Russia economy is stagnating, but the Russian government is using various statistical tricks to make things look better than they are. In this editorial in Gazeta, written by Alexei Mikhailov, he explains that one of the few pro-active steps Putin is taking, using National Wealth Fund to invest in large projects, has questionable merit.
It’s also worth reading another article translated by The Interpreter, that talks about the NWF investments: Russian Railways Will Borrow NWF Funds For a Long Time – National Wealth Fund to invest in shares of RZD without guarantee of return. – Ed.
Russia’s economy has ground to a halt. But the government treats the situation with spectacular indifference, pretends that everything is fine, and proposes some meager measures. At the same time it expects the economic situation to improve, and will probably even ensure that it does, albeit only temporarily and on paper.
Stagnation – that’s what it is
According to the latest estimates by the Ministry of Economic Development, the GDP growth in May was 0% – the same with June (month-to-month, seasonally adjusted). The economy has come to a halt. Investment has clearly begun to fall, unemployment is growing. The current account balance for the year contracted by more than 40% (in the first half of the 2013 compared to the same period of 2012). If this continues, by the end of next year it will reach zero.
The GDP growth in the second quarter of 2013 was driven mainly by real wage growth (primarily in the public sector and mainly at the expense of the regional budget), but it was mainly in April. To a large extent it was also due to the continued sharp increase in consumer lending. However, higher consumer demand was met largely by imports, since domestic production does not contribute much to this “celebration of life.” And in the first quarter of 2013, the picture was not so rosy.
Rosstat (the Russian Federal State Statistics Service) traditionally publishes three estimates of GDP for each quarter. The first one is just the number. The second one is the GDP by production method (by sectors). And the third involves specifying data on GDP growth for all three methods of calculation, which should complement and validate each other. And here’s where the danger lurks. According to the method of production, GDP grew in the first quarter of 2013 by 1.6% in all three estimates. But calculated by the revenue method, GDP was 2.9% lower. Subtracting one from the other, we get a 1.3% decline in GDP. The difference has been written off as a “statistical discrepancy” that amounted to 441 billion roubles and increased by a factor of 15 compared to the first quarter of 2012.
The obvious conclusion from these statistics is that the GDP estimated using the production method is clearly overvalued. And we will definitely see it in a year, once Rosstat does his usual revision of the old statistics.
The GDP estimate for the first quarter of 2013 can be substantially adjusted downwards for the growth figures in the first quarter of 2014 to look good against its background … This is called the “base effect.”
Now, looking at how inflated the initial estimates of GDP are due to the slowdown of the Russian economy, one can’t help wondering, what is behind the initial estimates of 0% GDP growth in May and June? Maybe the recession has already begun?
The government plans
This week at a cabinet meeting, Alexei Ulyukayev, the new Minister of Economic Development, presented proposals aimed at accelerating economic growth.
Measures to support small and medium-sized business, increased investment activity, and increased availability of bank credit, are more-or-less well articulated. Rather vaguely formulated were steps to improve business climate and “to address certain sectoral issues.” What surprised me the most was the negligible scale of the proposed measures.
These are the micro-measures to address a macro-problem of stagnation. At the time when the economic growth declines all the way down to zero, to the fore come such tasks as “changing the requirements for archiving of documents.” That is just something outstanding.
And, of course, if you look at the policies pursued by Ulyukaev’s predecessor, Andrei Belousov, the continuity is simply stunning. Almost nothing new [is being proposed] except for some “ribbons” related to the banking issues so familiar to Ulyukaev. This continuity makes you wonder if the new minister really has any new ideas.
What are they hoping for?
Why does the government care so little about the slowdown of the national economy? Because it hopes that things will get better before they get worse. And here’s how.
First of all, the economic slowdown became apparent in the second half of 2012. This means that the first half of 2013 is compared relative to the high base over the last year, but the second half of the year will be viewed in comparison with a base that has significantly slowed down. Simply due to the base effect, the government hopes to solve the problem of speeding up economic growth. And purely statistically, it may well turn out to be that way (as measured by “the corresponding period of the previous year”), even if in reality stagnation continues (zero growth in the previous month/quarter).
The second reason to hope is that things will get better by themselves is the 2013 harvest. More food will be produced in the fall and winter of this year. That, by the way, should also rein in inflation due to the deceleration of growth in food prices.
And finally, the inventory cycle. Increase in inventory holdings is recorded as part of gross GDP accumulation. In the first quarter this growth of inventories sharply declined. This is good news, because subsequent production could resume to restore the level of stocks, as it happened, for example, in the cycle of 2008-2010. The logic is simple: when excess inventories are accumulated, they put pressure on the market, and production is reduced. When inventories are absorbed, the production growth resumes. The government expects an upswing in this cycle to begin.
It is totally clear that the statistical tricks have nothing to do with reality. The harvest is an one-off factor not controlled by the government, and the inventory cycle can have only a temporary effect of output growth. But the main thing here seems to be “to survive another day,” and there is a traditional Russian “maybe”. Well, for example, maybe because of the worsening political situation in Egypt, world oil prices will go up. Or some other miracle happens.
How can the Central Bank help
But there is another set of measures that can be implemented, but cannot be openly discussed. One of them is to devalue the rouble. Out loud we can only speak of a stable course. The market reacts instantly to any word about devaluation, as the June statement by Anton Siluanov, the Finance Minister, has shown.
Of course, the real exchange rate appreciation over the last couple of years (in real terms, the rouble has reached the pre-crisis level in 2011 and since then has strengthened) has contributed to the slowdown of the Russian economy. Imports gets cheaper and becomes more price-competitive than domestic production, the exporters get less in rouble-terms and, therefore, profits fall. That profitability is the most sensitive part of the investment, that falls with the profits. And economic growth is declining.
The situation in terms of rouble value didn’t change until the end of May 2013, when the rouble started to substantially decline relative to the dollar-euro basket. That was a gift from Sergei Ignatiev, the outgoing Chairman of the Central Bank, for its new chairman, Elvira Nabiullina. So far the first month of Nabyullina’s work has been marked by fluctuations of the rouble in the direction of strengthening, followed by returning to the same level. But of course, it’s too early to judge after just one month. Nabyullina had to knock down the devaluation expectations, and she did.
Will the rouble devaluation continue? We’ll see. But it is precisely the weakening of the rouble that could generate revenues for the federal budget and profits for exporters, which will boost investment.
The “Second Front” where the Central Bank could stimulate economic growth is by easing monetary policy. It’s not about reducing the official refinancing rate that does not affect anything. The thing is that in Russia they effectively launched a “quantitative easing” program, similar to the United States QE. Starting Monday, July 29, CBR started to use the new credit facility secured by non-marketable assets.
Over the first five months of 2013, the monetary base (money created by the Central Bank) decreased by 11%. It didn’t start to grow until June. In July we will most likely see its substantial increase, including through new types of loans.
And finally, the third option for the Central Bank to stimulate the economic growth is to stop constraining the use of budgetary reserves.
Stash the pension money
Under Ignatyev, budgetary reserves were a total and absolute taboo. They were accumulated and held in the Central Bank without being used. For the Central Bank, the main purpose of their accumulation was to sterilize (withdraw from circulation) money supply. Budgetary reserves served as an instrument of monetary policy to control inflation.
Today no one insists on such an orthodox notion of fiscal reserves. And the economic authorities suddenly discovered that they have a huge money reserve – the National Wealth Fund (NWF), that is technically a retirement stash. No one is going to spend it outright. But it is so tempting to invest that money somewhere. And President Vladimir Putin has given the go-ahead to use the 450 billion roubles of the NWF money to finance three investment projects: another beltway around greater Moscow, a high-speed railway from Moscow to Kazan, and the Trans-Siberian Railway expansion. For many reasons it looks strange to say the least.
First, if you can invest this money somewhere, how come the authorities haven’t done so in the past 10 years? How come that money has been just sitting in the CB like some dead weight? And if it cannot be invested (for fear of inflation), why have they decided to do it now?
Second, if the budgetary provisions, in the economic sense, amount to monetary sterilization, any use of funds means printing money outright. Investment by emission.
Third, it seems like they selected extremely expensive projects that basically may never pay off. Speaking about the high speed rail they state already today that the money is needed not only for its construction, but also for subsidies until at least 2050. As to the estimates for the Trans-Siberian, they jump so much that it is hard to believe them at all.
Fourth, it is the pensioners’ money after all. It can and should be invested solely for the benefit of pensioners with guaranteed repayment and profitability. What kind of guarantees can we talk about when they buy preferred shares in potentially stranded projects?
The concept of fiscal reserves is totally out of whack. No one understands what it is anymore. Can they be used? If they can, then how? The meanings are layered one upon the other and as a result the desired effect is akin to the Keynesian one: to stimulate economic growth, burying money without expectation of any effectiveness.
But these recipes were tried in the U.S. during the desperate and intellectually disastrous Depression of the 30s. Since then, governments have learned how to make measures taken to stimulate demand and reduce unemployment significantly more efficient. Are we trying to follow the recipes of 80 years ago?
Is that the best our economic decision makers can come up with?