Translated by Ollie Richardson for Fort Russ
20th February, 2016
Sanctions, lower oil prices, the general downturn in the global economy — all these had a negative impact on the Russian economy. While George Soros, expelled from Russia, along with his Foundation, predicts the country’s bankruptcy in 2017, and the Minister of economic development Alexey Ulyukaev talks about a “trackstand” of the economy, in fact, positive changes have occurred.
Of course, this is not to deny the existence of problems such as the reducing amounts in the Reserve Fund, the inability of regions to allocate funds, the unstable exchange rate of the ruble, capital outflow, declining real wages and the growth of unemployment. And even more important – the decrease of the Russian GDP by 3.7% in 2015.
However, in this pessimism, we should not forget about positive trends that have real chances to lift the country from the economic bottom.
The growth of international reserves of Russia
The first thing to mention about the improving financial state is the increase in the volume of international reserves of the country being 5.4 billion in less than a month. In the period from January 29th to February 5th they rose to 376.7 billion. The Central Bank explains this trend as a positive reassessment of the course.
The international reserves themselves, as you know, are a combination of monetary gold in the possession the Russian government and the Central Bank, foreign currency assets and special borrowing rights. In addition, the calculation takes into account the reserve position of the country in the IMF.
According to the Bank of Russia, the last 7 weeks shows the continuous growth of reserves. Despite the fact that in 2015 their total amount decreased by 4.4%, the current trend cannot but cause rejoice.
The reduction of external debt and the volume of the Reserve Fund
On 19th February the head of audit chamber, Tatyana Golikova, reported to the President the reduction of the external debt of Russia for 2015 to 4.4 billion dollars. Thus, now the Russian external debt is 50bn, however, there has been a reduction in the Reserve Fund, funds which went on repayment of the budget deficit. According to Golikova, its volume on January 1st 2016 amounted to 3.2 trillion rubles.
On the other hand, the National Welfare Fund (NWF) increased. According to the chamber, for the year its volume increased by 19.1%, reaching a total amount of 5.2 trillion rubles.
The chamber also counted the budget deficit in this year. Earlier the Ministry of Finance provided statistics showing the deficit to be estimated at 2.6% of GDP.
“The deficit amounted to 1 trillion and 955 billion and also was lower, at 2.4% of GDP, than the planned 2.9% of GDP”, — said Golikova. In this case budget revenues exceeded the planned indicators by 3.1%.
The termination of the falling industrial production
This week we also learned that for the first time in the last ten months the decline in industrial production has slowed. If in December the fall industrial output was estimated at 4.5%, in January the index dropped to 2.7%. According to Rosstat, this is the first positive figure since March 2015.
However, this trend can be assessed positively, but with one caveat: the January indicators do not always reflect the real figures, because in this month there was a large amount of output. For this reason, experts do not build forecasts about the possible dynamics of this index until February.
At this stage the statistics are encouraging for 2015 – the industry of the Russian Federation demonstrated a decrease of 3.4%, but in the first month of 2016, we see growth of 0.9%. While the economic development Ministry predicts industry growth this year by 0.6%.
Zero GDP decline
The Minister of Economic Development, Alexey Ulyukayev, on 19th February also reported zero GDP decline for the last 2 months. In November the indicator showed a decline of 0.2%. Following December the figures returned to zero and, as shown by the January statistics, taking into account seasonal factors, the trend was preserved.
“The preliminary average for January with the removed seasonality is approximately zero, it can be a plus of 0.1% or minus 0.1%”, — said Ulyukayev.
The aforementioned trend can be treated two ways: as a positive (zero GDP growth is much better than a fall), and a negative.
The calculations of the Finance Ministry show Russia’s GDP this year, on current investment volumes, is unlikely to grow by more than 1%. According to the Deputy head of the Ministry, the increase in the share of investment can only be achieved through structural reforms. No better is the Central Bank, which experts expect economic growth earlier than the second half of the year.
The adaptation of the economy to external conditions and systematic measures
As was stated by Prime Minister Dmitry Medvedev, on the 25th February the final plan of the government will be approved to support the economy, but some of its paragraphs have already become known.
Special emphasis this year is on structural changes in the Russian economy, which the Ministry of Finance has insisted on. In the opinion of Medvedev, the majority of the plan involves systematic measures. “The current situation on the global oil market shows how the modern structure of the economy is necessary and sustainable economic growth with an emphasis not on the market of raw materials”, – he stressed.
In addition, the Prime Minister spoke about the adjustment of the economy to external conditions, despite some drawbacks. Therefore, the plan contains measures involving targeted support of sectors with high growth potential, that are able to make a positive contribution to long-term economic development.
The systematic measures are indeed needed in the economy. However, it is too premature to expect quick results: a change in economic structure is impossible this year.
The Deputy Minister of Finance, Maxim Oreshkin, assures that now the Russian economy has improved: the fall of the main indicators stopped or decreased to the minimum limit, we received understanding of the situation and new incentives for development. According to Oreshkin, “We are now from the point of view of balancing payments adjusting to 30 dollars per barrel”. However now he sees the beginning of a period of stabilization, giving access to positive growth rates.
Some Western analysts also recognize that the Russian economy has managed to adapt to some of the external conditions.
“Enough time has passed for Russia’s economy to learn to balance in the conditions of sanctions, but falling oil prices remain a big problem”, — noted an expert on investing in emerging markets -Kenneth Rapoza.
Despite the overall decline, the key indicators demonstrate a much smaller drop than was hoped in the West. For example, the results of the consensus forecast for unemployment show an expected increase. It remained at the level of 5.8%. Today it is slowing and inflation, according to the speaker, may lead to the Central Bank’s decision to reduce the key rate.
In any case, despite the fact that the economy is acceptably balanced in terms of sanctions and low oil prices, and the government finally got around to implementing system changes, we need to sensibly assess the situation. There is still much to do to ensure that intermediate positive indicators become established in the long run.