Too much pessimism reinforces negative expectations of economic agents

The EBRD's forecast has been revised following a long train of changes in projected values on Russia made by international organizations, banks and agencies (MFO, OECD, World Bank, Moody's, Standard & Poors, Fitch), as well as Russian agencies (the Ministry of Economic Development (MED), the Ministry of Finance (MinFin) and the Bank of Russia). Following the EBRD, the International Monetary Fund (IMF) has cut its forecast on Russia's GDP: IMF's experts are expecting a contraction to 3% in Russia's GDP in 2015, whereas in October 2014 they anticipated a timid growth of 0.5%.

The IMF points to plunging crude oil prices and escalating geopolitical strains as the key sources of such a slashed forecast. The EBRD, in its turn, points to the fact that the decline in investment coupled with unfavorable terms of trades and geopolitical situation has a strong adverse impact on the Russian economy. For instance, according to EBRD's experts, the decline in investment (which in 2015 may reach more than 10%) poses a serious threat to economic recovery in Russia. Furthermore, this threat is going to escalate as the available production capacity exhausts.

Indeed, based on the official data, capital has been fleeing quite rapidly rather than coming to the Russian economy. For instance, according to MED's estimates as of the end of September last year, fixed investment might decline by 2.4% in 2014, whereas the last year statistical data show a capital outflow of $151,5bn, up $90,5bn over the value reported in the previous year. At the same time, our estimates of the need in production factors, which agree with some other expert estimates, show that to make its GDP grow at the global economic level (about 3%, according to the IMF), Russia will need to see investment increase by at least 3.4% and the workforce by 1,1 million persons annually within a period of three years (i.e. $235bn and 3 million persons for three years, respectively). As a reminder, the dynamics of economically active population is currently negative as well.

There is another factor of economic growth that should be kept in mind, the total factor productivity (TFP), in other words, the effectiveness of the available production factors (the quality of institutions, etc.). We presented the foregoing estimates on the assumption that the TFP is constant, although this indicator plays an important role especially when it comes to accelerating and placing GDP growth rates on a higher long-run path. At the same time, production factors, as shown above, are facing a negative dynamics while the TFP will hardly see any growth in the years to come.

The situation being what it is, negative projections on Russia's economic development in 2015 shouldn't come as a surprise, although too much pessimism may, in our opinion, reinforce negative expectations of economic agents. At the same time, the drastically cut forecasts which were made almost simultaneously by all organizations and agencies should further encourage the Russian Government to revise its economic policy towards coping with the effects of the crisis and undertaking serious structural and institutional reforms in the economy.

Maria Kazakova, Ph.D. in Economics, Deputy Head of Gaidar Institute's International Center for Budget Sustainability Study.