Wednesday, 13 November 2013

Russian Medium-Term Growth and Policy Implications

The IMF had barely taken off from Sheremetyevo Airport and the Ministry of Economics was already busy modifying its medium-term forecasts for 2030 down from the government’s 4.5% figure it held to during negotiations with the Fund’s and MicEc now forecasts a 2.5% trend to 2030 (the IMF 3%).

So what has happened for this stark posited change in the Russian fundamentals? And what does this mean in the short term as regards economic policy?

In practice nothing has fundamentally altered for the Russian macro-economy. The medium-term structural challenges remain the same as before whilst the external outlook is, if anything, a wee bit more positive than a few months back – both for the underway cyclical rebound of developed economies critical for external demand for Russia’s hydrocarbons and over the longer-term the expected continual rise in global demand for oil in a world that is going to have more oil-guzzling middle-income consumers.

My guess therefore is that this rather staid, less-than-rosy medium-term scenario for Russia for 2030 highlights that the economists in government are beginning to put down realistic markers for Putin Inc. and using the IMF discussions as justification for the downward adjustments.

While policy makers-cum-politicians see the long term to be the next election, the bureaucrat-cum-politician-cum-Putin chum axis in Russia means that the 2030 scenario may have more policy traction in terms of at least genuine acknowledgement of structural challenges and medium-term fiscal vulnerabilities that would be the case in many other Emerging Economies where these documents tend to be donor-driven strategies…but the real test will be if there are credible measures to unlock the Russian growth potential.

Recent monthly and Q3 data have not changed the expected growth trajectory for 2013 that is now more likely to be closer to 1.7% rather than the 2-3% range anticipated just a month or so back.

Nominally the economy is at full pelt (the output gap is close to zero) with unemployment close to a record low. This in turn limits the potential lasting impact of policy easing on either the monetary or fiscal fronts without risking cost-push inflation.  And why external agencies ranging from the IMF to the EBRD are helping to push the message that the adjustment requires a significant shift on the supply side where Russia does so badly relative to EM peers: from labour market reforms to ease of doing business.

So what does augur for policy?

  1.  Fiscal loosening to boost Investment in 2013-14 is likely if external demand remains weak. This may involve fancy footwork to comply with the new Fiscal Rule through off-budget operations or (dodgy) securitisation of loans from the reserve funds to State-Owned investment projects.
  2.  No change in the monetary stance that is shifting toward full-fledged Inflation Targeting (IT) by 2014-15
  3. The policy rate will remain unchanged: i) for the simple reason that the central bank recognizes that the transmission channel remains weak for it  have any real impact on lending ii)  inflation remains above or close to its headline inflation target and iii) given tight labour market and high capacity utilization 

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