Paradoxically, Russia has very low central government debt – around 10% – and external debt a bit over 2%. Therefore it is unnecessary to use devaluation as a tool to minimize the national debt. Instead, the biggest reason the ruble is continuing to slide is the reduction in export earnings and increasing capital outflows. Devaluation, as long as it occurs on a large scale, could help Russia’s export sector, since Russian policymakers probably expect the global commodity market will continue slowing in China and the rest of emerging and advanced countries.
Valdaiclub.com interview with Bruno SERGI, Harvard University’s Instructor of “The Economics of Emerging Markets: Asia and Eastern Europe” and “The Political Economy of Russia and China” as well as Associate of the Davis Center for Russian and Eurasian Studies at Harvard University (2013-2016). He also teaches International Economics at the University of Messina.
The ruble has fallen in recent months against the bi-currency basket. The Bank of Russia expects further weakening of the ruble. Nevertheless, the government recognizes that “soft” devaluation of the ruble would be beneficial for the economy. Do you think that devaluation will be "soft"? How will it affect the Russian economy? How will the weakening of the ruble affect end users?
Soft devaluation is a gradual devaluation process and as Russia did not miss the printing party, monetary easing from the Russian Central Bank has also caused devaluation. As the ruble is not a major international reserve currency outside its native borders, such as the dollar or the euro, the domestic inflation expectation could arise due to easing and the supply of the ruble to the domestic market will most likely increase. For the end user, the ruble will be worth less on the import goods and services market.
Paradoxically, Russia has very low central government debt – around 10% – and external debt a bit over 2%. Therefore it is unnecessary to use devaluation as a tool to minimize the national debt. Instead, the biggest reason the ruble is continuing to slide is the reduction in export earnings and increasing capital outflows. Devaluation, as long as it occurs on a large scale, could help Russia’s export sector, since Russian policymakers probably expect the global commodity market will continue slowing in China and the rest of emerging and advanced countries, although the latest signals from Europe show that growth there is taking a slightly upward turn. I am not a fan of large-scale devaluation programs; but whatever my personal judgment is, it will hardly stimulate industrial production - 0.2% as of June 2013. Although unemployment is at historic lows (5.4% as of June 2013) and the gross domestic product is at +1.6% in the first quarter 2013, of concern now are the factors that are causing the ruble to slide further, that is, lower export earnings and increasing capital outflows. Weak investment and impetus from the external demand side complete this brutal scenario.
It is no secret that in recent years there has been a strong outflow of capital from Russia. Is the government making sufficient efforts to increase inflow and prevent the strong outflow of capital from Russia? What should be done to improve the investment climate in Russia? Did the "Navalny case” taint investment prospects for the Russian economy?
I believe it did. The “Navalny case” exacerbates this negative phenomenon of capital outflow and smaller capital inflow. Although Russia is not facing a situation of political instability, on the one hand the overall situation is not the most appealing for foreign entrepreneurs to choose Russia as a place to do business. On the other hand, there are not enough proper incentives to encourage those who really do wish to do business, to the point where many Russian businesspeople are even inclined to leave the country, according to a recent survey. Russia needs a change of pace to improve the general business climate, a sort of “cultural revolution” applied to the production system and to the business sector to be able to give a new impetus to modern-day Russia. Suffice it to say that Russia ranks 139th in the 2013 economic freedom index. Although it is a bit higher this year, Russia still ranks 41 out of 43 countries in Europe, and its overall score is below the world and regional averages, according to the Heritage Foundation. Russia’s economic environment is mostly unfree and lacks the foundations for long-term economic development. Endemic corruption (Russia ranks 133rd in the 2012 Corruption Perceptions Index) adds a devastating touch to the country’s prospects. A real perestroika of economic freedom and free entrepreneurship, without traps and snares, modern vertical and horizontal accountability, plus a profound fight against the vast corruption in Russia represent ballast for businesspeople, due to the sector's high cost and very low efficiency.
Why are oil prices so high while the rates of economic growth in Russia are so low? Some experts predict that oil prices will drop to $80 per barrel. How would this affect the Russian economy? Should we expect severe shocks?
Let me recall a well-known fact: the oil and gas industry helped Russia during the first two presidential terms of Vladimir Putin. Now, however, the situation in the sector is evolving with a unique complexity, at the domestic and European levels as well as on a global scale. This requires drastic solutions, refined and competitive strategies, free from any political shortsighted and corrupt management. This necessitates political tact and competitive strategies because state oil companies are losing momentum and efficiency; the Arctic resources and shale oil/gas phenomena bring more big issues to the table. That is, the market oil/gas price is no longer the only issue for Russia.
Let me elaborate a bit on this. It seems that oil and gas are everywhere; we can drill deep enough to tap new fields. This is good news. The end of the oil age is not in sight! According to estimates, Russia, the US and China have the largest technically recoverable shale oil resources, while China is estimated to have the world’s largest shale gas reserves (Russia ranks 9th worldwide for technically recoverable shale gas resources). The increase in worldwide total resources due to the inclusion of shale oil and shale gas is +11% and +47%, respectively. Shale gas has become an increasingly important source of natural gas in the US in the recent past, in addition to potential gas shale in the rest of the world. In 2000, shale gas provided only 1% of US natural gas production; by 2010, it was over 20% and the US government predicts that by 2035, 46% of the US natural gas supply will come from shale gas.
However, this is only part of the story. The efficiency of the oil/gas sector is declining dramatically in Russia due to mismanagement and corruption. As for efficiency, the energy cost for exploration and production has to be taken into account when conducting long-term projects. When the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease, no matter what the monetary price may be. It’s also true that in order for Russia (and China) to use major shale oil/gas formations, the country has to surprise us with the production of an adequate fleet of drilling rigs, and a fast-growing engineering and oilfield services sector of its own. This requires astute policies from Moscow, because it seems that the oil/gas sector is not immune to inefficient choices and corrupt practices.
What course will the government take to restore the rates of economic growth? How effective will this be? Will it be possible to avoid a recession? In your opinion, what should be done to restore the rates of economic growth in Russia?
The real risk is an enduring slow down of growth rather than a negative growth per se. The government should place strong emphasis on two lines of action: focusing on reforms that can quickly result in higher economic growth (real freedom of enterprise, fair and unbiased privatizations etc.), and on those which require more time to bring positive results (formation of human capital, that is, schools and universities, R&D, a well-organized and proactive public administration, faster and better civil justice). This will require that decisions be adopted and implemented right away. A crucial and thoughtful review of the state budget would allocate more resources for these sectors and those that may contribute to a speed up in long-term growth.
According to the Ministry of Economic Development of the Russian Federation, Russia is very close to the end of stagnation. However, the painful situation in the industry is not allowing the Russian economy to recover quickly. Can we trust the forecast of the Ministry of Economic Development? What is your forecast?
Several hundred thousands of people have canceled their business registrations this year either because of the doubling of the rate of social security contributions, or because of a business climate that does not favor individual entrepreneurs and small businesses. A marked slowdown in most emerging countries contributes fears to this. To revamp production, the Russian Ministry of Economic Development has proposed relieving new entrepreneurs of all taxes for two years. Beginning next year, any Russian individual entrepreneur who has registered a business for the first time will be able to receive a two-year break on all taxes. This initiative would be wiser if extend to all entrepreneurs in order to avoid any discrimination as well as to extend the friendly tax strategy from two to five years. Regardless of the recent decision to introduce the new fiscal rule that was previously indicated, the feeling remains that something has to be done to get Russia out of the trap, where it is “close to economic stagnation.” This is not just a problem for Russia, but for all advanced and emerging economies, especially emerging ones that appear to be really trapped in a cycle of economic slowdown. The IMF projects growth at 2.5% in 2013 and slightly over 3% in 2014 for Russia; the Economist magazine reports a +3.3% growth rate for 2014. Nevertheless, without a “grand strategy,” without a broader vision capable of laying down the foundations for long-term competitiveness, thereby driving future economic growth for the country, each decision that is taken runs the risk of being shortsighted.
