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May 14, 2019 No.
8061

Trio Of Russian Expatriate Economists: Russia's Economy Will Not Crash But Growth Will Remain Feeble

Mk.ru surveyed three world class expatriate economists: Sergei Guriev the chief economist of the European Bank of Reconstruction and Development, former deputy Minister of Finance of the Russian Federation and former first deputy chairman of the Russian Central Bank Sergey Aleksashenko, and Konstantin Sonin, a professor at the University of Chicago and a visiting professor at Moscow's Higher School. of Economics. They were asked to provide a prognosis for the Russian economy. While there are slight nuances between them, they unanimously believe that the necessary policies for extracting Russia from its dead end will remain elusive till 2024 (when Putin's term as president expires). Meanwhile, the Russian economy will continue to limp along with a feeble growth rate without crashing. The outlet approached them because "it is not necessary to await an honest answers from the authorities" with regards to the state of the Russian economy. Below are excerpts from the interview: [1]

How would you evaluate the state of the Russian economy: pressure points, possible drivers of growth and inhibitors of development?

Sergei Guriev: In the foreseeable future a macroeconomic crisis is hardly likely in the Russian economy. The federal budget is running at a profit. Substantial funds have accumulated in the sovereign wealth fund. The monetary policy keeps inflation under control.

On the other hand it doesn't pay to wait for speedy economic growth. The Russian economy continues to grow at rates of 1.5-2% per annum, [lagging] increasingly behind the US, the Central and Eastern European countries and even Kazakhstan.

The major inhibitors of growth are imperfect [market] institutions, a poor investment climate, a high level of corruption, isolation from the world economy. Growth potential is tied to human capital, and therefore the key risk is the emigration of educated specialists and entrepreneurs, and the degradation of the education system.


Sergei Guriev (Image: Kommersant.ru)

Sergey Aleksashenko: One must not call the state of the economy anything but sorrowful. For the last ten years the average growth rate is less than 1% per annum, demonstrating that Russia is sharply lagging behind the rest of the word. The main pressure point is the broken institutional environment that leads to a deficient system of protecting property rights, the fundamental of any business. I am talking of political competition, an independent judiciary, the rule of law and freedom of speech.

The preservation of the current political construct, the military-political standoff with the West and the aggression against Ukraine– these are the fundamental inhibitors of growth. The only driver of growth is the creative approach of the Russian Bureau of Statistics that manages to improve the economic indicators upon every revision, planned or unplanned and is in no condition to explain them to anybody.


Sergey Aleksashenko (Image: Kp.ru)

Konstantin Sonin: The Russian economy is in a complex but not critical state. The stagnation in production, incomes and standard of living has continued already for ten years: the brief recessions are replaced by short term upturns, but the average growth rate remains 1% per annum. The fundamental problem of the Russian economy for the last years is the excess pressure on the part of the government organs. All the time, new restrictive laws are passed and new by-laws. Each such law raises production costs and reduces the stimuli for innovation. Enforcement practices are becoming increasingly hostile to business, and it is precisely entrepreneurial activity that is the source of economic growth.

How will the Russian economy change till 2024 – the next political cycle? Is there hope for a qualitative change in a positive direction?

Sergei Guriev:: In the community of economists analyzing the Russian economy, the following consensus emerges. First, a speedup in growth is impossible without institutional reforms. Secondly, well, nobody is expecting these very substantial reforms.

Sergey Aleksashenko: With the preservation of those inhibitors that I spoke of above, the Russian economy has no chance of seriously changing. In the contemporary world there is not a single country that can develop successfully, by relying exclusively on its own forces. The key to rapid growth is involvement in the global economy.

Import substitution is a dead end route, where the country has already been in Soviet times. National projects are a naïve belief that government investments, financed at the expense of higher taxes are more effective than private ones. In practice it works out this way: the more the government invests, the more billionaires appear in the country.

Konstantin Sonin: Until 2024 I expect neither a catastrophic recession nor an exit from stagnation. To move towards growth what is needed at the very minimum' is active aggressive work by the government. Even without conducting thorough and serious reforms, it is necessary to lift the counter sanctions that fall first of all on the poorer part of the population, and lift the entire practice of a restricted internet, because that encumbers the borrowing and introduction of advanced technology, kick out corrupt officials and managers of state companies. Without this there will be no exit from stagnation.


Konstantin Sonin (Image: Republic.ru)

 

 

 

 

[1] Mk.ru, May 13, 2019