University of Matej Bel, FINAC

The macroeconomic challenges facing Russian Federation over the next 5 years

Author: Shagatay Samal Professor: Dr Colin Lawson Year: 2011

Contents Introduction .................................................................... ! . 1 2 3 4 5 Present economic situation ..................................... ! . Forecasting the economic situation .................................................................................... 3 Conclusion .......................................................................................................................... 8 References ........................................................................................................................ 10 Supplement ....................................................................................................................... 11

Introduction
Financial crisis in 2007-2009 shacked most part in the world including economy of Russia. Russia is one of big countries with big resources and with big influencing power on the world scene. Because of the fact that Russian economy is closely connected with other world economies, crisis also reflected with significant measure in an economic situation of Russia. The government of the Russian Federation in connection with this accepted a number of anticrisis measures. In a certain extent these measures helped to restore the economy to the level before the crisis, but also there is maintained old policy, which is based on the energy resources of the country. Experts consider that if Russia does not change its priorities, it is possible to further reduce the economy. This summary will be mainly about present situation in process of restoring Russian economy, its future forecasting and finally presenting possible macroeconomic challenges for the next years.

Present economic situation

As it was already mentioned above, Russian Federation is a big export orientated country. At first, it refers to weapons that exports are carried out in 55 countries and more than $ 5 billion. Also in Russia was launched the production with very high quality power-equipment that has high demand in abroad. Finally, in Russia there are some of the most developed nuclear and space industry. With these, many experts predict the rapid development of offshore software and forestry. Major Russian trading partners are CIS countries, China, Germany, Italy, Netherlands, USA, Poland, Switzerland, United Kingdom, Finland, France, and Turkey. The basis of the trade growth is primary industry sector. First of all, there is oil, nonferrous and ferrous metallurgy. These industries together make up 70% of the country's foreign exchange earnings. The result of the Russian economic activities on the end 2010 is 4 % of growth. On the picture 1 are shown the sectors that influenced the GDP of Russian Federation. According to the picture the big growth was contributed by the sector of Manufacturing. This sector covered the possible decrease in the level of GDP in a consequence of big decrease in level of Agriculture and Forestry. Decrease in level of Agriculture and Forestry was promoted by such factors, as a drought and fires in the forest zones in Central Russia and a ban on grain exports. The Construction sector cannot still recover after financial crisis in a consequence of the limited access to long-term credits and bankrupts of the construction companies. Because of 3

the absence of new buildings prices at the real estate market are raising. Despite the fact that banks' liquidity had increased, the sphere of financial services was reduced to 2,4 %. The beginning of the 2011 seemed to have been started well, but already in the second quarter the economy began to increase slower than had been expected.
Picture GDP growth under main sector, %

Sources: [1]

Inflation for 2010 grew to 8,8 %. The drought, which caused the decline in the agriculture sector, also caused the high inflation. The second reason of the higher inflation are more expensive prices of oil and energy, which also caused inceasing of prices of other

manufactured goods such as food. In this connection the Bank of Russia started to reinforce the monetary-credit policy with raising reserve requirements from 2,5 % to 5,5 % on the obligations of the legal entity and to 3 % on the obligations of individual. Experts assume that reaction to this policy will occur in the end of 2011. The level of poverty has decreased mainly due to higher pensions, a salary, especially government employees, and reduction of unemployment. Increase of pensions and a salary certainly was a consequence of growing inflation. Unemployment has decreased due to strategy of the enterprises to keep the workforce. According to forecasts, declining trend in poverty will remain in 2011 (11,2 %) and in 2012 (10 %). The capital and financial accounts of balance of payments was not developing well in the first half of 2011. This is a result of increased net capital outflows from the private sector in the amount of $ 31.2 billion, which is 3 times bigger than the same period in 2010. This can be caused by active banks' purchasing of foreign assets with fixed income and shares and

providing loans to nonresidents borrowers. Despite the increase in imports, balance of payments in the first half of 2011 increased on $ 5.5 billion. (More in picture 2)
Picture Balance of Payments

Source: [1]

Russian trade policy moved to its own purposes. In September 2010 were solved issues of bilateral trade with the United States, and in December 2010 - with the European Union. Later were solved issues with Georgia. So there is the possibility of Russia joining to the WTO in December 2011 and also on July 1, 2011 Russia began to operate customs union with Belarus and Kazakhstan.

Forecasting the economic situation

As seen from the information above, a state of the Russian economy is not stable, extremely changeable and vulnerable. Capital outflow, growth of import and many other indicators show that the Russian government should change the social and economic policy now. Experts consider that the basic problems of Russian economy are: a shrinking workforce, a high level of corruption, a difficult access to capital for small businesses, and a poor infrastructure in need of large investments.

But the main challenge is dependence of Russian economy on the price of oil. All saved reserves from late years before crisis was spent for rescue of banks and the industry and also for growing social obligations. The reduction of oil prices seriously reduced budget income, and made its scarce. Now Russia is lucky again, the prices for oil are again high, but there is question for how long.

The future forecasting of the Russian economy will be defined by following factors: a condition of world economy, a business climate, a budgetary policy of the Government of the Russian Federation and a monetary-credit policy of Russian Central Bank.

The major factors that are influenced by world economy and interact on the Russian economy are the price level and volume of demand for the basic export goods on the world market (Urals oil and other raw goods), demand for non-raw goods and capital availability in the world financial market for the Russian borrowers. The Russian economic growth is currently limited by the recession at the main world markets. Also it is influenced by the decreasing demand on export goods, by the competition with perspective developing countries, and by many other factors. For the good business climate the government of Russian Federation needs to remove administrative barriers to form a correct judicial system and protect the entitys rights. This decision would open the way to the new investments, which would be hampered by issue of elections in a 2 years. Currently budget plans of the government are to save reserve fund until the oils prices will not change and raise its level with external and internal loans and partly with the privatization of state property, although their amount is limited. In addition, there is a risk that during the election period and the Olympic Games in 2014, that the implementation to reduce budget expenditures will decrease and the budget deficit will increase. Planned privatizations of minority government shares of some strategic enterprises and sale of non-strategic assets are one of the most important reforms in recent years. Estimated sale cost of the property is $ 50 billion, or 2-3% of GDP. Ministry of Economic Development in September 2011 provided a version forecast of socioeconomic development of the Russian Federation for the planning period 2012-2014. The forecast includes the objectives outlined in President's speech and it is designed in accordance with the budgetary policy for 2012-2014.

The main priorities of economic policy in the forecast period are: social development and investment in human capital; modernization of the defense industry and the armed forces; innovative development and supporting of high-tech sectors; economic diversification, infrastructure development; balanced regional development; improving the investment climate, promoting competition and reducing the administrative burden on business; increase the stability of national financial system, reducing the budget deficit and inflation; formation of a Customs Union (between Russia, Belarus and Kazakhstan) and adaptation of the national economy to WTO requirements.

The forecast has two basic (versions 2 and 1) and two additional (options A and C) versions. Version 2 (moderately optimistic) reflects the relative increase of competitiveness of the Russian economy and improvement of investment climate. Version 1 (conservative) assumes preservation of low competitiveness in relation to imports and the absence of capital inflows in the slow recovery of investment activity and a reduction of real government expenditure on development. Version A (negative) is characterized by deterioration the global economy dynamics. Version C (moderately optimistic) reflects the maintenance of relatively high growth of world economy. The picture 3 shows the dynamics of GDP growth for each version over 2010-2014.
Picture 1 Increase rate of GDP under forecast variants

%
105 C 104 2 1 103 A

102

101 2010 2011 2012 2013 2014

Source: [2]

As a basic version forecasting is taken moderately optimistic version (version 2). Are guided by data 2010-2011, and events in the world, especially a possible decrease in oil price, is supposed reduction of GDP growth in 2012. But in general the GDP growth in the years 2013-2014 will be about 4-4,6 % (more in the table 3 and 4 of a supplement). Import growth will be related mainly with the increasing demand for intermediate goods consumption and investment goods, especially on machinery, equipment and vehicles (from 44.3% in 2010 to 52.3% in 2014). The ratio of mineral production may decrease from 9.6% in 2011 to 9,2-8,6% in 2012-2014 because of the of price conjuncture and the dynamics of the exchange rate. At the same time investment and consumer demand can ensure high growth of construction, transport, communications and trade. Concerning investment in 2012, there is expected the growth of investment in real estate and in agriculture after the drought of 2010. Moreover, energy-fuel companies want invest to upgrade its own systems. Deposits of the population can become the main source of funding because of barriers to international capital markets. This probably can increase loans to enterprises and households. There is a reason to believe that the Russian government has recognized the importance of maintaining inflation rate, in terms of international experience, at acceptably low level. The annual inflation rate in 2012-2014 can make 4-6 %. This can lead to a trust in such a policy with lower inflation expectations. And it is assumed that unemployment in the following years will decline from 6.8 to 5.8% because of good economic situation and increased demand for workforce.

Conclusion

This summary studied the main macroeconomic indicators of current and future economy of Russia. These indicators have helped to identify the main challenges of the Russian economy in the coming years. 2010-2011 years were recovery years for Russia after the economic decline due to the crisis. There are visible improvements in all economic sectors for the year 2010 except agriculture, construction and financial sectors, the reasons for the decline of which were described above. The drought, which caused the decrease of agriculture sector, high oil prices and price for energy resources, unpreparedness of the Central Bank to anti8

inflation policies of such agricultural countries with energy resources as Russia caused the high inflation in 2010. Then accelerating inflation led to a reduction of loans, hence, reduced the investment and worsens the investment climate in the country. But unlike in many other countries, restoring Russian economy managed to reduce unemployment. From all this, there are several areas to which attention to the Russian government should be paid to in the coming years, namely they are the following: transition from the economy dependent on the commodity sector to the innovative development and supporting of high-tech sectors; to improve the investment climate, to develop competition area and to reduce the administrative burden to business; monitor the growth of inflation and budget deficit; inflation control and reduction of fiscal deficit; balanced development of regions; and social development and investment in human capital.

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1.

References
WORLD BANK. Russias Recent Economic Developments. Russian Economic Report [online]. September 2011, 26, [cit. 2011-11-16]. Available at WWW:

<http://siteresources.worldbank.org/INTRUSSIANFEDERATION/Resources/3054991245838520910/6238985-1316082024531/RER26_ENG.pdf>.

2.

. - 2012 20132014 . : [s.n.], , 2011 [cit. 2011-11-16]. Available at WWW:

<http://mert.tatarstan.ru/SEPrognoz/SEP_RF.html>.

3.

, .. 20112013 . [online]. 12 2011, [cit. 2011-11-16]. Available at WWW: <http://www.finansy.ru/t/post_1302610515.html>.

4.

, . : . [online]. 07 2011, [cit. 2011-11-16]. Available at WWW:

<http://www.finansy.ru/t/post_1315378675.html>.

5.

ITA - INFORMATION TECHNOLOGY ASSOCIATES [online]. January 13, 2011 [cit. 2011-11-16]. Russia Economy 2011, CIA World Factbook. Available at WWW:

<C/wfbcurrent/russia/russia_economy.html>. 6. , . . Forbes [online]. 15 2011, [cit. 2011-11-16]. Available at WWW: <http://www.forbes.ru/ekonomika-column/finansy/64825-tri-prichinyuskoreniya-inflyatsii-v-rossii#comments>.

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Supplement

Tab. 1 The main indicators of socio-economic development of the Russian Federation for the year 2010-2014

2010 The price of oil Urals, USD / bbl.. c 2 1 Gross domestic product, the growth rate % c 2 1 Industry,% C 2 1 Investments in fixed assets,% C 2 1 Real wages,% C 2 1 Export - total, billion USD C 2 1 400,4 5,2 6,0 8,2 4,0 78,2

2011

2012

2013

2014

108 108 108 108 4,1 4,1 4,1 4,1 4,8 4,8 4,8 4,8 6,0 6,0 6,0 6,0 3,6 3,6 3,6 3,6 527 527 527 527

105 100 100 96 3,9 3,7 2,8 2,5 3,5 3,4 2,1 2,3 8,4 7,8 6,4 6,0 5,2 5,1 4,0 3,0 552 533 533 492

109 97 97 80 4,2 4,0 3,3 1,5 4,1 3,9 3,0 3,7 7,8 7,1 6,0 1,5 6,2 5,8 3,9 2,6 584 536 536 443

113 101 101 80 4,6 4,6 3,8 3,7 4,3 4,2 3,0 3,8 7,2 7,2 5,9 3,7 6,3 6,3 4,0 2,6 619 565 565 441 11

2010 Imports - total, billion USD C 2 1 Inflation (CPI), the increase in prices,% Dec. / Dec.of pr. Year annual average to the previous year 8,8 6,8 248,7

2011

2012

2013

2014

340 340 340 340

401 397 392 378

458 445 435 371 4,55,5 5,9

512 486 475 385

6,5-7 8,6

5-6 5,1

4-5 5,2

Real disposable household income (according to 2 version of forecasting) The real effective exchange rate of Russian Ruble (according to 2 version of forecasting)
Source: [2] with own translation Tab. 2 GDP growth under main sector, %

106 103

108 110

113 114

119 114

125 112

2010 GDP growth Tradable sector Agricultute, foresty Extraction industries Manufacturing Nontradable sector Electricity, gas, and water production and distribution Construction Wholesale and retail trade Transport and communication Financial services Other nontradable sector
Source: [2] with own translation

2011 4,1 5,6 10,5 2,0 6,8 2,4

2012 3,7 3,4 1,9 1,5 4,9 3,3

2013 forecasting 4,0 3,9 2,8 1,5 5,7 3,8

2014 4,6 4,1 2,1 1,4 6,1 4,4

4,0 6,2 -10,7 4,7 12,3 2,4

5,5 -0,7 5,0 7,7 -2,4 0,1

0,8 6,0 2,5 4,9 1,3 1,1

1,2 7,4 3,6 3,9 2,0 2,5

1,5 6,8 3,9 4,6 3,8 3,2

1,6 7,2 5,0 4,9 4,6 3,6

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