The Sharp Downfall of Oil Prices May Become a Turning Point in Economic Development

According to our estimates, at present the Russian economy has nearly exhausted its production capacity (i.e., the actual growth rate of GDP is near its potential value). The growth model based on domestic demand promotion, which Russia had relied upon prior to the crisis, has exhausted its potential, and so the decline of the economic growth rate in Russia was caused by lack of internal economic growth factors, and by no means by monetary factors.

Under such conditions it does not appear to be feasible to expand the use of the already available production factors, while any stimulatory budget and monetary policy measures will be counterproductive, resulting in inflation growth instead of boost of economic growth rate. Thus, in particular, it is not worthwhile to reduce the RF Central Bank's 'key' interest rate, because interest rates - similarly to the national currency's exchange rate - are not fundamental economic growth factors. Manipulations with interest rates or exchange rates can indeed somewhat influence the growth rate of GDP, but this effect will be only very short-lived. As for the outlooks for the medium- and long-term periods, the rate of economic growth will amount to zero at best, while under the worst scenario (that is, if - alongside the active economic sanctions - price of oil should drop below $ 60 per barrel or lower) Russia will experience economic decline, and there is some probability that this may happen as early as 2015.

On the one hand, the prospects of economic decline are indeed a cause for distress. On the other, a significant downfall of oil prices may also turn out to be beneficial from the point of view of future economic growth. The formerly high level of oil prices resulted in an unprecedentedly high rate of growth in Russia's national economy over the period 2000-2007, being one of the factors responsible for its overheating, while at the same time allowing Russia to survive the 2008-2009 crisis with less substantial losses than those that this country could have suffered if oil prices had been low. Until recently, the sky-high world prices for energy carriers had been sustaining the small but positive growth rate in Russia's national economy. However, by all indications, that favorable period is now over.

It is a well-known fact that favorable foreign trade conditions usually suppress a country's economic development on the domestic scene, because such a situation does not conduce to the emergence of proper incentives for the government to undertake any in-depth structural reform aimed at diversification of the national economy in order to shift the main focus from the oil and gas sector to the manufacturing industries, or any reform oriented to institutional development. It is noteworthy that this negative effect is stronger in countries with basically underdeveloped institutional environment. There - as shown by the results of a number of studies - high prices for energy carriers not only crush the prospects for reform, but also create fertile ground for corruption and concentration of the mineral resource rent in the hands of a small select group.

So, there is a possibility that the sharp decline of oil prices in late 2014 may become a turning point in the development of Russia's national economy and serve as a sort of stimulus for seeking a new equilibrium based on qualitative restructuring of the economy, which in its turn can give rise to the emergence of new fundamental factors of economic growth. In future, a sustainable high growth rate in Russia's national economy can be achieved, first, by relying on new production factors, in particular on human capital; secondly, by improving the quality of the already existing factors - such as production capacities and workforce - that is, increasing the total factor productivity index. To this end, this country will have to launch a more in-depth structural reform (transport, infrastructure, reform of the existing institutions like, for example, property rights, the judicial system, etc.); the reform must take place against the backdrop of a favorable institutional climate, which is important for investment demand revival.

Maria Kazakova – Candidate of Economic Sciences, Head of the International Budget Sustainability Department
This commentary is based on the article by Sergey Drobyshevsky and Maria Kazakova published by Forbes.ru: Decomposition of GDP: Can the Russian Economy Grow Faster