.

Yakov Mirkin, PhD, Head of the Department of International Capital Markets at the Institute of World Economy and International Relations of the Russian Academy of Sciences (IMEMO).

In 2019, the situation in Russia will depend on the external environment. We expect that the new year might be super volatile, and we will see external shocks in global finance that will negatively affect the Russian economy, such as the strengthening of the dollar, the growth of the federal funds target rate and the continuing fall of commodity prices. The developing markets will bring their own shocks, such as a decreasing demand for commodities due to a slower global economic growth, and trade wars. Russia will face an increasing pressure, both related to sanctions, but also economic and financial, as a payment for existing in a highly competitive environment. There will be reaction to each of these shocks. Depending on their severity, the economy management might switch to the anti-crisis regime in case the foreign sanctions are tough and can lead to a crisis inside Russia.

It is better to forecast trends, not events. The general trend will be the growth of the tax burden, the ongoing concentration of assets and the nationalization of the economy. Another one is 25 years of not lowering interest rates on bank loans. There will be an attempt to grow through the budget in separate industries and regions, using large projects where the budget bears everything: social protection, the defense potential and the economic growth. This will be a shell inside which domestic economy events will happen. I am speaking of regulative events.

As for economic legislation, the general trend will be the growth of administrative burden. If there are shocks that can cause a crisis inside Russia, we might see more regulatory restrictions to counteract these shocks. These will be restrictive measures in all areas, from foreign currency regulation to capital flow. We cannot predict concrete measures and events, however.

Igor Nikolayev, Director of the Institute for Strategic Analysis at FBK, one of Russia’s leading audit and consulting groups

As for the general economy, some events have already been predetermined and have happened this year. Allow me to remind you about the adoption of a law augmenting the tax burden — an increase in the VAT rate from 18% to 20%. This hike will be a serious negative factor and an important economic event. On the whole, I would say, 2019 might not be a year of accelerating economic development, but a year of decline. We might even observe a growth rates turning to negative. The reasons may be the flat oil prices and the tightening sanctions. The global economy, torn apart by trade wars, might throw in additional problems. It is already on the downslide. Hence the question: is the year 2019 a beginning of a general crisis, global or otherwise? I think it is.

As for the economic legislation and the important events in this area – I used to find myself thinking before that some things cannot be even imagined; now there is no such thing. Anything is possible. However, I think there will be no global changes in Russian economic legislation, since to a large extent the legal framework has already been created. But they can come up with something else with taxes, with excise taxes – another rise, of course, because they have growing needs and there is no money in the budget.

Nikita Maslennikov, Head of Finance and Economy, Institute of Contemporary Development

The new year will be quite difficult and even turbulent. The main event that will determine how the year goes is the VAT increase and how the economy will respond to it. It is more or less clear that the VAT increase will cause the inflation rate to go up to 6% during the year. But actual consequences are not yet known. I think we can expect a further decrease in purchasing power and lower business activity. This means lower investment, for example. Whether it will last one, two quarters or more is not yet clear. However, we know that it will definitely affect the GDP growth rate. The Central Bank’s policy in these conditions is rather hard to predict. One thing is obvious: we will experience a significant slowdown. Coupled with sanctions, we may have to face a recession. Another important event is the launch of national projects. So far, the launch is planned for the second half of the year, especially in terms of investment that must enter a positive trend. But judging from the preparation for these problems, there is little hope for a timely beginning.

As concerns regulatory action, it is clear that there must be decisions related to state procurement and a plan to improve competition. Efforts should be taken to finally deal with the rules for promotion of investment, whose number is always increasing but there is no clarity (for instance, in regards to whether businesses should expect special investment contracts or agreements on Belousov’s list). Plus, there is a state industry reform initiated by [Deputy Prime Minister] Dmitry Kozak concerning government subsidies. And, of course, work should be done to finalize the pension reform; I strongly hope that the decision to launch a new model of individual pension savings will be adopted to begin the entire process starting in 2020.

As regards the conditions for business operations and the stability, these things are lacking. We would like businessmen to receive responses in the first quarter of 2019.

There is also a risk that should not be underestimated – a systemic risk of the global economy plunging into a new recession. It is still not clear whether it will happen in early 2020 or late 2019. There are many questions as to the outcome of the China-US trade wars, the situation in the financial markets that were nearly falling several times, and the possible toughening policy by the US Federal Reserve System, and these questions sill remain unanswered. I support the idea that the crisis may be less profound that in 2008 yet more long-standing, and we do not know what’s better.

Boris Kheifets, Professor, Financial University under the Government of the Russian Federation

As regards the economy as a whole, we are now expecting anti-Russian sanctions to be tightened, and possibly sanctions to be introduced in the financial sector, which will be a very sad event in 2019. Yet, there are also positive prospects. For instance, I would expect a certain improvement of the international situation and a certain de-escalation, which also cannot be ruled out. This all can change Europe’s stance on Russia to some extent, and possibly, even break the deadlock in the Minsk process. This will definitely have a positive effect on our economy. Our leaders also say that there is a tendency for income growth. This will probably give an impetus to the industrial growth, but I personally think the chances are slim.

Russia’s relations with China will strengthen, as well as the ties with other BRICS countries, in particular, Russia-China-India relations. The ties with Japan are progressing well, although a major breakthrough can be expected only after conclusion of a peace treaty. Russia will reduce its foreign debt, which is also a positive moment. I think that the transit along the Northern Sea Route will expand, which is very important as regards Russia’s positioning in the global economy and the country’s increasing role.

As regards economic laws, we would like to expect initiatives for easing of business conditions, which would not concern certain territories such as special economic zones. So far, we are observing an aggravating situation, with the value-added tax [increase] being a prime example. However, there should be harmonization because economic development is impossible without economic revival.

Alexander Abramov, Head, Laboratory for Analysis of Institutions and Financial Markets, Russian Presidential Academy of National Economy and Public Administration (RANEPA)

I believe that the major economic event in 2019 will be extensive state investments that are being raised by Presidential Aide Andrei Belousov. The collected finances and their implementation channels are going to be the biggest event but at the same time the biggest risk. Overall, I expect greater economic risks, waste expenditures, and banks’ growing band debts. Another major event next year will be a response to the question as to how Russia will proceed to the economic growth. According to the Ministry of Economic Development, this growth is expected at a rather meager rate of 1.9% of the gross domestic product; yet, a greater rate is expected for 2020. The problem is that a global crisis is expected to take place during this period. However, the sanctions and the cumulative effects of the isolation can protect Russia from the most negative consequences of the global economic shock to some extent – I think, even despite a possible fall in oil prices.

As regards the economic legislation, the Central Bank should take efforts to formalize the policy of individual pension capital as this may become one of the major channels for collecting money from citizens for financing infrastructure projects. Formalization of this process at the legislative level, which is envisaged in the Russian Tax Code amendments, can considerably and rather positively affect the financial market development.

Agvan Mikaelyan, member of the Board of Directors of ACG FinExpertiza

I think the only positive changes in the Russian economy in 2019 will have to do with the facilitation of registration of new companies. Electronic document management will probably develop; that’s all. Now, about the negative expectations: most likely, inflation rate will grow due to the VAT hike from 18% to 20%; interest rates on loans will naturally grow. Third, tax control will become tighter – a positive change of course, but only on the one hand. On the other hand, law-abiding and transparent companies will find it harder to keep afloat, and the most honest businesses will probably have to leave the market in the end, or at least shift to the gray zone. The government has established a development vector that will be pushing taxes further up – despite the huge, simply gigantic budget surplus associated with the fear of future sanctions. The economic law will not change much next year, I suppose.


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