Russia: A Plan For Growth?
British Embassy Moscow
The Russian Government announces a new package to address the recent economic slowdown. Measures focus on SME support, increasing investment, improving the business climate, easing access to bank finance, and addressing the impact of Russia’s WTO accession.
Amid continuing concern about Russia’s flagging economy, Prime Minister Medvedev and his cabinet signed off a package of measures to stimulate growth at a meeting on 25 July. After expanding robustly in the wake of the global economic crisis, Russia’s economy has slowed over the past year. Although respectable in comparison with western European countries, Russia will struggle to record 3% growth in 2013. The slowdown has been broadly based, reflecting domestic capacity constraints as well as the lacklustre global economy.
The new package, which responds to President Putin’s demands for action to address the slowdown, has five components:
greater state support for SMEs – including state guarantees for loans, targeted tax breaks, and a drive to encourage state monopolies to engage with the SME sector;
state support for investment – through greater use of PPPs, looser rules for investment by the state pension fund, and National Welfare Fund financing for several major infrastructure projects;
efforts to improve the business climate – through a series of ‘road maps’, which aim to reduce the administrative burden for business;
easing access by enterprises to bank finance – by reducing regulatory costs for credit institutions, developing a deposit insurance fund, and improving Russian credit rating institutions; and
addressing the adverse impact on some sectors of Russia’s WTO accession last year.
Some of these proposals, such as the business climate ‘roadmaps’, had already been announced, and few details have been released about the new initiatives. The new package envisages the use of the National Welfare Fund, which currently holds $86.5 billion of national savings, to finance public investment. This supports the announcement by President Putin last month that $14 billion of funding from the National Welfare Fund would be used to finance three flagship infrastructure projects. Interestingly, earlier this month, Minister of Finance Anton Siluanov had warned against investing more money from the National Welfare Fund, to avoid jeopardising the financial security of the pension system.
There are also hopes that monetary policy can be eased in the months ahead, now that inflation has started to fall back towards its target range. The government has already expanded the number of refinancing tools that the central bank can use to increase liquidity and make it easier for banks to lend to the real economy. There has even been speculation by some commentators that the central bank might embark on a programme of “quantitative easing” on the US or UK model.
These measures – if fully implemented – should have a modest positive effect. The average interest rate for one-year consumer loans in Russia is 25%, well above the CBR’s benchmark refinancing rate of 8.25%, and so efforts to reduce borrowing rates are likely to be particularly well received by business. But there are concerns that raiding the National Welfare Fund to finance high-profile projects could breach Russia’s new fiscal rules and weaken its defences against a new downturn in commodity prices. Another concern by some observers is that measures to help domestic industry adjust to WTO accession may turn out to contain elements of protectionism.
But Russia will still face structural economic challenges. Raising the long-term growth rate requires sustained structural and institutional reforms to improve the business and investment climate, open up the economy to greater foreign participation and competition, and shift public spending towards economically useful programmes.
We will continue to monitor the commercial opportunities for UK companies in any new infrastructure projects.
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