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Macroeconomic Policy: From Stabilization to Growth

May 26, 2017, 18:15 UTC+3
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In 2016, the Russian economy came out of the recession and is now poised to grow, according to experts. However, growth might be slow, hindered by the existing barriers and leaving the country further behind. To that end, Russia’s objective is to get its economy to grow faster than the global average. Vladimir Putin instructed the Government and the Center for Strategic Research led by Alexey Kudrin to develop a growth action plan and a new national development strategy until 2024, respectively.

Following the recession of 2015, when the national GDP shrank by 2.8%, the Russian economy stabilised, doing better than expected with a decline of just 0.2% in 2016. Other metrics improved, too:

  • Industrial production grew by 1.3% compared to a decline of 0.8% in 2015.
  • Net capital outflow decreased by 3.7 times to USD 15.4 billion from USD 57.5 billion in 2015. This slowed the national currency’s depreciation: its annualised nominal value against the US dollar decreased by 9% in 2016 after falling by a third in 2015.
  • Inflation dropped from 12.9% in 2015 to Russia’s all-time low of 5.4% in 2016.

In 2017 and the next two years, the Russian economy is expected to grow:

  • The April forecast of the Ministry of Economic Development projects 2% and 1.5% growth rates in 2017 and 2018–2019, respectively (assuming oil prices at USD 45.6 per barrel in 2017, USD 40.8 in 2018 and USD 41.6 in 2019).
  • The IMF forecasts a growth rate of 1.4% in 2017, 1.44% in 2018 and 1.5% in 2019.

According to the IMF’s and the World Bank’s projections, these numbers are still twice below the global economy’s growth rate and will only leave Russia lagging further behind.

In light of this, President Vladimir Putin in his address to the Federal Assembly in late 2016 instructed the Government to develop a comprehensive action plan for 2017–2025 to help the country outpace the global economy by 2019–2020.

At the same time, the Center for Strategic Research (CSR), headed by former Deputy Prime Minister Alexey Kudrin, also set about the President’s task of outlining the national development strategy for 2018–2024 (it was the CSR that developed the economic reform programme for Vladimir Putin’s first presidential term, with its main goal to double the country’s GDP in 10 years).

In May 2017, Alexey Kudrin announced the completion of the strategy development. He believes that Russia can grow at more than 4% annually, doubling its GDP by 2035, which, however, requires systemic institutional reforms to be implemented and a number of conditions to be met:

  • Curbing of inflation to support long-term investment.
  • Balanced pension system, including steps to raise the retirement age.
  • Public administration reform to ensure lower costs, better transparency and faster decision-making.
  • Redistribution of government spending in favour of human capital and infrastructure development.
  • Reduction of pressure on business, reforms of judicial and law enforcement systems, reduction of public share in the economy, and fiscal consolidation.

The Ministry of Economic Development sees the task of building a stable and transparent business environment (with a predictable inflation rate, fiscal policy and tax system) and of removing structural barriers to growth as the Government’s key priority.

The plan includes measures to improve the business climate, increase non‑commodity exports and boost small and medium-sized business. It also seeks to enhance the Government’s support in a variety of sectors, drive higher returns on investment projects and reform the tax system.

The document is being developed by taking inputs from various research teams and business associations. As such, the Stolypin Club came up with a full‑fledged strategy assuming the same growth rate of 4% p.a., but relying on stimulus measures, including monetary policy easing, better credit availability and investment support, rather than fiscal consolidation and suppression of inflation.

Part of these initiatives will likely be accepted. For instance, the Government has already claimed it was prepared to go ahead with a reduced 5% income tax rate for businesses investing in fixed assets.

Also important is the role of regional and local governments in stimulating the economy.

  • Early in February 2017, the Government approved 12 target models to ease doing regional business based on global best practices. The regional governments will use the models to develop their own road maps for improving the investment climate locally, with early deliverables scheduled by late 2017.
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