Russian economy poised to face old problems in new year

Russia’s economy is set to return to its pre-coronavirus model of sluggish growth, weak investment and disappointing living standards in 2022, economists predict, as the Kremlin returns to austerity after the initial impact of the Covid-19 pandemic.

While other countries have used the pandemic to review their economic policies, launch ambitious investment projects or accelerate the green transition, Russia’s approach has been to return to the status quo as soon as possible, considering the fallout from the coronavirus as a justification for its model of stability on growth, and will now redouble its efforts on its ultra-conservative policies.

This means strong public finances and further pulling back from the global economy, leading to weaker growth and continued pressure on households, economists say.

“The authorities have learned that their policy has worked – as far as they are concerned. The ‘Fortress of Russia’ approach has served them well and they can probably congratulate themselves for it, ”said Elina Ribakova, deputy chief economist at the Institute of International Finance (IIF) in Washington, DC.

“Now they are very focused on the macroeconomic situation, stability and their conservative policies. In turn, they have somewhat abandoned regional policies and policies for providing better quality services to citizens, ”she added.

A return to austerity is most clearly reflected in the forecasts of independent forecasters of weak economic growth in the years to come.

The World Bank estimates Russia’s growth potential – a key indicator of how fast an economy can grow in normal times and which is considered the best predictor of long-term prosperity – at less than 2% per year .

“Russia still faces the challenge of increasing its long-term growth rates… in large part, the constraints that existed before the pandemic remain,” said David Knight, the World Bank’s senior economist for Russia.

The list of these constraints is long. It includes “unfavorable demographics, structural economic bottlenecks, a lack of far-reaching reform to diversify from the dominant role of the oil and gas sector in the economy, weak governance… high vulnerability to geopolitical risk… a weak physical infrastructure, high income inequalities and an inefficient social system. safety nets, ”according to Levon Kameryan, analyst at Scope Ratings.

Budgetary tightening

The government’s official tax and spending plans for the next three years, which were passed by parliament in December, are a good indication of how it appears poised to tackle the constraints and tackle the “dilemma. between supporting higher growth and fiscal stability, “according to Sova. Artem Zaigrin of the capital.

The government has said it is aiming for a large budget surplus in 2022 of around 1% of GDP, or $ 15 billion. In other words, a return to savings.

This will further strengthen Russia’s already impressive macroeconomic fundamentals.

Public debt is extremely low, at around 18% of GDP – and 80% of it is denominated in rubles, a form of protection if Moscow were to be hit with sanctions blocking its access to international financial markets. The current account – a measure of how much money comes into Russia from the rest of the world – is expected to hit a record high of $ 125 billion in 2021.

This has helped the country’s international reserves grow from $ 40 billion in the past 12 months to surpass $ 620 billion in the last. to count.

Advocates of a more growth-oriented agenda will point out that this expansion constitutes even more money that could be used to stimulate growth and improve living standards – a criticism also leveled against Russia’s conservative economic framework before the pandemic.

But that doesn’t mean that nothing has changed in the Kremlin’s approach to managing the economy, says Ribakova of the IIR. She sees a shift to a much shorter-term program over the past two years, where quick fixes such as higher benefit payments, one-off bonuses or pay increases for public sector workers have been accepted. as the main tool to support the economy. , as opposed to large public investment programs that were once intended to transport Russia’s economy and obsolete infrastructure into the modern era.

“I have even less hope that national projects will boost GDP than before the pandemic,” Ribakova said, referring to the government’s ambitious $ 400 billion investment program.

“Some people were adding up to two percentage points of annual GDP growth to their medium-term outlook – I have no hope for that,” she added.

Ribakova said the government has realized “the limits of a centralized system’s ability to increase productivity” and could slow down the ambitious $ 400 billion investment program.

National project plans, which cover everything from new roads, railways and bridges to renovating homes and improving healthcare, were already behind schedule before the coronavirus hit. Today, with labor shortages, rising global commodity prices, and the need to focus on more timely issues, such as providing hospital beds and encouraging vaccination, these longer-term projects could fall even lower on the Kremlin’s priority list.

“The best you can do is maintain macroeconomic stability and not waste money. If you can’t control the implementation of national projects from the center – which is very difficult to do – then you might as well save money. Basically they are worried that the money will be mismanaged, so they might as well save it, ”Ribakova said.

Risk of inflation

Zaigrin of Sova Capital predicted that stricter rules on how much the government can draw from its sovereign wealth fund after years of under-spending means that much of the investment obligation will likely be imposed on companies. public.

Energy majors like Gazprom and Rosneft are expected to spend their billions of dollars in profits building infrastructure around their crucial production sites and self-financing ambitious new projects such as possible new gas. link to China and the vast arctic oil of Rosneft plans.

This makes Russia’s economic fortunes in any given year more difficult to predict. A surprise pay raise for public sector workers, or a cash handout for retirees – like Putin announcement ahead of parliamentary elections – could kick-start a declining economy and boost growth rates. But that won’t do much to resolve the long list of medium-term issues.

It would also not help in Russia’s ongoing battle with inflation. Despite the start warnings In 2021 from Governor Elvira Nabiullina that inflation was unlikely to be a passing trend, even the central bank was caught off guard that inflation turned out to be “sticky”.

This remains the “key macroeconomic risk,” up to 2021, Ribakova said.

The surge in prices also highlighted a major flaw in the government’s approach to prioritizing stability in the face of international shocks over long-term growth and prosperity – growing public discontent.

High prices are regularly cited by Russians as the number one problem the country faces, and living standards are still down by around 10% from 2013. Putin said the country needs a boost. increase in real wages of at least 2.5% per year.

With inflation above 8%, this means significant nominal wage increases across the country, which increases the prospect of an inflation-wage spiral and could even undermine, or force a rethinking of the government’s approach focused on wage growth. stability.

“Inflationary pressures are probably affecting the popularity of the government, which could lead to a revision of conservative guidelines and an increased use of funds to maintain and improve living standards,” said Zaigrin of Sova Capital.

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