Russia

Pekka Sutela Swedbank

Riga 15052015

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Russia’s long-term growth: Current consensus

• Economists use the same data, and they have the same mindset, therefore, numerous studies concluse that the Russia’s growth potential is about 2% annually until 2030 – The World Bank, IMF, Russian Ministry of Economic

Development, Russian Central Bank, Bank of Finland, Research Institute for the Finnish Economy…

• This is low, but similar growth is expected for USA, and EU growth will be lower

• The share of all three in world output is expected to decline • Neither is the short run particularly optimistic

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Two facts to take home

• First, Russia is not about to collapse

• Second, Russia is not about to regain high growth

• This takes a bit of economics to explain

• Sorry about that!

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The secrets of economic growth

• There was no economic growth in Europe from 0 – 1500. Then something changed, very slowly… – And the economists were even slower in understanding what changed:

• John Stuart Mill (1848): Britain is just about to enter a stationary state

• We can now at least classify the underlying factors

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Production function à la Russia

• Change in GDP = f(Change in Labour, Investment, Aggregate productivity)

• Labour – Estimated one third of modern economic growth is due to population

growth – On current Russian pension rules, working age population declines fast

• Due to echo of WWII and the 1990s • Later retirement politically ruled out • In-migration usually to low productivity jobs • Pension age should be increased, but then pensioners are the biggest group of

voters

– Not much room for flow of labour from low to higher productivity jobs (“Farm to Factory” 1928-1970s)

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Russian population pyramid 1 January 2014

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• Investment – In 1999-2008 Russia grew through increased capacity

utilisation – And growth of investment ratio 14% -> 21%. This is

very low for a high growth manufacturing economy • Now investment ratio is back to 18%

– We know the problems: • Finance • Comparative advantage (“Russia between low-cost Asia and

high-tech Europe”) • Business environment (World Bank however: better than in the

rest of BRICS)

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• Productivity – Middle-income trap: low productivity economies can grow fast

through catching-up – If they adopt better commodities, technologies and institutions

which high productivity economies have already invented, innovated and found to be good. This is what Russia did 1992-2008

– But beyond a certain income level (Eichengreen: 15´000-18´000) USD per capita economies must increasingly rely on domestic innovation. Russia is just there.

– Innovation-based growth is usually slow and difficult • Especially as population growth also slows down

– And Russia is not good at innovation (cf China!)

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The conclusions are

• Growth in the 2000’s was unique – Based on systemic change, recovery and catching up – And naturally ever-higher oil price

• Russia is not to regain high growth • This has been known since the mid-2000’s, but still

the authorities have been unable and unwilling to create conditions for a new growth model – THE SYNDROM: A WEAK STATE, UNCERTAIN OF ITS

POPULAR SUPPORT, IS UNABLE TO SET TARGETS AND AIM CONSISTENTLY AT THEM

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Any good news? Yes…

• Capital outflow which reached 151.5 bln USD in 2014 was 32.6 bln in 2015Q1, and may reach 111 bln (CBR) or 90 bln (Ministry of Economic Development) in 2015.

– Of 2015Q1 outflow, 24.3 bln was debt reduction

• Current account surplus 2015Q1 was almost as high as 2014Q1

– In spite of poor import substitution and drop in non-oil exports; as imports dropped by 36%

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• Ruble has strengthened beyond expectations

– Sustainability of RUR 60 = 1 EUR?

• Unemployment remains very low at about 6%

– As before, adjustment through lower real wages: consumption down 6.7% 2015:1-3

• Inflation induced by devaluation may be peaking at 17%

– Policy interest rate cut 17% -> 12.5%

• GDP decline may well prove less than expected

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Oil price has stabilised

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Ruble has strengthened – too much?

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MICEX Composite Index

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