Direct Speech, Economics, EU – Baltic States, Russia

Nine national goals are to be achieved by 2024: (1) ensure sustainable natural population growth; (2) increase life expectancy to 78 years; (3) ensure sustainable growth of real wages and pensions above inflation; (4) cut poverty in half; (5) improve housing conditions for at least 5 million households annually; (6) increase the share of innovating organizations to 50%; (7) speed up the digitalization of the economy and the social sphere; (8) become one of five world’s largest economies with growth rates above the global average and inflation below 4%; (9) support high-productivity export-oriented businesses in the key sectors of the economy, doubling non-raw-material and nonenergy exports.

The Government will execute the Order by implementing 12 national projects, as well as the Integrated Infrastructure Modernization and Expansion Plan – essentially, the thirteenth project. However, there is a lack of clarity on how they will help to achieve the goals. It will be particularly difficult to reach the intended growth rates. The growth potential remains at 1.5-2%. The forecast underpinning the current three-year budget assumes moderate growth, with expected rate at 1.6-1.8% GDP in 2018. In 2019, the official forecast assumes a decrease to 1.3%. Growth is expected to increase to 2% in 2020 and 3.1% in 2021. 

However, there are a number of risks that may lead to slower growth: inflation in 2019 may be above the planned 4.3% and the VAT will be raised from 18 to 20%. In 2018, real incomes, decreasing for four years in a row (by a total of 11%), may see zero or even negative growth. External factors are also at play, with further sanctions against Russia and a deteriorating global environment. Experts assess that sanctions ‘subtract’ around 0,5% of growth annually.

As a result, real growth in 2019 may be at 1% or less, which is below that forecasted by the Government and the Central Bank. 3.1% growth is achievable only through a very active economic policy and institutional and structural change. 

Some structural changes are visible in two domains – the reduction of non-oil and gas budget deficit and the launched pension reform.

The Government has presented an ambitious plan to reduce nonoil budget deficit. Diversifying away from oil is a key challenge for the Russian budget system. During peak oil in 2012, non-oil & gas budget deficit stood at 9.7% of GDP, it will slide to 7.3% in 2017 and is expected to reach 6% by late 2025.

Another major change is the pension reform. After the transition period in 2028, the retirement age will hike from 60 to 65 for men and from 55 to 60 for women. But the budget will actually start to save money only after 2028-2030 and these funds will remain in the Pension Fund. So the budget will basically not save any money with the increase of the retirement age. On the contrary, raising retirement benefits at first will require additional 7.5bn USD at current rates annually. 

The federal budget would ideally reflect the new growth model as well. Over the next three years, spending will increase from 18 to 20 trillion rubles (270 to 202bn USD at current rates), but with a decrease from 17% to 16% as share of GDP. Meanwhile, the budget structure for 2019-2021 will remain the same. With an overall decrease in expenditure, there are slight cuts in national defense (0.3 p.p.), national security and law enforcement (0.2 p.p.). Productive expenditure, like education, healthcare and infrastructure, will not increase as percentage of GDP. This means that the budget is not responding to the challenges of the technological revolution and a need for emphasis on human capital.

Another systemic task highlighted in the presidential address to Parliament is the downsizing of the public sector. This isn’t the case, however, with the current draft budget expecting to gain less than 400mln USD from privatization in three years. On the contrary, SOEs continue to acquire private assets. 

The President has not only assigned ambitious goals, but also formulated a ‘breakthrough’ policy involving substantial changes beyond budgeting. Institutional reforms are needed, including improving of public administration; lowering the administrative burden on businesses; enhancing regulation; upgrading of the judicial system. In the coming three years, the Russian economy will continue to face the need for structural change. The national goals will not be easily achieved. Taking into account the external environment, growth rates may be much lower than desired, thus questioning a breakthrough and a change of the economic.