The much anticipated G20 summit delivered some relief from the US-China trade dispute, as the imposition of higher tariffs was postponed. Although there were also bilateral talks between the Russian and US presidents, as well as meetings of the leaders of BRICS economies, the significance of the G20 summit largely amounted to a reaffirmation of its role as the key venue for maintaining policy dialogue among the largest powers on the world stage. While the summit did not bring a definitive resolution to the China-US trade dispute, there were in fact important breakthroughs in other areas, such as the announcement of the EU-Mercosur FTA deal, which took several decades to negotiate. This agreement is set to create the largest free-trade area in the world, thus signifying the potential for regional integration to compensate in part for the trade disputes and mounting protectionism in bilateral country-to country trade relations.
In this respect, Russia together with its partners in the Eurasian Economic Union (which includes Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan) is looking to further widen the array of free-trade accords. This coming October, an FTA accord is set to be signed with Serbia, while the FTA with Singapore (which includes the liberalization of goods, services and investment) is due to be finalized by the end of this year. Discussions on an FTA agreement are also under way with India, Israel, Indonesia and a number of other developing countries. Furthermore, on June 20 South Korean Trade Minister Yoo Myung-hee and Russian Economic Development Minister Maxim Oreshkin launched FTA negotiations in services and investment in Moscow.
Currently, more than 20 countries and blocs have expressed interest in creating an FTA with the Eurasian Economic Union, including the likes of Egypt, Jordan, Thailand and Chile. There are also memoranda signed with trade blocs such as Mercosur and ASEAN on joint cooperation and potential liberalization initiatives. Overall, Russia together with partners from the Eurasian Economic Union is starting from a low base in terms of the number of alliances – currently there are only the FTA accords with Vietnam (2015) and Iran (2018), as well as a non-preferential trade accord with China, reached in 2018. Russia’s momentum in trade negotiations, however, suggests that in the coming years it could play catch-up vis-a-vis developed economies in significantly expanding the geography of trade and investment alliances – something that may positively impact the conditions for foreign investment going forward.
In the monetary policy sphere, with seasonal deflation possibly to be observed in August and a zero reading for June, the CPI for the year could fall below the 4% mark as predicted earlier by Maxim Oreshkin. This, in turn, suggests that there could be more room for maneuver in further reducing the key rate from the current 7.50% to 7.00% or even less. This will be further facilitated by the Fed’s change in stance this year, with the cycle of rate increases giving way to several potential cuts later this year.
Similarly, on the fiscal front, the relatively high degree of conservatism in Russia’s fiscal stance that enabled it to accumulate sizable reserves in the National Wealth Fund (NWF) will likely give way to increasing spending. This will be in part due to greater financing of the so-called National Projects (in areas such as infrastructure and human capital) after a slow start in the disbursement of funds in 1H19, as well as investment of part of the NWF once its size exceeds 7% of GDP (most likely next year). The scale of fiscal loosening will be tempered by the overriding need to maintain macroeconomic stability, but the room for maneuver appears to be sizable given the strength of the sovereign balance sheet.
The picture that emerges is that across the main strands of Russia’s economic policy there is scope and momentum for using the reserves in fiscal and monetary policy as well as in structural policy measures to liberalize the external trade regime. In some respects Russia’s economic position appears to be in a “counter-phase mode” to the global trends that are characterized by limited scope for fiscal loosening (given the prevalence of debt overhang), relatively low degree of monetary policy maneuver (after a protracted period of low policy rates) and growing concerns over intensifying protectionism. Financial markets appear to be largely putting their hopes on monetary policy support from the central banks of the leading economies in warding off recessionary fears. The question is whether this monetary support factor is strong enough to continue to prop up the markets going forward and pass the tests of ongoing macroeconomic data from the US and other leading economies.
In Russia’s case part of the reason for this “counter-phase mode” and the build up in reserves has to do with a combination of external constraints and a set of policy rules that evolved in Russia over the past several years that cover all three key areas of economic policy: the fiscal rule associated with a conservative cut-off oil price assumption, inflation-targeting with the 4% inflation target serving as a monetary policy rule and WTO membership and commitments serving as a structural policy anchor on the foreign economic policy side. The task for the Russian government going forward will be to maintain the framework of these economic policy rules while at the same time allowing for the significant reserves to be deployed in counter-cyclical fashion as the rest of the world economy is facing a deceleration in growth and scarcity in the arsenal of policy instruments to support economic activity.