The Central Bank believes that Russia can potentially expect an economic growth of 1.5-2.5% in 2025. Invest Foresight interviewed Nikita Maslennikov, Lead Expert of the Center of Political Technology, Head of Economy and Finance at the Institute of Modern Development, to find out what is required to achieve this target.
– The Central Bank believes that the Russian economy will bounce back to the growth trajectory as soon as 2025. Where does this optimism come from?
– First of all, I don’t think the Central Bank is being optimistic. These figures reflect the current state of affairs. According to the Central Bank’s basic scenario, the economy is still going through structural transformation but at this point, it is not enough to make significant progress when it comes to increasing the economic output.
– Why?
– Basically, 1.5–2.5% is the pre-crisis estimate – and the highest bar. This result is possible if we see a favorable development on the external markets, with good conditions for our main stock commodities such as oil, gas and metals and agricultural products. So, this prognosis is more realistic and honest than it is optimistic. It is very unlikely that we will jump above 2.5% because we are facing plenty of issues: stimulating demand, balancing demand and supply, and restoring imports, including via parallel channels. There must be a stimulating policy for all areas.
We should also remember that picking up any pace at all will only become possible in two years and ahead of us are years of decline. So this growth will be a recovery and we should not expect any breakthroughs.
– Is 1.5% to 2.5% of the economic growth above the statistical error for such forecasts?
– It is more of an average estimate, meaning that the higher result is very unlikely and the lower result has every chance to happen. The probability of any forecast depends on the essence of the economic policy. In its scenarios, the Central Bank refrained even from any suggestions or recommendations for the government. It was mainly referring to its own job, which is targeting inflation. And this is normal because we will see a zero growth at the inflation rate below 10%. If the inflation rate is more than 5%, the investment growth will be modest and approximately equal GDP. Another thing they will do is to maintain the floating exchange rate of the ruble.
– What growth rate must there be so that the economy really grows?
– It is a complicated question. If we go by the pre-crisis projects of 2020-2021, the state will need a growth rate of 3% and higher to fulfill all of its obligations. It means that the annual investment growth must be no less than 4%-5%. Accordingly, workforce productivity needs to grow at the same pace.
As for the real income and real salaries, they need to be adjusted to the annual GDP growth, but not lower.
Let me remind you that we did not pick up that pace then, even though we had the ability to do so.
The current situation is different. The sanctions are changing many notions, and we are finding ourselves in the situation of a two-year recession and unclear prospects for 2023, because a global crisis is among the Central Bank’s possible scenarios.
In this case, the growth criteria should change, I believe. The growth must be at least 2.5 percent. However, in 2024, we will still be stuck at the level of 2021.
– What must be done in the first place to reach the growth trajectory?
– In my opinion, it is necessary to speed up the adaptation of our economy to the current environment. It will allow for increasing the economic growth to 2.5-2.7% by 2025. But this growth requires a somewhat different economic policy, a much more active and stimulating one. Therefore, the economic development and social return will depend on what we will be doing with the economy.
– And what should we do?
– It goes without saying that social spending must be sufficiently higher and grow at least equally with the inflation rate. All other indices also should be adjusted in a certain way. First, there must be a focus on improving efficiency, including public expenditure. It is necessary to restructure all tax allowances. We should create a single system to include all stimulating regimes, which are plentiful and range from the IPPA (investment protection and promotion agreement – Ed.) to PDAs, and others. These regimes are often desynchronized and can be used only separately, while the situation often rapidly changes.
We should increase efficiency of government expenditure in a response to our budget oil and gas revenues currently being at 46-48%, and in 2021 they were almost 1.5 times less.
– Which exactly?
– Structural transformation and restructuring of the economy, as well as increasing labor efficiency, require efforts to stimulate an inflow of investments, both budget and private. And private investments are a necessary condition for doing business, starting with taxes and ending with natural monopoly tariffs, plus a whole range of various things in between.
– Let’s imagine the basic forecast by the Central Bank becoming reality and Russia’s economy starting to gradually grow in 2025. What will be its impacts? What benefits will it bring for the government, business, and citizens?
– This will provide business with a certain vector of change in conditions for entrepreneurial activity, with prospects and certainty. And certainty is half the success in organizational planning. The government will also take efforts to create conductions for economic development, without numerous distractions. And for citizens, this scenario will obviously reduce the current uncertainty; the basic forecast for the inflation to settle at 4% will give them understanding of prospects as well as expected dynamics of their real earnings and wages, and help them evaluate consumer loan terms and amounts.
This will result in a different mode of consumption and family budget – which will eventually have a positive impact on the quality of life. Stability always gives people a sense of predictability and security, as well as an ability to plan for the future. People will work more efficiently in a calmer environment.
– As Stolypin said, “Give Russia 20 years of internal and external peace and quiet and it will change beyond recognition.”
– Yes, that’s absolutely correct.