Transcript Sutela Slides - Carnegie Endowment for International Peace

Russia’s Response to the
Financial Crisis
Pekka Sutela
Carnegie Endowment for International Peace
Washington D.C.
4 May 2010
A Safe Haven Lost?
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Russia, like many resource-dependent countries, had learned from earlier crises
and accumulated large reserve funds in recent years. In end-2008, they amounted
to 225.1 billion USD, in April 2010 to 129.4 billion USD. This was originally at least
partly controversial, but the fiscal conservatives lead by Prime Minister Putin and
Finance Minister Kudrin now see themselves vindicated. Depending on oil price
and other matters, both reserve funds may be exhausted in coming years. Russia
will return to reserves accumulation when circumstances allow.
Russian leadership distrusted global economic arrangements, and complained
privately about a forthcoming crisis they would have to pay for.
By early 2008, risks of growth boom based on the combination of high export
prices and ample availability of global liquidity were pointed out in Russian
economic discussion (e.g. Mau, Vedomosti 14 January 2008)
The 2006-2008 preparation of the 2020 program was all about alternatives to
perceived excessive resource dependence
First policy measures in Fall 2008 did not look improvised
Thus, though timing and extent of crisis were unknown, a degree of preparation
existed
So why the talk of a safe haven?
• Politicians are not in the business of doom-saying
• Shifting blame to where it belonged: global imbalances
• Good grounds why a pure financial crisis might handle
Russia softly
– Small financial sector; meagre role in investment finance
– Little foreign debt, esp. relative to reserves
– Strong public sector financial position and quite good
creditworthiness with numerous past upgrades
– Households with no financial wealth, little debt: no wealth
effect on consumption
– Labor markets expected to be very flexible
Why was the drop so drastic?
• Some of the standard explanations deficient
– Bad institutions? Yes, but some with worse ones thrived; others with better
ones suffered
– Resource dependence? Yes, but on the average resource dependent countries
fared better than others
– Bad policies? With few exceptions Russia’s policies where the standard ones
• For a medium income level country, Russia is tradewise exceptionally
open; For a resource dependent country, it has a large population
• Financial dependence proved important
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Debt small, but short-term, concentrated and fast growing
Domestic financial deepening partially grew consumption
Dependence of financial intermediation on foreign funding drastic
The dual financial system: households and most companies using domestic
markets; some big companies and banks dependent on foreign markets
– Part of a more general pattern: in crisis ownership less important than the
source of funding. This is why Eastern and Central Europe fared worse than
Latin America
Russia’s anti-crisis policies in
comparison
• Basically similar to those in other countries
– And consequently praised by outsiders. Thus, IMF 8 Dec 2009: ”The Russian
authorities have continued to manage the fallout of the global financial crisis
well”
• Comparing size of packets makes little sense
– Apples and carrots
– Still, fiscal adjustment from 5.4 per cent of GND surplus in 2007 to -5.9 per
cent deficit in 2009 is very large
– As planned, about half of resources into financial sector support, about half
into real economy support
• Russia had its peculiarities
– The incredible succeeding stepwise devaluation
– How, starting with high inflation, to avoid stagflation
– Emphasis on monotowns, pensions, minimum wages: crisis fighting as a social
policy measure
– Structure of the banking system left no alternative to ”favoring” statecontrolled banks as liquidity channels
Step-wise devaluation
• These usually fail as create expectations on ever more steps
• Introduced in December 2008 by Prime Minister’s decision against view of
advisors, Central Bank, the IMF and others
• Capped in January 2009 with a final about 10 per cent step. Since, nominal
exchange rate stable with strong pressure towards appreciation
• Devaluation was delayed as reactions of the public, remembering times of
dollarization, were feared. This tended to depress production in the
expectation of decisions. Still, no market panic or such
• In July 2008 – January 2009 currency reserves declined more than
expected, about 200 billion USD. But of this, some 50 billion was due to
USD/euro exchange rate change, about 100 corresponded to decline in
private foreign debt, and the rest basically shifted to private Russian asset
holders (”privatization of reserved”) improving their balances
Risk of stagflation
• After declining almost monotonically since 1998, inflation
again increased to double digits in 2007 (11.9 per cent) and
2008 (13.3 per cent), as the economy was overheating
• Also, not all financial inflow could be sterilized, incomes
increased twice as much as productivity, and controlled
prices (including gas central tariffs) were increased
• Central bank rates strongly negative in real terms, lending
rates on about inflation rate level. Still, nominal rates much
above international ones, expected and maintained steady
nominal exchange rate
• No perceived possibility therefore to cut central bank rates
(until 2010). Fiscal policy stance key in anti-crisis measures
Anti-crisis measures as social policy
• Since 2005 added emphasis on social policy, with view on demography
(national priority programs). In practice expenditure on health, education
and housing stable as share of budget, increasing in line with total
expenditure
• Since 2007, decisions to increase pensions, minimum wages, public sector
salaries. This continued in spite of crisis, with strong support from Prime
Minister. Expenditure on national economy also increased strongly
• Economic rationale: very high propensity to consume esp. from pensions.
Political rationale: 1/3 of voters on pension. Socio-political rationale:
hundreds of company towns (”monotowns”)
• Much of increased expenditure permanent, harming future fiscal balance
• Another victory of tactics over strategy, as large part of supported
industries non-competitive or worse, energy inefficient (against aims of
Energy 2030 strategy), or military / dual use (and now longer necessary in
view of current security thinking)
Social expenditure as a share of consolidated
budget expenditure, 2005-2009 (Source: Rosstat, Kaznacheistvo)
2005
2006
2007
2008
2009
Housing
6.9
7.5
9.7
8.2
6.3
Education
11.8
12.4
11.8
11.8
11.2
Health
11.7
11.5
12.1
11.0
10.4
Culture
2.3
2.3
2.2
2.2
2.0
Other
27.7
28.2
25.1
25.8
28.7
- Including
pensions
20.8
20.0
17.1
18.4
20.4
State-dominated banking sector
• Among largest banks end-2007 only two private
Russian ones, three foreign-controlled, five statecontrolled (including big three)
• In crisis, private Russians faced funding problems.
Some foreign-controlled are for sale. Market share of
state-controlled banks (depending on definition) has
topped ½
• State-controlled banks used as liquidity channel (esp.
Sberbank, Rosselkhozbank) and development bank
(VEB)
• Little possibility to turn back trend towards more state
controls in short-to-medium term
Bank of Finland Russia forecast 23
March 2010
• Steeply down; fast up
2007
2008
2009
2010
2011
2012
GDP
8.1
5.6
-7.9
5.5
5
4
Import
27
15
-31
13
10
13
No Easterlin Paradox in Russia:
Happiness Follows GDP growth
(Guriev and Zhuravskaya 2009)
It is the economy:
”What did Putin achieve in ten years?”
(Levada Centre 27 July 2009)
Political support follows economic welfare
2004:3
2008:3
2009:7
Improved
living
standard
24
16
22
Economic
development
10
21
17
Increased
optimism
13
12
9
Order and
stability
6
8
8
Stronger int’l
position
4
8
7
Challenges for the future
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Unpredictable export revenue
– Oil price
– Energy efficiency needed for maintaining export volumes
– Change in gas markets
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Regaining budget surplus
– Re-accumulating reserve funds a high priority
– Expenditure pressure due to recent hikes, long-term needs
– Revenue problem due to declining share of energy sector in GDP
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Exchange rate policy
– Increased flexibility of nominal rate, no pure inflation targeting
– Real exchange rate appreciation pressure as financial inflow resumes
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Financial system development
– Rolling back the state
– Need for long-term domestic funding
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Pension reform
– Increasing dependency ratio
– Previous failures to depart from pay-as-you-go
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Competitiveness of jobs