Outlook on the Russian economy: Klaus Rohland
RT: This week Russia’s Central Bank cut interest rates for the 3rd time in six months, this time to 11.5%. But some say this move doesn’t have the same stimulating effect in Russia as it does in the U.S. Would you agree with that and if so why would you say that is?
KR: That’s because Russia’s financial system is less developed than U.S. Take the ratio of debt in the economy to GDP, in Russia that’s 50-60%, in U.S. it’s double the amount. Russia also has a comparatively high inflation. There is a usual – for economies – trade between cutting interest rates and combating inflation. There would be some impact, but not the same as in the U.S. Anti-crisis policy in Russia is socially-oriented; especially in company-towns, with a focus on jobless people.
RT: As the Russian government spends the remains of the reserve fund to cover next years budget deficit, the main question is, has it spend it wisely or just wasted them?
KR: These were reserves for the bad times, when the economy is in deep recession – 6-7%. So it’s logical to spend the reserve fund. The question is, if you should spend it till the end, or start borrowing again. Our understanding is the government will start borrowing to cover budget deficit and also use reserve fund. The combination strategy seems to be the right one.
RT: Were the reserves spent wisely and in time?
KR: This crisis is unexpected. Fundamentally there is nothing wrong with it –
care about poorest people is also feeding the economy. The impact of crisis for families and children can be dramatic. It also focuses on targeted unemployment benefits, especially in company-towns.
RT: What about injecting liquidity into the system? Why didn’t it reach the real sector?
KR: We do think that part of it certainly reaches the real sector. There have also been huge initiatives to directly support the real sector. Take, for instance, the car industry. The world produces 90 million cars a year, and demand in the world is around 50 million, so there is a huge overcapacity that would exist even if there would be no crisis. The difficulty is how would you fight a business cycle crisis and structural crisis at the same time? Banks are facing the situation of nonperforming loans, the interest of the stability of the financial sector is to increase the capital ratio. Some people say banks should have 30% of outstanding credits as assets to be better prepared for non-performing loans. So, some of the money banks get, they will use to improve their balance sheets, which is good for the banking sector, but it’s not so beneficial for the real economy. It’s not only a Russian problem.
RT: You mentioned nonperforming loans. How big of an issue do you think that’s going to be for Russian banking system?
KR: The crisis started in the financial sector, and then it had an impact on the real sector. The disability of the real sector returns us back to the financial sector. So it’s quite realistic to say that there will be a second wave of crisis coming up. If you have a financial crisis, you must have increase in non-performing loans, and it’s clear to me we’ll see an increase over the coming months.
RT: Do you expect second wave in Russia or worldwide?
KR: It’s less severe than in other countries. The debt to GDP ratio in Russia is much lower, and Russia is in a better position because of its fiscal policy over the last 7 years – it has the 3rd biggest reserve fund in the world. Russia has better room to maneuver than any other country in the world.
RT: At last years forum we talked about Russia’s economy overheating, now we’re talking the economy contracting at a fast pace. Would you say the crisis is beneficial for the Russian economy?
KR: We all didn’t at that time anticipate what was going to happen. Russia will take one lesson out of this crisis – Russia is too dependent on commodities prices. It’s necessary to diversify the economy. It’s necessary to think about small and medium enterprises, less inspections, more transparency, more freedom for enterprises, longer-term reforms for the pension fund.
RT: Russia’s dependence on oil prices. On every one dollar increase in the price of oil, Russia gets $1.7 billion dollars annually. But a low oil price helps Russia’s economic development. Was the current low price period too short for Russia to make some major structural changes?
KR: I do believe you have to focus on small and medium businesses. They know best what works and what needs to be done. The best policy is to make their life easy, and competition also helps in this regard.
RT: and the role of innovative technologies?
KR: The creation of big state innovative companies can be part of the solution, but not the solution completely. It’s necessary to put equal emphasis on the emerging private sector of the country. That’s a tricky task for any government.
RT: But the low oil price helps Russia’s economic development. Was the recent period of low prices too short for Russia to make some major structural changes?
KR: I’m not sure the period of low oil prices is over. You don’t see demand driving the price up, the price of $60-65 per barrel in the long run. By 2050 we run out of oil. The world should be prepared for a post-carbon economy. Energy demand won’t be satisfied by oil, so ignore the oil price and focus on the reforms you have to do. Russia could have the same GDP growth with 40% less energy, Russia annually wastes the amount of energy equal to energy consumption of France.