Economic recovery not seen until 2017

In its previous draft Guidelines the Bank of Russia had quite a challenging plan to decline inflation to 4.5% and 4% in 2015 and 2016 respectively. In the new version, however, the regulator intends to decline inflation to 4% in 2017. Moreover, by switching to a mid-term horizon of planning, the Bank of Russia gives up setting quantitative targets for every year. This will allow the Bank of Russia to mitigate reputation risks in case actual inflation deviates from the target. At the same time, the Bank of Russia's upwards revision of estimates of consumer-price inflation in 2015 (5.5–6.9%) and 2016 (4.3–6.5%) appears to be realistic and in line with the Gaidar Instutue's estimates.

Anticipating consecutive weakening of the role of the foreign exchange and budget channels of money supply formation, the Bank of Russia expects the money supply to increase primarily through credit institutions refinancing operations. For this purpose the regulator plans to take a package of measures which, unlike the previous version of the Guidelines, are focused on foreign exchange transactions for a period to be determined by the current demand.

An important role is given to refinancing operations not only in the national currency but also foreign currencies. For instance, according to the data on the balance of payments forecast, in the absence of Bank of Russia's direct foreign exchange buy/sell operations in the domestic foreign exchange market, foreign exchange reserves in 2015 would shrink at least $42bn as a result of foreign exchange repo operations and foreign exchange swaps, as well as foreign exchange transactions of the Bank of Russia, and the same would shrink $7bn in 2016 and 2017, according to a more optimistic option approximating the projection of the Ministry of Economic Development of Russia.

The updated version of the Guidelines contains five scenarios of Russia's economic development. At the same time, Bank of Russia's has substantially downgraded, compared to the previous version, its estimates not only for the current year, but also in the mid-term perspective. First, all of the scenarios provide for the lack of stimulating effect of external factors on the Russian economy. Second, the Bank of Russia estimates the effects of western sanctions against Russia until the end of 2017.

Finally, given the current macroeconomic trends, economic growth in Russia in 2014 would not exceed 0.3%, according to the Bank of Russia estimates. At the same time, investment downturn would be much stronger: gross fixed capital formation in 2014 would decrease 3.3%, whereas as early as September 2014 it was expected to decline not more than 2.5%. Considering the fact that, according to the Bank of Russia, the key conditions for overcoming the investment downturn is to make the economy less uncertain and improve the business environment, and it will take long to overcome the existing structural constraints, and according to the baseline scenario for 2015–2016, the Russian economy is expected to grow at nearly zero rate. The Russian economic is not expected to recover until 2017.

In our opinion, Bank of Russia's updated version of the Guidelines contains a realistic path of Russia's economic development in 2015–2017, taking into consideration the geopolitical tensions whose effects will continue for a while, and the structural issues which are most visible under quite challenging conditions for Russia. Therefore, the guidelines which the Bank of Russia plans for the development of the current monetary policy appear reasonable with regard to the extension of mechanisms and list of instruments of refinancing credit institutions. In transition to a floating exchange rate it will help enhance the efficacy of not only the interest rate channel, but also the entire monetary policy in place.

A. Kiyutsevskaya , an expert, Gaidar Institute

The comments are based on Anna Kiyutsevskaya's article «Правдоподобный сценарий» ["A plausible scenario"] for Banki.ru website