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April 27, 2016 No.
6402

Russian Prime Minister Medvedev: Zero Economic Growth In 2016; Growth Expected In 2017-2019

On April 21, 2016, Russian Prime Minister Dmitry Medvedev spoke at a government meeting on socioeconomic development scenarios and parameters for 2017-2019 for the country, at which he acknowledged that in 2016, the Russian economy would show zero or slightly negative growth.

According to the World Bank, the Russian economy will see a 1.9% contraction in 2016,[1] whereas the International Monetary Fund (IMF) estimates a shrink of 1.8%.[2] Moody's forecasts that in 2016, the Russian economy will contract by 1.5%.[3]

Also at the meeting, Medvedev stated that the Russian economy will grow by about 1%-2% in 2017-2019.

The following are excerpts from Medvedev's opening remarks at the government meeting:[4]


Russian government meeting (Source: Government.ru, April 21, 2016)

"Socioeconomic development scenarios and parameters have been prepared in basic, conservative, and targeted versions. They differ in their assessment of the main macroeconomic indicators, which in Russia include the price of oil, GDP growth, inflation, the ruble exchange rate, investment levels, trade, and the development of industry and agriculture.

"Initial economic conditions remain challenging, given sanctions, our limited access to foreign capital and technologies, and other politically motivated actions against Russia, as well as the extreme volatility of the hydrocarbons market.

"According to the current forecast for the basic scenario, the prices of oil will hover at around $40 per barrel for Urals crude. An action plan has been prepared in the event of a pessimistic scenario. The conservative forecast is based on oil prices of $25 per barrel.

"Across-the-board cuts in expenses are not part of the plan. We don't plan to increase the tax burden on the budget. But balancing the budget and making our budgetary policy more efficient will remain at the top of our agenda, and we will continue to work to implement these items. A number of decisions have already been taken to strengthen fiscal discipline.

"Other decisions we've taken concern additional mobilization of revenues, including from the management of state property. We expect to have a budget deficit in the medium term. However, expenses will be fully covered by revenues and other sources of financing... such as foreign borrowing (as far as this is possible now), domestic borrowing, and privatization revenues.

"According to the basic scenario, the gross domestic product will not grow and may even decrease this year, but will increase by about 1%-2% in 2017-2019. The targeted variant stipulates reaching an average global growth rate.

"To return the national economy to its growth trajectory, the government will continue the policy of import substitution and priority development of vital industries, namely agriculture and high-tech industries. We will work to improve the investment climate, stimulate non-commodity exports, and help small and medium-sized enterprises. Our social decisions will be maximally balanced and measured, considering that we must above all support the people who have been hit the hardest in the current situation."

APPENDIX I: Russian Government Report On Its 2015 Economic Performance

The following are excerpts from Prime Minister Medvedev's speech to the State Duma, April 19, 2016:[5]


Medvedev speaks to the State Duma (Source: Government.ru, April 19, 2016)

"...As you know, our economy has been under pressure caused by several negative factors...

"1.   The first factor is the low price of oil and other commodities. What matters is not only the depth of the plunge, which we have seen several times before over the past decades, but the speed of the fall. Last year, the price of oil fell by nearly 50% over six months, which is an unprecedented speed of fall. No economy can quickly adjust to such a dramatic decline. It was a major shock for our economy.

"2.   The second factor is sanctions against Russia. Russia is still cut off from a large share of international credit resources and the market of modern technologies.

"3.   The third factor is the instability and unpredictability of global markets, which have been increasingly affected by political considerations, as you surely feel, rather than economic laws.

"4.   And lastly, the main factor - I stress this, because I consider itto be the most important factor - is the structural problems of our own economy, which have become more acute amid the current crisis. We have discussed this more than once...

"Given this kind of pressure, it's unclear whether the country could have survived within its current borders had this happened in the 1990s. Today we have not only survived, but we have the ability to develop and move forward. Of course, we understand that the government's ability to allocate large funds to the economy and the social sphere, and to support the banking sector seriously, depends on the export of commodities and on access to foreign loans. But we cannot, and more importantly, we must not depend solely on these sources..."

"We Will Not Print More Money To Make Up For The Shortfall In Budget Revenue"

"True, the country needs profound structural reform; the government is well aware of that, but we also understand how this will immediately affect the social sphere. Any forced reformation will exacerbate and extend the crisis for a few more years. This is why I want to say, and I want you to hear me clearly, that we will not implement reforms at the expense of the people.

"It's true that the economy is short of funds, but we will not print more money to make up for the shortfall in budget revenue. Everyone understands that this would be like printing paper, which will only spur inflation and devalue people's incomes, salaries, and pensions...

"The people and the economy can only survive reforms of a certain speed and depth, which is why the government will continue to operate under the old principle of balanced solutions [only]. We knew this when we developed and implemented our anti-crisis plan last year. It not only cushioned the negative consequences of the crisis, but also created the basis for further development and even a number of structural reforms. This plan was incorporated into the government's action plan for 2016. The best and only possible response to the challenges facing us is the modernization of our economic structure. A more modern economy should be adjusted to people's needs, and aimed at creating better goods and services for the global market...

"We identified five areas without which forward-looking development is impossible. These are:

"1.   budget policy optimization,

"2.   support for non-oil and gas exports, and import substitution,

"3.   improving the business environment,

"4.   enhancing state governance

"5.   And, perhaps most importantly, the development of the social sphere."

Budget Policy

"Needless to say, without an effective budget policy it would be impossible to adapt the economy to the changing environment. Previously...instead of a three-year plan, we confined ourselves to a one-year budget. This allowed us to respond to the current situation more promptly. However, today, even with the risks and problems still in place, this is no longer necessary. We should return to three-year planning. This will give us a better vision of the future.

"The government's principal objective was to find a balance between the need to cut spending amid the current crisis and the provision of budgetary incentives to resume growth. This is a dilemma that exists for every government during an economic crisis. Overall, we have probably learned to cut spending. From day one, we abandoned a formal approach toward balancing revenues and expenditures... and, despite an austerity program, expenditure has increased by 788 billion rubles...

"Spending optimization was careful. Reductions were made primarily in areas that were characterized by low efficiency...We have managed to avoid amending the 2016 budget even though this seemed inevitable at the beginning of the year. We have no plans to amend the budget during the spring session...It may be recalled that the 2015 deficit was within acceptable limits, at 2.4%, even a little smaller than planned...

"During this year, inflation (year on year) fell below 8%. This level is comparable to the post-crisis year 2010, when the Russian economy resumed growth after a significant decline. We managed to preserve quite a low level of sovereign debt. As a matter of fact, it is not quite low, but very low, compared to other countries. I could even describe it as extremely low compared with other countries, and this, by the way, is our competitive advantage, as all financial analysts and international financial institutions point out. It was only about 13.6% of the gross domestic product, which gives us the opportunity for a budgetary maneuver in the future. Just think of the debts other countries have.

"Another point that I would like to emphasize is that we have changed the structure of state revenues. The share of revenue not related to oil and gas has increased to nearly 60%. In many ways, of course, this is due to falling energy prices, but the measures that we took have worked, too. This is a different model. The economy can be stable even without the oil and gas windfall, something we have now proved..."

Support For Non-Oil And Gas Exports And Import Substitution

"We need good, competitive Russian products. We need a competitive industry as a whole. To this end, we have taken a number of steps... The Industry Development Fund is functioning - last year its advisory council approved 74 projects, which created more than 10,500 new high-tech jobs. This year, the government decided to recapitalize the fund with another 20 billion rubles. We applied other financial measures to support enterprises, including subsidies, state guarantees, co-financing of research and development, and measures to stimulate demand, including public procurement. As a result, many industrial companies continued to implement their investment projects, with or without state support.

"Of course, one year is not enough for us to draw conclusions, but there are already industries that have not only shown good performance, but also claim to provide a basis for a new model of economic growth in our country - an innovation-based industrial breakthrough, if you will. This includes:

"- the chemical industry,

"- certain sub-sectors of machine engineering,

"- the pharmaceutical industry,

"- agriculture,

"- and the food industry...

"Output of mechanical engineering and food industry products has increased by almost 10%. Chemical production is up by almost 6.5%. The production of medicines is up by 26%. This has never happened before. Food production increased by 2%, and agriculture, as you may be aware, grew by almost 3%. Here are some more results, according to industries:

"Agriculture Industry:

"Agriculture, as I mentioned, has shown steady growth across all positions. As a result, it grew by 3%, as I just said. For the first time, we have reached five out of eight Food Security Doctrine benchmarks. We are now supplying sufficient domestic meat and meat products to the market (not all items, but in general) and are boosting our exports. We are able to not only cover our own need for food, but also to export food, which hasn't been the case for a very long time..."

"Energy Industry:

"With regard to the fuel and energy industry, it was affected by the overall situation of the market, but also performed decently. Despite an unfavorable global market situation, and sanctions levied against our companies, Russia produced more than 0.5 billion tons of oil. This is an all-time high in our country's recent history. The industry revenue grew not only because of the positive effect of devaluation on corporate costs, but also due to a major tax move, which, by the way, you and I developed. We were actively engaged in the construction of a gas transportation infrastructure, including the Power of Siberia main gas pipeline. In 2015, we built 42 km. This pipeline will allow us to form additional markets for Russian gas in the Asia-Pacific region. Most importantly, perhaps, for ordinary people, we will build household gas supply lines along the entire length of the pipeline. People in the Far East are looking forward to this. Green energy is another important part of our work. We have launched several solar power plants. We will continue to develop environmentally friendly power plants..."

"Defense Industry:

"Russia's defense industry is increasingly independent of foreign suppliers. In 2015, output increased by 13% and the manufacture of military equipment by almost 20%. Compared with 2014, production volumes increased (let me give you these figures, they are illustrative): by 32% in the radio and electronics industry; 22.5% in the ammunition and specialized chemical industry; more than 16% in the shipbuilding industry; 7.5% in aerospace, and nearly 6% in the aircraft industry.

"Let me emphasize that the import substitution effort in this strategically important area will, of course, continue. This is simply necessary for our survival and a guarantee of our sovereignty. Russian arms manufacturers produce competitive products whose quality and reliability, far from being inferior, are, in a number of respects, superior to their foreign analogues.

"We have been building up our exports, too. Last year, export revenue, let me remind you, exceeded $14 billion. Contracts worth $26 billion were signed, while the overall order portfolio in late 2015 amounted to $56 billion, which is an absolute record. Achievements by designers, engineers, and workers in the defense industry have made it possible to effectively rearm the army and the navy. As a result of the successful fulfillment of state defense orders in 2015, the share of modern equipment and weapons in the armed forces has exceeded the plan indicators by 50% and now averages 47%..."

Improving The Business Environment

"What does business expect from the state? First, it wants the state to be predictable, especially with regard to taxation. Now that oil prices have dropped, there is the temptation to increase budget revenue by imposing higher taxes. But, as you know, our position is different from that in principle and remains unchanged. We do not plan to increase taxes until 2018... What business needs is for the state not to interfere with its operation, for example by means of numerous inspections... We had to clear the system of state regulation of the barriers that were created in the past, including in the Soviet era...

"Businesses need support where they cannot manage alone. This implies creating a fair competitive environment. Investors must have equal access to funds, infrastructure, and markets. The situation with respect to competition is not ideal in Russia. Access to market is often granted to cronies, and tenders and competitions are held on a pro forma basis. We are working to change this. Last year, we adopted the fourth antimonopoly package after four years of discussions, including at the State Duma.

"One business climate indicator is the condition of small and medium-sized businesses. This year, we continued with the state support program for small and medium-sized businesses. Significant funds have been allocated from the budget..."

Enhancing State Governance

"Nothing will work if the state is unable to operate efficiently. This goes for all areas, from state governance and fighting corruption to tax administration and oversight. This is absolutely clear to everyone and it is a huge burden on the budget.

"A decision was made to reduce the number of civil servants by 10%, effective January 1, 2016, and this also applies to those employed by central and regional offices of all agencies that report to the government or federal ministries. As you know, similar decisions have been taken regarding agencies within the Presidential Administration.

"The government also came up with an initiative to create a single mechanism for administering tax, customs, and other fiscal payments..."

Development Of The Social Sphere

"Everything that I said and everything that we do has one, and only one, purpose - to make our people's lives comfortable and efficient. Our people should be proud of Russia not just because we have nuclear weapons or the world's best ballet. People should be proud of their country because the government always supports them and protects them both from external threats and from the fallout of economic shocks.

"I will list the most important things that we managed to accomplish under these difficult circumstances. I will start with demographics... Increasingly, families are having a second, a third, and even a fourth child, despite unfavorable changes in our society's age structure that can be traced to the 1990s. The number of elderly people is up, which in itself is a good sign, although they are a burden on the working population. Nevertheless, I would like to emphasize, so that we have a clear understanding that this is the result of our joint work in recent years, that in Russia we have achieved an all-time high life expectancy of over 71 years. A few short years ago, most Russian men died before they reached 60. This increase in life expectancy is the result of our social policy, which focuses on helping those in need, in a difficult situation, and also those who are unable to deal with their problems on their own, be it a retired person, a child, or a person with a disability. And, of course, we focus on providing employment to those who are able and willing to work..."

Crimea "Is Our Land And Our Concern, And We Will Continue Our Efforts"

"Colleagues, last year we had to deal both with important and routine issues that are part of the government's and the State Duma's area of responsibility. However, some of those challenges were not so trivial, such as the tragic events resulting from the war that terrorists have declared on the entire civilized world, including Russia. Following the terrorist attack in the skies above Sinai, which killed our citizens, we engaged in urgent evacuation of all Russian tourists from Egypt. It was not an easy operation, to tell the truth.

"The situation in Crimea also called for emergency measures on our part. That situation can be rightfully dubbed energy terrorism. The criminals who blew up power lines right before the onset of winter created a life- and health-threatening situation for many people. Many hospitals, schools, and kindergartens were left without electricity or heating. Portable generators were dispatched to Crimea, fuel reserves were created, and socially important facilities were switched over to backup power sources...  Crimea has become a Russian region, which is perhaps the main result of our joint work. This is our land and our concern no matter who says what, and we will continue our efforts there...

"The world is moving toward a new economic and technical order. Many markets are still taking shape, and the underlying production chains are just being formed. Our common goal is to make sure that Russia does not remain an onlooker as the world moves toward its economic future. This is the raison d'être of every Russian politician at any time, regardless of election cycles. Let me quote the words of Pyotr Stolypin [Russian statesman assassinated in 1911]: 'As we try to protect Russia, we must unite and harmonize all our efforts, responsibilities, and rights, to uphold our country's higher historical right, which is the right to be strong.' We have all it takes to do so and, most importantly, we have faith in our country..."

 

Endnotes:

[1] Rt.com, April 6, 2016.

[2] Ft.com, April 12, 2016.

[3] Moodys.com, April 22, 2016.

[4] Government.ru, April 21, 2016.

[5] Government.ru, April 19, 2016.