Research paper
Published 17 December 2019
Updated 9 May 2024
ISBN: 978 1 78413 361 0
How is it possible for the directors of the Russian economy to pursue an orthodox stabilization policy with a great measure of success and yet to have achieved so little to stem the growth slowdown? This paper examines the reasons for the divergence in economic management.
Before the 2018 presidential election, there was a competition of sorts to devise a new growth strategy for the new president to adopt. Aleksei Kudrin’s Center for Strategic Research (CSR) carried the liberal flag. Boris Titov and the Stolypin Club advocated acceleration led by a surge of state spending. The Ministry of Economic Development (MinEkon) was closer to Kudrin.36 All called for an improvement in the business environment, with the CSR specifically urging judicial reform.
The new president of course turned out to be the old president. The new government was mostly the old government. And the new strategy was new only in places.
There has latterly been a small shift of budgetary allocation in favour of the more ‘productive’ expenditure headings of health and education – as advocated by the CSR. The revision of business regulation continues – the beneficial outcome of which process never seems to materialize. The main focus of the current strategy, however, is the state-led investment programme of ‘national projects’. This is faintly – and only faintly – reminiscent of the Stolypin Club strategy: notably, it is not financed by large-scale borrowing.
There are 12 national priority areas, consisting of 69 federal-level projects. The overall cost of implementing the projects is estimated at 26 trillion roubles, or about 4.3 trillion roubles ($65 billion dollars) annually, equivalent to approximately 4 per cent of 2018 GDP. Some 70 per cent of funding is supposed to come from the budget.37
All Russian policymakers speak and write about the projects as if they are of the highest possible importance, and beyond any questioning.
These projects follow on from a presidential ukaz (edict) of 7 May 2018.38 This means that all Russian policymakers speak and write about them as if they are of the highest possible importance, and beyond any questioning. Criticisms of any other policy – by Aleksei Kudrin, for instance, in his role as head of the Audit Chamber – are couched in terms of whether or not that policy serves the implementation of the national projects.
The objectives laid out in the ukaz can be summarized as follows. Nine national goals are to be achieved by 2024: (1) ensure sustainable natural population growth; (2) increase life expectancy to 78 years; (3) ensure sustainable growth of wages and pensions above inflation; (4) halve the numbers of people living in poverty; (5) improve housing conditions for at least 5 million households annually; (6) increase the share of innovating organizations (a curious measure that is officially monitored) to 50 per cent; (7) speed up the digitization of the economy and the social sphere; (8) become one of the world’s five largest economies. with growth rates above the global average and inflation below 4 per cent; (9) support high-productivity, export-oriented businesses in the key sectors of the economy, doubling non-raw-material and non-energy exports. The government will execute the ukaz by implementing 12 national priority areas, as well as the Integrated Infrastructure Modernization Programme.39
The national projects approach means that the key role in acceleration is given to state investment. Privatization, and reform of the private sector’s ecosystem, are neglected. MinEkon, which provides the official government forecast underlying budget plans, envisages GDP growth of 1.3 per cent in 2019, 2.0 per cent in 2020, and 3.1 per cent in 2021 – the acceleration to be generated by the national projects.40 By contrast, the Higher School of Economics (HSE) GDP forecasts for 2019–21, as of November 2018, saw the growth rate edging up only to 1.9 per cent by 2021, implying little gain from the national projects.41
The trajectories of investment (per cent annual change) forecast by MinEkon and the HSE could hardly be more different.
|
2019 |
2020 |
2021 |
|
|---|---|---|---|
|
MinEkon |
3.1 |
7.6* |
6.9* |
|
HSE |
2.0 |
2.4 |
2.5 |
* In April 2019 MinEkon adjusted the forecasts for 2020 and 2021 to 6.9 per cent and 6.2 per cent respectively.42
Source: RBK, 24 November 2018.43
The projected average annual rate of spending on the national projects – the 4.3 trillion roubles cited above – would amount, if it were all brand new lines of expenditure, to a 19 per cent increase on the rate of fixed investment in 2018. Evidently, however, much of the spending on the national projects will be a continuation of existing work. And new lines of expenditure may crowd out some unrelated investment projects, pre-empting finance and construction capacity, for example. At any event, the national projects’ net impact on investment seems to be open to interpretation: what looks like a gale-force wind to MinEkon is a barely detectable breeze to the HSE. One assessment by Alfa-Bank economists associates the national projects with only a 0.2 per cent annual near-term direct effect on GDP, and a 0.1 per cent annual indirect effect.44
There are differences, too, over the anticipated longer-term effect of the national projects on output. How productive are they likely to be? Kudrin, for instance, underscores that they are not accompanied by anything much in the way of privatization or reform of property rights; while Vladislav Inozemtsev cautions against state-led investment programmes in general.45 Bureaucratic, top-down management seems likely: witness the 15 prescribed key performance indicators for regions, designed to assess the work of governors in promoting the national projects.46 Some sort of state intervention in the building materials industry may follow from the finding that, to accommodate the national projects, supplies of sand must increase by 42 per cent, and of gravel by 44 per cent, over the period 2018–24.47
The Russian leadership is deploying state spending against its growth problem. Critically, it is not deploying institutional reform. Moreover, this spending is being conducted while a budget surplus is to be maintained. Policy rather than reform has served well in stabilization. However, it may not be enough to bring the desired results when it comes to growth.
