No end in sight for crisis as more and more questions remain unanswered

What are your probable answers? “An opposition politician?” “A foreign expert?”  Neither of the above, as the above statements were made by Russian Finance Minister Finance Alexei Kudrin at a Reuters Conference in September. If such conservatively minded government official has started advocating for structural reforms, then one can say that the overall situation is really serious, not only in Russia, but throughout the globe. 

Premature economic stimulus programs withdrawal harmful to recovery

The reality is that most anticrisis stimulus programs adopted in world’s major countries to stimulate economic growth at the height of the current recession are being wound down, and nobody today can credibly predict how the global economy will develop further in the future. Eminent U.S. economist Nouriel Rubini, credited for accurately predicting the on-start of the current financial crisis, has put the probability of a second wave of crisis at 40%, a forecast that cannot be overlooked when formulating new plans for the immediate future in Russia. 

Today, one can say that this crisis, despite of the enthusiastic assurances of Russian officials, has not really ended in Russia. The reality is that the economy and most businesses have adapted to the current situation, where on one hand there are no sufficient resources for further growth, while a worse downturn in the economy is being prevented by sky-high oil prices on the other. In conditions of such an unstable balance, any factor, even the most insignificant external influence, can seriously change the course of events and dislodge the economy from its fragile equilibrium state. 

“The reality today is that most anticrisis stimulus programs adopted in world’s major countries to stimulate economic growth at the height of the current recession are being wound down, and no one today can credibly predict how the global economy will develop further in the future.”

This situation is further aggravated by the fact that the trust of the local population in both government and businesses in these crisis conditions has fallen more significantly in Russia than in most other countries, according to the annual poll data compiled by the Edelman Trust Barometer-2010. The Russian situation is unique as an annual drop of 10% in the trust level equally applies to both government and businesses, with the only difference being that the latter is comparatively less trusted, at 42% and 38%, respectively, according to the Edelman Trust Barometer-2010 data. This is contrary to the global trends in other countries, where there is an increase in trust in government structures and business circles.

For most Russians, such results are not unusual, as even public opinion polls executed in the interests of the Russian government by the Development Research Center of the Russian Higher School of Economics (HSE) had shown that, at least, a third of the 1.2trln rubles spent on supporting the local economy in 2009 was ineffectively used. At the same time, the economy’s lopsided dependence on oil has also deepened further. For instance, according to Kudrin, the so-called oil-and-gas deficit in the government’s budget stood at only 1.7% of Russia’s GDP in 2000 and 3.2% in 2003, but today it is expected to hit a record-high level of 13.7% by the end of 2010.

Businesses fail to learn appropriate lessons from crisis

When the current crisis started in Russia, many predicted that inefficient businesses will go bankrupt, while incompetent employees, fearing layoffs, will start to work much better. However, it seems this did not happen, as, according to HSE’s Development Research Center, most companies have reverted to their pre-crisis business models, where salary growth is not commensurate with the employees’ labor productivity. In other words, this means that increase in citizens’ incomes on the background of industrial stagnation will lead to a reduction in the overall efficiency and competitiveness of the Russian economy. 

And, finally, it is necessary here to highlight the problem of human factor. On one hand, there is an exacerbation of the ongoing demographic crisis in Russia, where there are currently 100 pensioners per 128 workers, compared to 100 pensioners per 150-160 workers in other parts of Europe. This crisis is expected to worsen further by 2020, when there will be 100 pensioners per 112 workers, falling further to 100 pensioners per 100 workers by 2030. This helps explain the ongoing preparation of the public’s opinion for the inevitability of an increase in pension age in Russia. 

On the other hand, the shortage of qualified managerial staff, capable of executing innovative projects, and also the deficit of employees capable of undertaking innovative activities, has also continued to worsen, according to the authors of the report specially prepared for the St. Petersburg Economic Forum 2010. The funny thing is that this is happening in Russia, which practically has the world’s highest number of graduates per 1,000 residents. However, while Russia leads in terms quantity, the quality indicators of such students’ education have seriously declined. Against such a background, the foreign investors’ view on Russia in a short-term perspective is very optimistic. This stems from the fact most Russian companies listed on stock exchanges are much cheaper, and hence more predictable than their foreign analogs. Then, when one adds to this the practical absence of external debt in Russia, the result is that the country as a whole is highly attractive for speculative short- and even medium-term investments.

But for large long-term strategic investments, say for 10-20 years, the opinion of investors is totally different due to the ongoing taxation, judicial and law-enforcement systems reforms, meaning a high probability for changes in the existing ‘game rules’ in Russia, and, consequently, become a source of concern for most strategic investors. On the other hand, most companies’ taxable bases are being reduced, making budgets of governments at all levels deficit, and as a result, less predictable, especially as the prices for oil are expected to continue their volatility in the coming years. This means at the present price level, Russia can only generate languid growth of about 2-3% of GDP, which will be insufficient to solve all the accumulated problems in the country, including inability to ensure economic stability on the long run.

Kremlin’s modernization policy needs active public-private partnership to succeed 

In these conditions, the value of domestic demand that has, for example, helped ensure fast recovery in several sectors of the local economy, increases significantly, first of all, in the food telecoms industries. However, for this purpose, it is necessary to provide citizens, companies and government budgets with normal sources of revenues, otherwise, such demand will be insolvent. Besides, there is also the urgent need to make locally made goods and services competitive, at least, on the domestic market; otherwise, the local consumers will prefer imported products.

Simultaneously, there is an absolute need to create a situation for innovative breakthroughs in the economy. Here, only state efforts will be insufficient. There needs to be a corresponding impulse from both large and small businesses that will help create totally new industrial sectors that were previously not seen as potential drivers of economic growth in the country. All this will require an appropriate approach towards attracting investments and creation of predictable investment conditions for businesses as well as eliminating corruption, administrative barriers and lack of competition in the economy. Indeed, this was exactly what I wrote about at the end of my article that was published on a similar topic in this journal exactly a year ago. 

In conclusion, I would like to note that the present economic meltdown has thought us one thing, and that is crises — both in theory and practice — are inevitable, and therefore, we do not need to be afraid of them, but on the contrary, try to prepare ourselves for them.

* The author is the MIBA general director and an RCCI. board member.