No Preconditions For A Crisis Similar To That In 1998
Russia’s budget must be adapted to the current economic situation, otherwise a spontaneous “fine-tuning” may hit the population through high inflation, as was the case during the crisis in 1998–1999, assumed Russia’s Finance Minister Anton Siluanov at the 7th Gaidar Forum.
The assumption of facing an economy similar to that in 1998 is a figure of speech, because at that time Russia had budget-related problems plus a short-term government debt accrued during previous years. Russia’s current budget faces no such pressure from debt commitments.
However, with the current prices of energy resources, it is difficult to maintain an overage in budget expenditure commitments. The question regarding the effect of upcoming budget cuts on slower economic growth rates is not quite correct. If budget cuts affect non-productive items, namely military spending and social policy, this will have no effect whatsoever on economic growth rates.
In fact, economic experts including Aleksey Kudrin recommend that these budget expenditures should be trimmed. However, if spending on infrastructure, health care and education declines, such a budget cutting will have more effect on long-term economic growth rates. Regarding the effect of the dramatic fall in oil prices on Russia’s budget, it is worth saying that none of the countries that export energy resources is ready to face such prices. All countries including Russia will have to adapt to new conditions, adjusting their budget policy.
In our view, with oil prices most likely ranging between $30 and $50 per barrel, not only will the Russian economy will see no conditions for recovery, but also it will unlikely to stabilize at the bottom of the business cycle (i.e, a stagnation).
Note that the first signs of crisis were actually noticed by the expert community as early as 2013, when oil prices were not so low yet. Respective signals were sent to the Russian government, which, however, took no relevant measures, hoping that the situation would stabilize and the global economy begin to show positive signs.
Also, in recent years economic experts have recommended the Russian government to undertake structural economic reforms such as privatization, demonopolization, redundancies in the public sector, as well as a pension reform, revision of the budget structure priorities, changes in the fiscal policy, etc.
Further delays in following these recommendations may have dramatic consequences for the Russian economy in the long term.
Sergey Drobyshevsky, Scientific Director at the Gaidar Institute