Russia’s Strong Balance Sheet Only Goes So Far
Published: October 9, 2013 (Issue # 1781)
At the start of this year, it was generally accepted that 2013 was likely to be a year of consolidation for the global economy and a year during which Russia would more than likely just “sit it out” while waiting for a pick up in global trade and investment confidence.
Underlying that pragmatism was a widely held confidence that this year would see a strong rebound in domestic growth through the second half of the year that would lead into an even stronger recovery in 2014. When the economists at the International Monetary Fund, or IMF, issued their 2013 outlook in April, they forecast growth of 3.4 percent for Russia, which was broadly in line with the consensus in Moscow and similar to the growth achieved in 2012. Last week, the IMF economists slashed their current year forecast back to only 1.5 percent growth and not far off the Central Bank’s recently lowered forecast of 1.8 percent for the full year.
To achieve real growth, Russia must institute correct spending and incentive policies.
The rhetoric from senior government ministers has also changed dramatically over the past six months. Through most of the first half of this year, the tone from the government could be described as cautious but hopeful. Then, last week, we heard from Prime Minister Dmitry Medvedev that the previous drivers of growth in the economy had been exhausted, and the country must “be ready to make hard decisions.” This message was even more forcibly made by President Vladimir Putin at the VTB Investment Conference on Wednesday, where he also emphasized the need for increased productivity and smarter state spending. Economic Development Minister Alexei Ulyukayev has been even clearer with his comments, stating that while the economy is not on the verge of recession, it does face the risk of a long period of stagnation that would be worse than a sharp crisis.
So, how did we move so quickly from the optimism of spring to this dread-filled fall? There are several factors that explain this. The global economy has not recovered as fast as expected and serious legacy problems remain unresolved in both the U.S. and the European Union. On the domestic front, budget revenues have fallen short of expectations this year and while the growth in budget spending is being restrained at the targeted 4 percent for this year and next, there is still far too much money being spent on nonproductive areas rather than via schemes to help industry expand.
For an economy such as Russia’s, which is strong fiscally but very vulnerable to external shocks, there is always a dilemma between using the balance sheet to maintain domestic stability or using it to try and create new domestic-growth drivers. The first option is always an attractive short- or medium-term political option, while the second one is clearly needed to take the economy out of the rut it has been in since 2008. True to form, the government appears to have opted for the safer option.
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