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Russian reforms: New deal or more the same? Mikhail Dmitriev President, Business partnership “New Economic Growth” ICEUR Master Class Vienna, 5 December 2016 Russia has experienced the longest recesstion in its history Russian GDP plummeted deeper than in other BRICS except Brazil But cumulative retrospective GDP growth on PPP still remains impressive GDP growth YoY China Brazil Russia India GDP on PPP in 2011 prices South Africa Ukraine Russia Romania Source: Analytical Centre of the Government of Russia, Reuters Datastream, World Bank, IMF Turkey Poland 2 Foreign debt deleveraging: 2 times larger in 2015 than in 2009 Foreign debt, beginning of the year, bln USD Total Government CBR Banks Non-financial companies Source: Development Center of HSE, CBR 3 Political choices behind the macroeconomic trade-offs • During the current crisis the authorities abstained from escalating social transfers • Instead, they preferred to rely on political capital acquired during the post-Crimean political consolidation • They emphasized fiscal austerity and orthodox monetary policy and favored higher profits and smaller output reduction • Economic sanctions aggravated the crisis and affected the living standards • But the magnitude of the economic crisis alerted and disciplined the elites • A genuine quest has begun for longer-term economic solutions 4 The recession impacted consumption stronger than the previous two Retail trade Real wage GDP Consumption Households State administration Gross accumulation Fixed capital formation Inventories Net export 43 months 21 month 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Analytical Center of the Government of Russia, Institute of Economic Policy, Development Center of HSE 5 Inflation is likely to come down to 4% by the end of 2017 Minfin plans to cut federal budget deficit to 1% of GDP by 2019 (under assumption of oil price $40/bbl) The 2018 Presidential elections are not considered as an obstacle to further fiscal tightening IMF praises Russia’s monetary policy but already regards fiscal tightening as overzealous Source: East Office 6 Wages and consumer confidence recover from deep plummeting 7 Source: Rosstat Sharp decline of real wages was inconsistent with the growth of productivity Source: HSBC, East Office 8 Corporate profits go up but they are not reinvested into the economy “surplus” corporate deposits in the banks, bln rub (LHS) loans to companies (% growth, inversed scale) But import of machines, equipment and vehicles has been growing YoY: June: 7% August: 33% September: 19% October: 17% Source: HSBC, Development Center of HSE, Centre of Macroeconomic Research of Sberbank 9 The economy has almost bottomed out But the medium-term expectations remain lacklustre Medium-term consensus forecast November 2016 Real GDP growth CPI (Dec/Dec) Rub/USD annual av. Urals, USD/b annual av. Source: HSBC, Development Center of HSE. 10 President Putin’s approval remains high, But approval of the government and regional authorities has declined Source: Levada-Center, Rosstat, HSBC. 11 Source: Levada-Center. 12 03.16 09.15 03.15 09.14 03.14 09.13 03.13 Potential for political protests (%) 09.12 03.12 09.11 03.11 09.10 03.10 09.09 03.09 09.08 03.08 09.07 03.07 09.06 03.06 09.05 03.05 09.04 03.04 09.03 03.03 09.02 03.02 09.01 03.01 09.00 03.00 09.99 Protests are possible Would participate 03.99 09.98 03.98 09.97 03.97 04.16 06.15 08.14 08.13 Potential for economic protests (%) 10.12 12.11 02.11 04.10 06.09 03.08 05.07 07.06 09.05 11.04 01.04 03.03 05.02 07.01 09.00 11.99 01.99 03.98 05.97 07.96 09.95 11.94 05.94 Protest intentions are low and continue to decline Protests are possible Would participate Back to the future: top priority of current consumption Requests to V.Putin, 2002 Rise the living standards and resolve social problems Improve the effectiveness of public management Stimulate economic growth and employment Address problems of culture, science, health and education Address problems of housing and utilities Requests to V.Putin, April 2016 33 25 12 Housing and utilities 2 Infrastructure and local problems 2 Education and science Restore Russia's might 1 International issues Personal wishes 1 Crime and terrorism No answer, irrelevant answer 26 5 21 Corruption and resentment against the authorities 5 0 41 Econommic problems and inflation 16 Put an end to Chechen war Income level, social protection and pensions 10 15 20 Source: FOM, Levada-Center 25 11 10 6 4 1 Other questions, no questions 30 35 28 0 5 10 15 13 20 25 30 35 40 45 Top down demand for institutions and evolution of the mechanisms of political control Alexander Baunov (Carnegie Moscow Center): During the last five years Russian political system has experienced a double U-turn from institutionalized bureaucratic control framework to grass-roots activism practices and back Mobilization based-practices were widely used during political instability of 2011-2012 and during the “hot” phase of the Ukrainian conflict However, recent political consolidation at home and de-escalation of tensions around Ukraine have triggered the bold departure from mobilization tactics Today the control framework aims at achieving legitimacy through rule-based practices and stronger institutions This political environment favors institutional reforms Source: Carnegie Moscow Center 14 A radical breakthrough in Doing business rankings since 2012 Russia moved up by 70 positions - now well ahead of other BRICS and better than some of the OECD members Source: the World Bank. 15 Institutional improvements in Global Competitiveness Index Source: WEF. 16 Anti-corruption campaign and reforms of law enforcement and judiciary During the last 5 years the number of corruption investigations against high ranking officials has been increasing Hundreds of civil servants have been discharged as a result of review of the income declarations For corrupt officials risks of being caught are rising, so is the demand for reforming judicary and law enforcement The incriminating bias of prosecution is causing more concern than before This improves the chances for judiciary and prosecution reforms The proposals for such reforms are being developed 17 Propensity for institutional reforms has increased, so has the implementation capacity In fact, both previous economic crises were followed by a stronger demand for business-friendly reforms and by consorted efforts to implement such reforms Today the appetite of the elites for structural reforms seems to be stronger than ever since early 2000s Many old reform taboos in sensitive areas are being lifted at an amazing speed The government system is gradually transformed from an image making machine into a centralized delivery unit …And it often delivers Ability to effectively manage complex institutional change has considerably improved both at the national and at the regional level 18 A long list of potential reforms Innovations policy Regulatory reforms for infrastructure Retirement age increase Enhancement of territorial labor mobility Public sector restructuring Elimination of barriers in construction and development Urban planning modernization Reform of municipal finance Enhancement of commercial rental housing supply Long-term finance development Public administration reform Law enforcement reform Reform of judiciary 19 THANK YOU FOR ATTENTION! 20