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Russian Economy: Clear Answers to Difficult Questions

Russia's national economy has faced dramatic challenges in the period of recovery and structural adjustment following the 2008-2009 economic and financial crises.The current “zero growth” phase of economic development will be followed by long-term “stagflation” with capital flight and social degradation.

Russia's national economy has faced dramatic challenges in the period of recovery and structural adjustment following the 2008-2009 economic and financial crises. The current “zero growth” phase of economic development will be followed by long-term “stagflation” with capital flight and social degradation. The main factors contributing to the economic slowdown are domestic by nature, and include:

1. easing of investment activity;
2. growth of unit labor costs;
3. a drop in competitiveness on global and domestic markets;
4. further monopolization of national and regional markets;
5. structural insufficiency of human capital development (professional education, healthcare, social services);
6. the burden of bureaucracy and corruption on private entrepreneurship.

The global market environment is also strained. First of all, the low rate of GDP growth of the European economy has established rigid limitations for Russian commodities exports. Secondly, the huge burden of the “Ukrainian crisis” has exacerbated the negative trend of risk estimates regarding Russia.

There are short- and long-term consequences of the policy of sanctions. In the short term, they consist only of a signal or road marking for investors to change the direction of their investment traffic. Both foreign and domestic investors have started reconsidering their direct investment plans. The inevitable review of all investment projects results in the brakes being put on capital flows. This will lead to the most disastrous results in the long-term perspective.

The Russian government's economic policy should be shifted from an anti-crisis short-term approach to long-term development goals. Budget, fiscal and monetary policy should be aimed at stimulating investment in the national economy.

Federal and regional budgets today have rather limited flexibility for reacting to actual challenges. In 2014 -2016, the volume of federal budget revenues/expenditures will equal 20% of the national GDP.

The demographic situation – that is, the growth in the number of aging residents – defines the growing pension (social security) payments. Thus the priority of social expenditures in the federal budget structure is essential. But fiscal resources are not sufficient, even for such obvious targets. At the same time, the Russian authorities are allocating more and more resources on defense. Military expenditures will double in the next ten years.

Under these circumstances the only realistic approach is to stimulate public-private investment cooperation – what Russian authorities refer to as "public-private partnership." In this arena we are facing a new kind of challenge: how to ensure the efficient allocation of financial resources. Traditionally the main government investment projects are economically unprofitable. They are suffering from a lack of “road map” planning and are coming up against compliance violations.

The criteria of effectiveness for these projects must be declared openly and properly: profitability, high internal rate of return, high competitiveness of services and output produced. In this context, any tax privileges, budget subsidies, guarantees or favorable credit terms must be announced openly. The mutual obligations of state and private partners must be clarified.

The experience of joint venture investments with foreign corporate partners has demonstrated the proper way to ensure technological modernization of the national economy. Russia is interested in involving foreign capital in a broad list of projects of mutual interest. Macroeconomic stability has always been a precondition of success for any economic policy. No industrial, agricultural or social service projects can yield results without the trust of businesses and households in the national monetary unit, the reliability of government bonds and banks' solvency.

In this context “healthy” banks and non-bank credit and financial markets are fundamental for making the Russian economy attractive for domestic and foreign investors.
The new role of the Central Bank as a “megaregulator” of all national financial systems will become the key instrument in ensuring sustainable economic development.

Today, the Central Bank's regulation of monetary supply and the currency exchange rate is based on free-float and anti-inflation principals. Enforcement of the financial system should be preserved as a priority in order to provide for an increase in capital and accumulation of investments. The Bank of Russia should be on guard against any dangerous experiments.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.