Russia is facing the start of economic stagnation. The stagnating economy can be normalized only by public and private investment. The government should stop being afraid of a repetition of the 1998 default and start investing money in the economy, all the more so since Russia has enough hard currency for this.
2013 has come to an end and it has left the Russian economy in not quite the ideal state. During the course of the year the Ministry of Economic Development reduced the macroeconomic growth forecasts for the next three years several times. Economists also decreased their GDP growth predictions for 2013 and registered increasing inflation. In his address to the Federal Assembly on December 12, President Vladimir Putin explained this decline in economic growth rates by domestic factors. Ruslan Grinberg, director of the Institute of Economics at the Russian Academy of Sciences and Leonid Grigoriyev, chief advisor of the head of the Government’s Analytical Center comment on the state of the economy at the end of the year.
Grigoryev shares the general view on economic stagnation and reduction in the economic growth rates. He argues that all economies are facing difficulties today and in this sense Russia’s position is not very different from that in advanced countries. “This result is fairly good for Russia in conditions of zero exports growth – either in scale or prices. The United States is overcoming the crisis; Japan is not making any progress; Asian countries and Brazil are slowing down, while Ukraine is ending the year with zero growth,” Grinberg said.
Grigoryev believes that Russia’s federal expenses and investment have remained the same over the past two years. The consumption of imported goods continues to grow, while net exports have been decreasing. To redress this situation Russia should find a comprehensive solution, streamline investment, adopt smart industrial policy and increase macroeconomic stability. Grigoryev noted that the situation is not critical if the state controls the implementation of major projects and prevents the growth of corruption. “Today we are turning into a Latin American oil exporter… Oil prices remain the same… Everything in the country is controlled by law-enforcement bodies and lawyers that defend the interests of oligarchs,” Grigoryev concluded.
Grinberg explains Russia’s slower economic growth by the ongoing global recession. He also gives three major domestic reasons as a factor. One of them is the completion of large economic projects such as the Olympics and the World University Summer Games.
Grinberg believes that the second reason is psychological. The Russian Government has expected the private sector to make a leap forward. It has been talking about this for the past 20 years, but instead business in Russia is subjected to bureaucratic pressure from all sides and this has a serious impact… The entire first generation of the Russian businessmen (of non- oligarch type) has been striving for law and order. They do not want the state to always be interfering with their assets. They do not go for long-term projects as they are strongly dependant on government policy. Grinberg mentions a joke that is popular among economists: “Your business has become so successful that it has started to match our interests.”
Grinberg says that the third reason is that entrepreneurs have no idea where to invest. Twenty five years of economic transformation have produced some achievements, but the emphasis on the consumer has brought about a huge increase in imports in all spheres of life. A 60% increase in direct foreign investment this year testifies to this. Grinberg said that in a sense Russians are returning to the Soviet times when “foreign investors lived on the fat of the land, while domestic investors could be subjected to unfair exposure or treated like a toad under the harrow.”
We are facing the start of economic stagnation, Grinberg argues. To overcome this trend we need to determine the key factors in the development of innovations and the real economy. Russia has tremendous natural resources and intellectual potential that are prerequisites of high development rates. However, the bad investment climate and the state’s ununiform interference with business are making high development impossible. Proceeding from his own ideas of economic socio-dynamics, Grinberg suggested consolidating public-private partnership and state capitalism, a concept that is acceptable both in crisis and post-crisis years. The stagnating economy can be normalized only by public and private investment. To accelerate its economic growth Russia should change the structure of its economy. The government should stop being afraid of a repetition of the 1998 default and start investing money in the economy, all the more so since Russia has enough hard currency for this, Grinberg concludes.