Russiaĺs Strong Balance Sheet Only Goes So Far
Published: October 9, 2013 (Issue # 1781)
Atáthe start ofáthis year, it was generally accepted that 2013 was likely toábe aáyear ofáconsolidation foráthe global economy andáa year during which Russia would more than likely just ôsit it outö while waiting foráa pick up ináglobal trade andáinvestment confidence.
Underlying that pragmatism was aáwidely held confidence that this year would see aástrong rebound inádomestic growth through theásecond half ofáthe year that would lead intoáan even stronger recovery iná2014. When theáeconomists atáthe International Monetary Fund, or IMF, issued their 2013 outlook ináApril, they forecast growth ofá3.4 percent foráRussia, which was broadly ináline with theáconsensus ináMoscow andásimilar toáthe growth achieved iná2012. Last week, theáIMF economists slashed their current year forecast back toáonly 1.5 percent growth andánot far off theáCentral Bankĺs recently lowered forecast ofá1.8 percent foráthe full year.
Toáachieve real growth, Russia must institute correct spending andáincentive policies.
Theárhetoric fromásenior government ministers has also changed dramatically over theápast six months. Through most ofáthe first half ofáthis year, theátone fromáthe government could be described as cautious but hopeful. Then, last week, we heard fromáPrime MinisteráDmitry Medvedeváthat theáprevious drivers ofágrowth ináthe economy had been exhausted, andáthe country must ôbe ready toámake hard decisions.ö This message was even more forcibly made byáPresidentáVladimir PutináatátheáVTBáInvestment Conference onáWednesday, where he also emphasized theáneed foráincreased productivity andásmarter state spending. Economic Development Minister Alexei Ulyukayev has been even clearer with his comments, stating that while theáeconomy is not onáthe verge ofárecession, it does face theárisk ofáa long period ofástagnation that would be worse than aásharp crisis.
So, how did we move so quickly fromáthe optimism ofáspring toáthis dread-filled fall? There are several factors that explain this. Theáglobal economy has not recovered as fast as expected andáserious legacy problems remain unresolved ináboth the U.S. andátheáEuropean Union. Onáthe domestic front, budget revenues have fallen short ofáexpectations this year andáwhile theágrowth inábudget spending is being restrained atáthe targeted 4 percent foráthis year andánext, there is still far too much money being spent onánonproductive areas rather than via schemes toáhelp industry expand.
Foráan economy such as Russiaĺs, which is strong fiscally but very vulnerable toáexternal shocks, there is always aádilemma between using theábalance sheet toámaintain domestic stability or using it toátry andácreate new domestic-growth drivers. Theáfirst option is always anáattractive short- or medium-term political option, while theásecond one is clearly needed toátake theáeconomy out ofáthe rut it has been inásince 2008. True toáform, theágovernment appears toáhave opted foráthe safer option.
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