Russia’s economy is expected to bounce back into growth in 2021. The Economic Development Ministry’s estimate is 3.3% under its baseline forecast; according to the Bank of Russia, growth will reach 3-4% this year. Despite the crisis and the pandemic, inflation remains low, and unemployment is moderate. Unlike the world’s leading economies, Russia entered 2021 with sovereign debt at its lowest, mainly in the national currency. The participants in the expert discussion Hard Talk about Economic Growth during the 2021 Gaidar Forum considered potential drivers of economic recovery and discussed whether Russia would be able to maintain growth in the future and whether an unconventional monetary policy could ensure growth in the long term. We would like to share the discussion highlights with Invest Foresight readers.
Rebound is inevitable
We shouldn’t be worried too much about the economic growth in the near future as it is almost inevitable in the majority of the countries. After the pandemic-caused collapse of 2020, economies will undoubtedly bounce back.
“As far as the post-pandemic development is concerned, the rebound is almost guaranteed but it is still pointless to speculate about its trajectory. The economic growth will happen, provided that countries pursue a responsible economic policy,” comments RANEPA Rector Vladimir Mau.
The World Bank predicts a 4% economic growth in 2021 — subject, however, to the full-scale COVID-19 vaccine rollout. China is expected to have a particularly impressive economic upturn of 8%. The GDP of the United States is expected to grow in 2021 by up to 3.5% and Japan by 2.5%, which is higher than several years ago. As of the end of 2018, the GDP of the Eurozone grew by 1.8% and the year before, by 2.4%, in the highest increase of the decade (according to the European Statistical Office).
Growth or gamble?
The economic growth of the past several months has been mostly linked to cautious fiscal policies of central banks in many countries — in particular, through increasing the sovereign debt and the money supply (the global government debt reached 100% of GDP). Well-timed during a crisis, this kind of fiscal policy is, however, unlikely to secure future economic growth. Bank of Russia Governor Elvira Nabiullina noted that the policy has not resulted in a significant growth — on the contrary, it has prompted further inflation of the financial bubbles which are still to deflate back. There are also signs of a growing inflation. Moreover, this kind of policy aggravates inequality that is becoming a key factor in defining wealth.
“When a soft fiscal policy is used as a way to maintain growth rather than as a temporary measure, the value of assets increases. Who benefits from assets rising in price? Definitely not the general public,” Elvira Nabiullina said.
The speakers agreed that the policy of building up the sovereign debt and the budget deficit is unacceptable for Russia in the long term. Furthermore, a similar approach already resulted in a sweeping financial crisis in Russia back in 1998. There will eventually be a payback time for supporters of the soft fiscal policy, be it higher inflation or public expenditure cuts.
“The process can take longer and be milder in developed countries that issue reserve currencies, but faster and harsher in developing countries,” Finance Minister Anton Siluanov said.
Amid the pandemic, the Central Bank adopted a countercyclical policy, reducing the interest rates; the Finance Ministry spent its reserves as well. According to Anton Siluanov, plans call for normalizing budgetary policy as soon as in 2022, to which end a series of structural changes has been held, including in taxes, procurement regulations, and others.
“It would be difficult to normalize budgetary policy in other countries,” the minister said.
We don’t need uneconomic growth
However, participants in the discussion believe that economic growth should not be considered an absolute value. For instance, the economic growth of the second half of the 1980s was not accompanied by an improvement of the wellbeing of the citizens, while in Japan the quality of life is growing despite the 25 years of stagnation, Vladimir Mau said.
Anton Siluanov agreed that the growth does not necessarily lead to the creation of a long-term surplus product; a quality growth that would lead to the creation of contemporary jobs and new technologies is much more important. One can dig a hole and then fill it up, but this investment will not bring any surplus product. The same goes for oil prices: when they were rising, the economy was on the rise, and then the prices fell.
“There is such a thing as uneconomic growth: when economic growth reflects a decline in the quality of life and life satisfaction. We do not need such growth,” Anton Siluanov added.
Investments as a growth driver
The development of private investment can support the economic growth in Russia. According to the discussion participants, the issue of supporting private investment is becoming more pressing. According to Maxim Reshetnikov, numerous measures were taken to this end in 2020, including the adoption of new regulation on security of investment. A governmental resolution on infrastructure bonds was signed in December, and work on green bonds is underway as well. Immense efforts have been taken to create opportunities for citizens to make investments in the stock market, as well as to reform development institutions aimed to attract private investment along with budget funds for projects. Currently, ten rubles of private investment can be brought per one budget ruble through development institutions.
“We should initiate a new wave of private investment. Last year, we created opportunities for investments and provided a substantial foundation for a new investment cycle,” Economic Development Minister Maxim Reshetnikov said.
Efforts should not be focused solely on state investment, Anton Siluanov agreed.
“This policy was justified in the situation we were facing last year. But we need private investment and numerous institutional changes, be it protection of property or judiciary system, which we mention constantly,” Anton Siluanov noted.
Digital technology to support growth
The growth of the Russian economy can be supported by a greater development and introduction of digital technology. The session participants noted that regarding its influence on the economy and the boost it provided, the digitalization can be compared only to electrification and printing. They also emphasized that today Russia is a leader in creating conditions for development and introduction of digital technology. The law on experimental digital modes promises to give an impetus to the process of digitalization; work is underway to discuss the newly developed law on electronic archives that would facilitate abandoning paperwork; the law on self-employed has proved efficient. Digitalization is creating new niches for employment, with a new class of workers developing through the use of IT infrastructure and platform solutions.
“Not only can we catch up with other countries – this is the case where we can get ahead of many of them and boost labor capacity and personal income, and support the economic growth,” Maxim Reshetnikov noted.
“Prosperity and growth come from institutional reforms plus digitalization of the country,” Anton Siluanov concluded.
By Olga Blinova