What to Expect from New Russia’s Economic Leadership

At the end of June a number of new faces appeared in the Government and in the Presidential Executive Office. The Economic Development Ministry got a new head, while Elvira Nabiullina took the helm of the Central Bank of Russia. All the new appointees have always strictly followed these rules in their previous positions.

The logic behind the staff reshuffle among the Government’s economic leadership is quite clear. First, new faces have always and will always be recruited from the pool of competent economic experts, who have proved to be capable managers. Second, only those who are loyal to the top leadership can aspire to join the team. Third, such people can voice their own opinions, which may be a dissenting view, and even have a professional obligation to do so, although the public discussion ends once the decision is made, of course.

All the new appointees, be it Presidential Aide Andrei Belousov, Head of the Central Bank of Russia Elvira Nabiullina or Economic Development Minister Alexei Ulyukayev, have always strictly followed these rules in their previous positions.

I believe this is a reasonable standard in a presidential system. Parliamentary systems are different, since coalition governments are formed by politicians representing various parties. In a presidential system only elected officials, i.e. the President and members of parliament, are engaged in politics, while ministers and heads of government agencies are professionals and managers.

The key issue for the new economic team is the challenges and risks currently facing the Russian economy, not possible disagreements among members on certain issues. The slowdown of the Russian economy is systemic; it’s not a market cycle. The problems cannot be solved using current practices of “manual control”, and there is no cure-all for growth-related issues (be it amnesty for economic crimes, nationalizing or privatizing enterprises, or having the Central Bank of Russia cut its refinancing rates).

In my opinion, debating whether we need “more government or more free market” is also irrelevant. The economic team should explore all possible options and choose the best tools to promote investments in specific economic sectors and regions rather than in the economy as a whole. It is inevitable that people with different theories and ideologies will work side-by-side, and I hope that the new team will cope with these tasks.   

Under Russia’s current economic model, stepping up investments carries major risks for all types of investors. All players, including both private and state-owned companies, rely on certain risk hedging practices by either moving funds offshore and reinvesting them in Russia as foreign investments, securing federal or regional budget guarantees, or benefiting from political support, which may not always be legal.

Russia needs to mitigate its economic risks in order to successfully foster increased investment. That said, administrative barriers and, more importantly, the introducing criminal punishment for such risk-hedging practices raise these risks even more, instead of lowering them. Eradicating investment-related corruption is the only way to mitigate such risks. Anti-corruption measures should be taken when investment projects are planned, not after they fall through. We should start with specific construction projects financed from the state budget. If this objective is achieved, I’m confident that there will be no discrepancies between Andrei Belousov and Alexei Ulyukayev.

The Bank of Russia is not just a lender of last resort for the banking system, which was clearly demonstrated under the leadership of Sergei Ignatyev at the height of the crisis in 2008; it is also a regulator. In order to establish a single regulator for Russia’s financial system, Elvira Nabiullina will have to focus all her efforts and all available staff on this task.

Increasing investments in other sectors of the economy is impossible without a comprehensive and diversified financial market operating in rubles, which still remains open to foreign institutional and private investors, as well as Russian investors. For that, we need a stable ruble, which implies fighting inflation and preventing sharp fluctuations of the foreign exchange rate. These should remain the top priorities of the Central Bank’s monetary policy.

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