Is Russia’s economic crisis over?

The government’s officially stated position is that Russia’s economy is recovering rapidly from the economic crisis, and will soon be back on a growth trajectory. People are being promised an improvement in their standard of living. At the same time, however, analysts interviewed by Lenta.ru doubt that the Russian economy can quickly emerge from the bottom.

It will not get worse

The worst is behind us, as far as the Russian economy is concerned, said Igor Shuvalov, first Deputy Prime Minister. He is confident the Russian economy has been bought back to health and, in the next year, will grow by one percent.

The authorities also believe that the declining trend in Russian incomes has ended. In 2017, improvements in the standard of living will become a “trend for all groups of the population”.

Shuvalov said Russia’s financial system has also stabilized and strengthened.

“The banking sector is getting stronger. Insurance companies are also going through a period of formation of a new insurance market. The entire financial and banking system is much more stable,” he said.

The chasm is growing between Russia’s rich and poor

Big financial freeze

The government is clear--the economy has rebounded from the bottom, and is gradually improving. However, will the quality of life of Russians and the level of their incomes really change, given the expected sluggish growth of the GDP in the coming years? This is the question that Lenta.ru asked the experts.

Anatoly Aksakov, Chairman of the Duma Committee on Financial Markets said, “Yes, we can say that the turning point in economic development has been reached. As of the third quarter, the situation has been developing in a positive direction. We are seeing growth in the industrial sector, even more conspicuously in agriculture. Accordingly, the situation with the real incomes of the population is also changing in the favourable direction, wage increases are outpacing inflation, albeit only slightly,” he said.

“It is obvious that we will see growth next year. This is also reflected even by the situation in the securities market. For the first time in recent years, the MICEX Index has topped the 2000-point mark,” said Aksakov. “I think the key factor here was the final adaptation of the economy to the low oil prices and Western sanctions. When the economy enters an economic crisis, there always occurs an internal regrouping of forces. Any organism, and the economy is a living organism, mobilizes its internal resources to defeat the disease. The stabilization of oil prices has also played its role here – $50 per barrel, whereas the budget was made based on a price of $40. Nevertheless, the main role has been played by the economy’s adaptation to new conditions,” he said.

Yakov Mirkin, Head of the International Capital Markets Department at the Institute of World Economy and International Relations (IMEMO) RAS, said, “Of course, the higher echelons of the government need to be announcing positive expectations. Psychology plays a very important role in economic growth, but there should be something else present, which will stimulate growth in the economy.”

“For now, the picture is the same as it was a year ago. The Russian economy is greatly affected by global commodity prices, the dollar, and the physical demand for fuel. The situation in the global financial markets is very volatile. This volatility may increase, depending on the policies that the new president of the United States eventually implements. Beyond our borders, there exists complete uncertainty, which can lead to growth or, on the contrary, bring on a new wave of the economic crisis,” Mirkin cautioned.

“Domestically, the economy is experiencing a big financial freeze, ultra-high interest rates, very high refinance rates of the Central Bank, and a physically, in absolute terms, shrinking budget. Then there are the heavy taxes and a growing regulatory burden. Of course, based on the principle of “patient, heal thyself”, we are seeing stabilization, but nevertheless, we see that the disease is still in its chronic stage, with the falling incomes. The overvalued ruble can make its contribution to this, especially as concerns the positions of the commodity companies. The forecast is – ‘whichever way the curve turns’. There is shortage of real instruments to help improve the economic situation,” said Mirkin.

Sergey Khestanov, Adviser on Macroeconomics to the General Director of Otkrytie Brokerage House said, “The best epigraph to this topic is – ‘our market has reached the bottom and started to dig’. I am starting to develop an allergy to our officials. Once they start saying something about the ‘bottom’, then you can well expect some misfortune.”

“In fact,” he said, “they are partially correct, in that the rate of decline of the Russian economy has been reduced. At the expense of spending cuts at all levels – state, federal constituent entities, corporations and households – our economy keeps adjusting. However, there is an important caveat here – if no external economic shocks occur, then it is likely that next year, we will reach local equilibrium, or even show a slight growth.”

Government wants the poor exempt from paying taxes

“However, regarding wages, I would have been much more cautious here. Our informal “grey” sector – is a parameter that is hard to analyze. It is much better to analyze this salaries parameter indirectly, by looking at retail trade turnover. If we look at this, we see that this was a very tough year,” Khestanov said. “Turnover in retail saw a drop of 15 per cent. Yes, the economy, from the consumer’s point of view, to a large extent has adapted, but we can say this confidently only when retail turnover stops declining and levels out, and then it remains that way for a couple of quarters.”

“It is possible that people are actively increasing their savings. However, increased accumulation of savings indicates, other things being equal, that the consumers are frightened, fearing a further deterioration of the situation, believing that we have not yet reached bottom. We must wait until this fear subsides,” he said.

Vladimir Tikhomirov, Chief Economist at the BCS Financial Group, said, “I agree that the economy is close to becoming stabilized, and that growth will resume next year. However, the main question is not in the stabilization, and not in low rates of GDP growth. The main question is what measures the government will take to raise the rate of economic growth, thus increasing the welfare of citizens, increasing the resilience of the country’s economy to external shocks. To this question, unfortunately, we still have no answer – the future economic programme remains completely unclear,” he opined.

First published in Russian by Lenta.ru.

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