The Realities of Life Require a Structural Adjustment of the Economy
Doctor of Economic Sciences Igor Nikolaev, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences, shared in an interview with Capital Ideas his thoughts on the economic prospects of the Russian Federation against the background of Western sanctions.
Sanctions pressure on Russia is intensifying; the collective West is adopting more new packages of restrictions. How successfully is the Russian economy adapting to the new realities?
Judging by the fact that compared to how they saw things in April–May, the Bank of Russia and the Ministry of Economic Development have revised their latest forecasts of the main indicators for 2022 for the better, the adaptation of the Russian economy is going well. Let me remind you that the Ministry of Economic Development, rather than their May estimate of a 7.8% fall in GDP in 2022, now expects that the decline will be 4.2%. The Bank of Russia, instead of a reduction in GDP by 8.5% in 2022 (April 2002 estimate), today expects it to be 4–6%. However, I would not overemphasize these more optimistic forecasts, since at the same time the estimates for 2023 are deteriorating. Therefore, it would be more fair to say that the shock for the Russian economy of the first weeks – late February and the first half of March 2022 – has passed, and some adaptation to the new realities has occurred.
If the sanctions vise continues to tighten, what awaits the Russian economy in the near future: stagnation or (as they say now) negative growth? What are the scenarios?
Today it is difficult to say something definite about the distant future, so I agree to try to assess what awaits the Russian economy in the near future. And let’s dispense with assessments in disingenuous terms, like “negative growth.” The near future is the next 1.5-2 years: it will be a crisis, and so GDP will decline. The Ministry of Economic Development believes, quite optimistically in my opinion, that in 2022 GDP will fall by 4.2%, and in 2023 – by 2.7%. My assessment: the decline will be deeper – an additional 1-2 percentage points annually should be added to MinEc’s forecast. In 2024, as predicted by the Ministry of Economic Development, there will be noticeable growth of the economy: by 3.7%. In the current conditions of extreme uncertainty of the economic situation, I would not have taken a stab at 2024 at all – and in any case, I would not predict that there would be such a strong rebound to a plus number.
Do these forecasts fully apply to Moscow and the Moscow region, or does the Russian capital have its own distinctive features?
In general, Moscow and the Moscow region cannot stand outside the trends that characterize the country’s economy as a whole. Nevertheless, the capital region has certain advantages. First, a significant part of the financial resources of the country is concentrated here. In a crisis, when there is not enough money, this is of great importance. Secondly, those industries which do well even in a crisis (food industry, pharmaceuticals, production of medical equipment, etc.) are well-developed in Moscow and the Moscow region. This, of course, dampens the crisis – but will not be able to eliminate it completely even in the capital region.
You often hear that at the head of everything is import substitution, which will prevent an economic blockade of Russia. However, it is not possible to replace completely everything imported. What prospects do you see here – will import substitution allow sustainable growth of the Russian economy to be achieved?
In the near future, as mentioned above, the crisis will continue. There will also be economic growth someday – I believe beyond the foreseeable year of 2024. Import substitution will mitigate the initial effects of the crisis somewhat. But to what extent it can help to enable achievement of sustainable economic growth in the future – this is a big question. I think that there are not so many industries where it can be successfully implemented (for example, in those that I mentioned in the answer to the previous question). Import substitution alone will not be enough for sustainable economic growth. Simply, when we talk about such growth, we imagine that there will be high growth rates. On the other hand, GDP can grow steadily by 0.1% annually, and this would also formally be a steady growth of the economy. But no one needs that kind of growth …
What steps, in your opinion, should now be taken first of all to maintain macroeconomic and financial stability in Russia?
A lot needs to be done in order to achieve this; I will tell about only one important area of work. We will have to, we are simply compelled to actively deal with this: the restructuring of the economy. There has been a lot of talk about the need to “kick the oil habit,” but little has been done. Now, when the demand for Russian energy will decline (China, India, etc. will not completely replace the previous consumers), we will have to think about what we can export – and such products exist. What is most important is that these products will be outside the sanctions: agricultural products, the food industry, mineral fertilizers, the production of medicines and medical equipment. Relatively speaking, grain should become our new oil. That’s what we need to work on.