Economic policy and growth: short-term problems – no excuse to ignore long-term challenges
Rosstat reported that Russian industry was down by 2.9% in 9M20 and by 5.0%y-o-y in September. Manufacturing was flat y-o-y in 9M20 and down by 1.6% in September, while mining posted a 10.0% and 6.5% y-o-y contraction in 9M20 and in September alone, respectively. The results do not look too bad, and it seems likely that the mining sector can resume y-o-y growth in 2Q21 unless another production-cut deal with OPEC takes place. The y-o-y growth in manufacturing may turn positive as early as 1Q21 as well, but this growth is not expected to be strong (i.e., well above statistical errors) until April.
The CBR and the Ministry of Finance have been able to tackle short-term challenges associated with the pandemic and support the ruble, keep the domestic money markets table, run the budget with a relatively small deficit and avoid a deep GDP contraction. However, long-term problems, such as the consistently slow economic growth, have not been addressed. On the contrary, these measures drove the problem deeper as providing broad support to the economy always means aiding chronically inefficient businesses (the efficient ones most likely did not need this support).
* Assuming no major deterioration in the pandemic situation, the 9M20 statistics do not challenge our view that Russia's GDP may contract by less than 4% this year. Next year the Russian economy is expected to rebound by around 3% or slightly more, which will mean that Russia’s long-term growth trajectory will remain sluggish as it turned to be since 2013 when the economy grew by 1.8% amid the $110/bbl oil price.
* External factors alone should not be blamed for Russia’s unimpressive economic performance as there is enough room to improve economic policy. One such macroeconomic policy tool is the fiscal rule, which in some cases can have an ambiguous impact on the economy, as apart from budgetary expenditures and domestic liquidity flows, it inevitably affects the exchange rate, while the latter affects the economy in a broader sense.
* Keeping the ruble on the crutches of FX interventions meant artificially inflated imports, which contracted less than exports. It narrowed the trade surplus and the current account, forced the authorities to support the ruble even more and reduced growth potential in some sectors.
* Other measures, such as subsidizing interest rates (for certain segments of small and medium businesses, for car purchases, or on mortgages) effectively means providing budgetary support for banks, which are reluctant to reduce interest rates as much as the CBR reduced the key rate. Consumer lending rates on average remain in double digits, which means rates are artificially and unreasonably high for those who do not claim support from the government.
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