Chairman of the Audit Chamber Alexei Kudrin released a forecast in late May, according to which Russia’s GDP in 2019 will not increase by more than 1%, which disagrees with the Finance Ministry’s official forecast of 1.3%. In his interview for Invest Foresight, Director of the Institute of Current Economy Nikita Isayev says why the official statistics should not be trusted, whether Russians should be afraid of a coming economic crisis and why global investors are fleeing the country.
– Mr Isayev, how do you estimate the current economic situation in the country? Is the Finance Ministry’s official GDP growth prognosis fair?
– The official economic statistics in Russia is being artificially inflated, to demonstrate the non-existent growth of GDP. As a matter of fact, the Russian economy is in decline; the country is stagnating. The government shows us allegedly true figures claiming that the growth is 1.5% or 2% or even 3%. All this is just a game of the Federal Statistics Service that eliminates ‘inconvenient’ sectors from its review and only reports on growing sectors.
Meanwhile, the actual income and the quality of life continue to fall. The unemployment rate is growing. There is a positive dynamic but only in export-oriented commodity industries, primarily in oil and gas. There is some growth in the forest and fishing sectors, ferrous and non-ferrous metal industries and the chemical industry. However, this is due to fortunate market prices on export products.
We are being told about the budget surplus of almost RUR 2 tln ($31.2 bln). Another aggravating factor is the fact that the funds from the investment programs of state corporations are distributed to unspecified infrastructure projects with a high risk of corruption.
– Which industries are excluded from the official statistics?
– All the industries with a negative dynamic. These are mainly processing industries, consumer services, small and medium-sized businesses that continue to suffer from forcible takeovers and inefficient governmentalization. The growth we see is entirely based on high oil prices.
– What will happen next?
– If oil prices begin to decrease (which already happened earlier this year) the budget will have to be adjusted. Social expenses will be the first to prune.
– What factors can catalyze a full–fledged economic crisis in Russia?
– What we are witnessing is a real life–size economic crisis. Zero growth is an economic crisis for Russia. Our economy requires permanent growth at least by a small margin. China, with its growth of 5.5%, says it is a crisis, as they usually grow faster – its economy can add 6.2% a year. Russia lags behind world economic growth, and this negatively affects its investment appeal and the quality of life. The mortgage boom in Moscow, inflated by various forms of support from developers affiliated with the state, definitely cannot change the economic situation in the country.
– So you are saying we need system–wide reforms? What reforms?
– The first reform should concern inter-budgetary relations and the tax system. We need to achieve a redistribution of revenues between local and regional budgets. Secondly, we need to defeat corruption in the oil and gas sector and other export-oriented industries. Thirdly, we need to split up state corporations into smaller competitive enterprises; and we need to develop the private sector, using both Western and Russian models.
Furthermore, it is necessary to recognize that the economy is in crisis and launch a full-fledged anti-crisis program, cut inefficient spending, and eliminate seats of corruption that exist at all budget levels.
– Certain economists predict a global crisis next year. They say it will originate either from the US or from southern Europe. How likely do you think it is?
– I doubt that these predictions are correct. The coming crisis is more likely to be expected from East Asia. The Chinese economy is overheated, and it can seriously affect global markets. The trade war between China and the United States is also likely to provoke negative developments in the global economy.
– And the last question we cannot fail to ask. How will the high-profile arrest of Baring Vostok founder Michael Calvey affect the investment climate in Russia?
– Michael Calvey’s arrest has dealt a real blow to the investment climate. I think we should expect a decline in investment and an outflow of capital. In fact, capital outflow has already tripled.
By Alexander Stolyarov