Russian economy in transition towards 22 Young Leadership Programme on the Russian Forest Sector Joensuu 17 December 21 Vesa Korhonen, Bank of Finland Institute for Economies in Transition BOFIT
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1! The economy affected by a rather special demand structure a growth 1) Sensitive to outside world via changes in export prices model 2) Everything else = trend: What does it represent? there was 3 3 2 2 1 1 Lähteet: Rosstat, keskuspankki Structure of total demand and exports, % shares total demand Fixed capital formation (fixed investments) Private consumption Exports Public consumption exports of goods & services Other goods & services Metals, jewels, and products thereof Coal Natural gas Fuel oils & other oil products Crude oil 1 9 7 6 3 2 1 1) + 2): If export prices (e.g. the oil price) do not change, growth of the economy heads towards trend growth. Share of these pricesensitive products is 16 17 % of total demand, or 2 % of GDP. 3
indices, 199 = 1 3 3 2 2 1 1 - -1-1 -2-2 -3-3 - Imports GDP 9 96 97 9 99 1 2 3 6 7 9 1 11 12 13 3 3 2 2 1 1 Russia had a model of easy economic growth, various factors were up: export prices, work force, utilisation of existing capital stock, productivity, foreign financing, no longer growth slowed over 2 years ago % change from four quarters earlier 1 2 3 6 7 9 1 11 12 13 1 GDP Imports 3 3 2 2 1 1 - + Ukraine, sanctions uncertainty : economy in zero growth now -1-1 -2-2 -3-3 - GDP cleaned from the difference in the number of workdays and seasonal variations, January 99 = 1, estimate by the economy ministry
7 6 3 2 1-1 -2-3 - 2 2 2 16 12 - - -12-16 -2-2 External Export prices (in dollars) Export volume % change from four quarters earlier 1 2 3 6 7 9 1 11 12 13 1 Domestic Public consumption 7 6 3 Export prices (in roubles) % change from four quarters earlier Fixed investments 1 2 3 6 7 9 1 11 12 13 1 2 1-1 -2-3 - 2 2 2 16 12 - - -12-16 -2-2 Which GDP demand components have pressed down growth? Export revenues (in foreign curr.) stagnant for about 2½ years Source: Russian customs 21 11 12 13 1! Imports of goods from non-cis countries % change of value from 12 months earlier (latest = November 21) in dollars in euro 7 7 6 6 3 3 2 2 1 1 - -1-1 -2-2
12 1 6 2-2 - -6 - -1-12 6 What lies ahead? Forecasts for 21 16 did project GDP growth of around 1 % (oil 1$). But the oil price fell to, 7, 6 % change from four quarters earlier GDP extra growth from rising oil price / export prices BOFIT model: trend growth from all other factors Growth, average per year 1 2 3 6 7 9 1 11 12 13 1 Central bank, Dec: GDP 21 16 and -.7 (oil ), or -.6 and -1 (oil 6); imports -6 and -2., or -1 and -3 Economy ministry, 2 Dec: GDP 21 -. (oil ), imports -1 Uncertainty! private investments More stimuli? ( stay-in-power over some more debt?, watching reactions and considering?), or cuts? ( test?) Future: Will trend growth slow further? # work force # investments: even earlier, not enough now, private sector investments capital stock, productivity, diversification of the economy # the system: even earlier, reform measures slow at best, and unclear views of the role of markets and the state in the economy now, stronger aims for self-sufficiency. # state expenditure priorities: even earlier, defence and social security now (21 17), more defence, at least; education and health?
Investments: big projects completed in 213, uncertainty (and freeze of part of energy prices for 21) 3 3 2 2 1 1 Investments largest sectors volume, 2 = 1 (each sector's % share of all investments in 213 in brackets) Source: Rosstat Transportation incl. pipelines and communications (26) Electricity production (7) Real estate sector (13) Manufacturing industries incl. oil products (1, excl. oil products 11) 2 6 7 9 21 11 12 13 Oil products (3) Pipeline transportation () Energy 3 % 1-3Q1, % change (large and medium-sized firms) - oil and gas production 1 - electricity 6 - pipeline transportation 17 - manufacturing industries - oil products 1 Investments 213: State companies big Private companies (economy ministry) Government: Need to guide state companies to invest (and also guide e.g. pricing of the inputselling companies.) Long loans from state for infra projects. Economy ministry forecast: Investments (e.g. in infra) by state companies will grow in 21, and especially in 21. 7
Need for diversification aggravates 3 32 3 2 26 2 22 2 1 16 1 12 1 6 2 Export volumes indices, 199 = 1 Oil products Total exports Crude oli 9 96 97 9 99 1 2 3 6 7 9 1 11 12 13 1 1 16 17 Gas 21-1 economy ministry Dec 1, dotted lines 21-17 economy ministry Sep 1
Government budget slower GDP growth and lower oil price puts pressure on revenues & expenditures, and spending priorities are: Govern- ment spending: 1 13 12 11 % of GDP Consolidated government expenditure - main items (federal budget, regional and local budgets, state social funds) Social policy, 1 13 12 11 soc, pol, 1 9 of which pensions 1 9 power & order, development? 7 6 3 2 Education Health Defence + internal security & order Economy Administration 7 6 3 2 1 Housing and the services 1 Interest payments on debt 9 Source: Finmin, 213-17 Finmin estimates Sep 21 And then, Putin s decree Dec 1: Cut government spending in real terms by % per year in 21-17, but not these.
System Business environment (some elements), rank among business capitals, 19 countries Earlier method and Moscow 212 213 Putin's decrees 7 May 212: have to be th in 21 and 2th in 21 EASE OF DOING BUSINESS New method and Moscow & St Petersburg 213 21 EASE OF DOING BUSINESS: Starting a business Dealing with construction permits Getting electricity Registering property Getting credit Protecting minority investors Paying taxes Trading across borders Enforcing contracts Resolving insolvency 1 16 1 12 1 6 2 Source: Doing Business 21 and 21, World Bank other areas to reform? 1
Tax rates Access to finance Workforce skills Political instability Informal sector Labour regulation Tax admin. Corruption Electricity Crime Courts Licensing and permits Transport Access to land Customs / trade reg other areas to reform, e.g. Key Obstacles to Doing Business in Russia 2 2 1 1 BEEPS: Key Obstacles to Doing Business in Russia (response frequency in per cent) Russia EU-1 state state state (and state private) state state state Source: EBRD/WB BEEPS 2-9. EU-1 include Bulgaria, Romania and exclude Cyprus, Malta. state 11
3 3 2 2 1 1 Russia & outside world opening/integration very gradual and meagre Russian imports largest country groupings and countries % shares (average of last 12 months) EU EU excl. Germany China CIS countries Germany Japan and Korea USA Finland WTO August 212 OECD 2XX free trade 2XX free trade agreement, 3 + X customs union Ukraine in CIS free trade agreement, free trade with the EU on 1 Jan 216 Lähde: Venäjän tulli 12
2 GDP imports rouble current account and capital movements inflation exports External sector balance of payments (b-o-p): 2 2 2 16 12 In 21, capital outflow (net) from Russia or the rouble deep % of the average of last four quarter s GDP Current account Trade balance, goods & services Trade balance, goods 2 2 2 16 12 - - - -12-16 -2-2 -2 Financial account: private sector + b-o-p error item, incl.banks and change of foreign cash stock (for foreign cash, increase = negative value) Financial account: corporate sector (red line excl. banks and change of foreign cash stock) - -12-16 -2-2 -2-32 9 96 97 9 99 1 2 3 6 7 9 1 11 12 13 1-32 13
Rouble has fallen 9 net sales, billions of euro per day Weakening Rouble against USD/EUR due to (/) basket markets 7 (net capital outflow), 6 the central bank made rouble purchases to support 3 the rouble. 2 The rouble floats now 1 (1 Nov), interventions Source: Bank of Russia still possible -1 if pressure 1 1 1 1 9 1 2 3 big and could bring financial instability, and that has happened in December. Rouble against USD Rouble against EUR Net sales of foreign currencies by the central bank on the domestic forex market rouble exchange rate, cents 1,,2 3, 3,6 3, 3,2 3 2, 2,6 2, 2,2 2 1, 1,6 1, 1,2 1,,6,,2 1
Inflation has accelerated due to the rouble s fall 3 3 2 2 1 1 Consumer prices percentage change from 12 months earlier (latest = November 21) 3 3 2 2 1 1 - -1-1 All consumer prices Food Minimum food basket Non-food goods Services Inflation difference: Russia minus trading partners - -1-1 Sources: Rosstat, Bank of Russia, BOFIT 1
Rouble + inflation = relevant; now the rouble fell sharply 19 1 Rouble real exchange rate and nominal exchange rate indices, 22 = 1, last = November 1 Inflation difference, cumulative 17 16 1 1 13 12 11 1 9 Inflation difference (Russia over trading partners), cumulative Real exchange rate vs. Real exchange rate vs. currency basket *) Nominal exchange rate vs. currency basket *) Cost level vis-à-vis other countries changes, same as e.g. relative change of wages in euros. 7 6 *) Bank of Russia trade-weighted currency basket (9 % of Russia's foreign trade) Source: Bank of Russia Nominal exchange rate vs. 16
Imports are down Imports percentage change of value from four quarters earlier (latest = 3Q1) Source: Bank of Russia Goods and services, euro value Goods and services, dollar value Goods, euro value Goods, dollar value 1 11 12 13 1 6 6 3 3 2 2 1 1 - -1 17
11 1 9 Russia's imports largest goods and services categories, billions of euros, four-quarter sums Consumer goods Machinery and equipment excl. passenger cars, incl. other consumer durables 7 Investment goods 6 Services excl. travellers' expenditures abroad 3 2 1 7 9 1 11 12 13 1 Travellers' expenditures abroad Chemical products Food and agricultural products Not recorded by Russian customs Metals and metal products Clothing and textiles Passenger cars Forest industry products Sources: Russian customs, Bank of Russia 1
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