Sticky Stagnation: Russia’s Economy in 2013

The following is an English translation of an article by economist Oleg Biklemishev published in Novaya Gazeta which outlines some of the main economic challenges Russia is facing headed into 2013.

Sticky Stagnation 2012

The system is not ready for development

Year 2012 is becoming economic history. After a month or two, the experts will carefully explain everything after looking into the final statistical data. In the meantime, there are several symbolic stories that seem to create an image.

The first scene: Pensions (retirement plans)

Perhaps one of the most discussed topics was the future of the pension system and savings trust. As a result, Prime Minister Dmitry Medvedev, who has blamed the calculation error on his predecessors, returned most of the money to the pension distribution feeder.

Liberal economists spoke out against it. Pension Reform 2002 indeed had a radical error in the calculations: the calculation was focused on the development of a market economy and nation-building dependent on its citizens, and not vice versa. Today, when resources of the savings system are mainly controlled by the state management company, Vnesheconombank (VEB), and are mostly invested in government debt securities – the system became fiction. In the present circumstances, cancellation of the independent compulsory pension component and transfer of the payments to the workers social security pension fund distribution seem more logical.

The second scene: Property

Another remarkable event is the acquisition of TNK-BP by Rosneft, which was blessed by Vladimir Putin as “a nice big deal, which is important not only for the Russian energy sector, but also for the whole economy.”

First, the deal puts an end not only to the extremely fashionable official rattle about the “invariant” focus on privatization, but also to the use of privatization ideology in Russia in general (both, fiscal and political). The potential cost of this de-privatization operation (the government is regaining the ownership of once sold property and now owned by the private owners) is more than twice the revenue earned from the privatization during our recent history.

Second, there are serious doubts about the availability of private capital willing to finance such high volume Russian nationalization (Rosneft had a similar experience before when it captured the main production unit of Yukos, and had to borrow money from the Chinese comrades on less transparent terms). I would like to be wrong, but there is every reason to believe that the Bank of Russia would eventually become the leading source of funds for the formation of “the world’s largest mining and liquid hydrocarbons reserve company.

The third scene: Growth

Every economist knows that the country’s GDP consists of consumption, investment and net exports (excess of exports over imports).

Consumption has been growing slowly despite the disturbing Central Banks’s rapid expansion of individual loans. Capital is in its fifth consecutive year of the massive flight from the country.  Investment barely reached the pre-crisis mark only by means of the mysterious additions by Rosstat, as well as questionable mega-projects induced by the government. Exports, mainly raw hydrocarbons, seem to hit the ceiling both in its physical and value terms. Due to the failure of the national energy policy, global economic risks and the shale revolution, a fall in exports, perhaps sharp, is not far off. In contrast, imports after Russia’s WTO accession, despite all the tricks played by Russia’s vigilant main doctor who had suddenly awakened to care about the environment, is bound to rise.

In other words, it is unclear how economic growth will begin in general, not even speaking about the target of 5-6%.

Afterword.

It seems that Putin, having returned to the Kremlin, has begun to realize that he has entered uncharted waters: he has become much weaker, and Russia, on the contrary, has changed a lot in recent months, and one cannot simply “rule” it as it used to be ruled. There is a sharp conflict between the dynamic development of the country on a par with world leaders and total impracticality of the system constructed by Putin. Exactly the same problem in the past inspired Gorbachev to announce the two logically contradictory slogans – perestroika and acceleration. Both signs are present in Putin’s speeches, but there is no serious determination to initiate changes: the Russian elite is well aware that perestroika would cause unpredictable consequences for the elite.

Unfortunately, there is only one alternative to the catharsis of perestroika, and that is a viscous stagnation, eventually turning into a full-scale catastrophe.