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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
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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
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A long list of potential reforms
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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
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THANK YOU FOR ATTENTION!
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