Gaidar Institute Presents the Latest Issue of the Monitoring of Russia’s Economic Outlook

Head of the International Trade Department of the Gaidar Institute Alexander Knobel opened the discussion by presenting a short analysis of Russia’s foreign trade turnover in 2016.

‘In 2016, the physical volume of Russian exports remained the same as in 2015; however, nominal revenue from exports considerably declined due to a sharp drop in world prices. The most important role in determining the volume of Russia’s foreign trade turnover continued to be prices for major exports and the exchange rate of the ruble. Russia’s balance of trade was affected by a considerable slide in prices for Russian exports. In 2016, the annual average crude oil price dropped by 22-26%, while global prices for chemical industry products, as well as for ferrous and nonferrous metal-bearing products, decreased on average by 25-30%'.

According to Alexander Knobel, the relatively ‘calm’ behavior of the ruble’s exchange rate over the course of 2016 made it possible for imports to get stabilized at 2015 levels. ‘Thus, total imports in 2016 amounted to 97-98% of total imports in 2015. Hence imports primarily depend on the exchange rate. Stabilization took place with regard to all types of imports’.  

The expert noted the persistence of the trend towards transformation of the geographical composition of Russia’s overseas trade. ‘Since 2013, the share of the EU, Turkey and Ukraine in RF foreign trade has been on the decline, while that of the countries of South-East Asia has been on the rise. However, the EU countries still remain [our] main partners, for they account for more than 40% of [Russia’s] commodity turnover’, said Alexander Knobel in conclusion.

Head of the Department of Financial Studies of the Gaidar Institute Mikhail Khromov noted a positive trend in the restructuring of the retail credit portfolio towards long-term and cheap credit resources. According to Mr. Khromov, the year 2016 saw a slight growth in the amount of consumer credit debt carried by the population. ‘In 2016, growth in the population’s debt to the banking sector hovered around a standard error of 1-1.5%, but this is a positive trend, maybe even a sign of a turning point. The largest contributor to consumer debt growth was the housing mortgage lending market, which issues longer-term and cheaper credits to the population than the  consumer finance market,’ concluded Mr. Khromov.   

The expert then told his audience that the current crisis had not led to a decline in the amount of mortgage debt outstanding, which is very important for growth of the loan market as a whole. ‘On the contrary, what we see now is a drop in consumer credit debts. This type of debt is more expensive for loan takers and more risky for the banking sector. The restructuring of the credit market in favor of housing mortgage lending seems to be a positive factor because it improves the consumer credit debt situation. Longer-term and cheaper credit resources make it possible for the population to spend a lesser portion of their current income on credit repayment, which means an alleviation of the debt burden cutting into their current income’, explained Mikhail Khromov.

Then the expert pointed out that in 2012-2013, the share of income spent by the Russian population on servicing their debts became equal to that spent by the US population, although total consumer credit debt amounts to 70% of GDP in the USA, and only to 15-17% of GDP in Russia. ‘This situation can be explained by the predominance of expensive short-term credits on the [Russian] market. The trend towards mortgage lending has somewhat straightened out this situation for the moment and stabilized the debt burden of the population. The problem of expensive short-term credits remains acute’, concluded the expert.  

The RANEPA's Senior Research Fellow Ilya Sokolov addressed the major trends and typical features of the 2016 federal budget. He said that its main distinctive feature was the fact that, from a macroeconomic point of view, the execution of the budget had been much worse than the forecast. ‘While the rate of annual inflation was below forecast, the economy, instead of rising 0.7% of GDP, dropped 0.2% of GDP, and the average price of oil in 2016 was 41.6 USD per barrel instead of 50, which resulted in repeated revisions of the official projections of oil and gas revenues. In 2015 we had thought that the adopted federal budget had been based on conservative forecasts, but reality has shown that these forecasts were optimistic. As a result, macroeconomic circumstances drastically narrowed the room for any budget maneuvers’, pointed out Ilya Sokolov.

The expert confessed that when forming the federal budget, officials frequently based their calculations on oil prices which were notoriously hard to forecast. He emphasized that forecasts ‘are being maneuvered in order to balance the budget. If oil and gas revenues strictly follow the course of the economy as a whole and do not strongly fluctuate in response to changes in international markets, their behavior is easily predictable. Oil and gas revenues are rather hard to forecast, which opens the way to manipulations when it becomes necessary to optimize the budget.’   

Mr. Sokolov also told his audience that over the past 8 years budget expenditure had doubled. ‘Thus, the oil price needed for Russia’s budget to be balanced had amounted to about $58.5 per barrel, while in 2016 it amounted to about $110 per barrel, which   represented a twofold rise in this country’s appetite for expenditure’.

According to Mr. Sokolov, half of the 2016 drop in aggregate revenue was compensated for by increased non-oil and gas receipts. However, a major part of the non-oil and gas receipts of 2016 was accounted for by the partial privatization of Rosneft. ‘Thus, all growth in non-oil and gas revenues in 2016 was due to the [State’s] selling part of its assets. The collection rates of all the other taxes have remained unchanged’.

As far as the issue of growth in expenditures was concerned, the expert noted that most of expenditures were continued to be accounted for by the nonproductive branches of the economy. ‘2016 saw an upward trend in expenditure, which grew by 0.3% of GDP. The main driver of this growth was the ‘National Defense’ budget function, and the main cause of the rise in expenditure under this budget function was the decision that the debts accumulated by the enterprises of the defense-industrial complex should be partly repaid from the budget (in the amount of about Rb 740bn).

As regards the structure of expenditures in 2016, we can see that most of them were nonproductive expenditures, which did not contribute to the creation of conditions necessary for promoting economic growth. Only one-third of the expenditures (which equaled about 11% of GDP) were productive ones, including expenditures on education, healthcare, infrastructure, science, R&D, and excluding all the other expenditures, such as expenditures on the nonproductive branches of the economy, e.g. defense and social policy’.

At the same time, Mr. Sokolov pointed out that the drop in oil-and gas revenues was also a blessing in disguise because it marked the beginning of the evolution of Russia’s raw-materials-based economy and a decline in its dependence on situational revenues. By way of summing up, he said: ‘However, it is far from clear what will replace the non-received revenues.’  

Video recording of the press conference >>>