ALEXEY VEDEV: IT IS TIME TO MOVE TO GOVERNMENTAL DIRECT FUNDING AND ECONOMY SUPPORT
Alexey Vedev, Head of Financial Studies Department of the Gaidar Institute, estimated the economic situation, governmental measures and possible consequences for the Russian economy resulted from COVID-19 in an article SPEAR’S Russia.
“A key element of the current crisis is its dual nature: the economy has been hit by supply and demand - side. In this regard, the measures taken by leading countries look quite adequate, that is, the current crisis must be flooded with money. From this point of view, the anti-crisis plan announced by the Russian government looks either as half measures or totally insufficient. For example, there was a program announced to issue bank loans at zero interest to businesses “for paying salaries”, but the funds that private enterprises will have to repay these loans with have not been identified.
The initiative to introduce tax holidays sounds strange as well, thus, the taxable profit of enterprises is not clear. It would be much more appropriate and efficient to either subsidize or directly finance businesses and consumers. That is, to stimulate demand, compensate for the losses of economic agents. To do this, one should use all available sources of financing: the National Welfare Fund (NWF) and the redistribution of funds within the budget and, if necessary, the loan issue. Presently, savings of the NWF are equivalent to about 8% of GDP.
The required assistance, similar to other countries, accounts for about 4–5% of GDP, despite the fact that the package of measures announced by the Russian government is currently estimated at 1.2–1.5% of GDP. Even if we triple the costs of the economy anti-crisis support against current plans, the NWF budget will not be exhausted this year.
It should also be remembered that the Russian economy is extremely underdemonetized. Therefore, if necessary, the government can simply print money without the risk to accelerate inflation.
Finally, it is necessary to adequately estimate the level of decline. Before the pandemic, I estimated the probable fall in Russian GDP in 2020 at 1.5–2%, but now I admit a drop of up to 10%. We are dealing with a full-blown crisis. Current monitoring shows a decline in business activity up to 20%, and this is a lot.
In this situation, the government should quickly and systemically examine probable losses by contacting the leading manufacturers. Evidently, all talks about tightening tax policies should be stopped. The recently announced increase in taxes on deposits and conflicts with offshore companies look simply indecent in the current environment. The government needs to change the overall tone and switch to direct financing and support of the economy.
Moreover, it is critical to draw conclusions from this crisis. The main conclusion is that it is important to develop a different economy that is not dependent on the export of hydrocarbons and other raw materials. I think that the lesson from oil prices is a separate matter. I believe that we will come back to the topic of privatization and the ubiquitous redundancy of the state as well as to the notorious topic of investment climate. It has to be improved virtually, not verbally. Russia does have resources for investment. The real issue is that only an adequate economy deserves investments, not the one that we face now. Back in 2015–2016, the Ministry of Economic Development described an investment development model. When the pandemic cut short, we must give it a second glance”.
The initiative to introduce tax holidays sounds strange as well, thus, the taxable profit of enterprises is not clear. It would be much more appropriate and efficient to either subsidize or directly finance businesses and consumers. That is, to stimulate demand, compensate for the losses of economic agents. To do this, one should use all available sources of financing: the National Welfare Fund (NWF) and the redistribution of funds within the budget and, if necessary, the loan issue. Presently, savings of the NWF are equivalent to about 8% of GDP.
The required assistance, similar to other countries, accounts for about 4–5% of GDP, despite the fact that the package of measures announced by the Russian government is currently estimated at 1.2–1.5% of GDP. Even if we triple the costs of the economy anti-crisis support against current plans, the NWF budget will not be exhausted this year.
It should also be remembered that the Russian economy is extremely underdemonetized. Therefore, if necessary, the government can simply print money without the risk to accelerate inflation.
Finally, it is necessary to adequately estimate the level of decline. Before the pandemic, I estimated the probable fall in Russian GDP in 2020 at 1.5–2%, but now I admit a drop of up to 10%. We are dealing with a full-blown crisis. Current monitoring shows a decline in business activity up to 20%, and this is a lot.
In this situation, the government should quickly and systemically examine probable losses by contacting the leading manufacturers. Evidently, all talks about tightening tax policies should be stopped. The recently announced increase in taxes on deposits and conflicts with offshore companies look simply indecent in the current environment. The government needs to change the overall tone and switch to direct financing and support of the economy.
Moreover, it is critical to draw conclusions from this crisis. The main conclusion is that it is important to develop a different economy that is not dependent on the export of hydrocarbons and other raw materials. I think that the lesson from oil prices is a separate matter. I believe that we will come back to the topic of privatization and the ubiquitous redundancy of the state as well as to the notorious topic of investment climate. It has to be improved virtually, not verbally. Russia does have resources for investment. The real issue is that only an adequate economy deserves investments, not the one that we face now. Back in 2015–2016, the Ministry of Economic Development described an investment development model. When the pandemic cut short, we must give it a second glance”.