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Topic: Economy
Region: Russia
Type: Member Comments
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Yaroslav Lissovolik

Chief Managing Director of Sberbank, Head of analytical Department of global markets Sberbank Investment Research, RIAC Member

Russia’s new initiatives associated with sizeable increases in social spending and outlays on national projects as outlined by President Putin in his address to the Federal Assembly in the beginning of this year mark a new beginning in Russia’s economic policy. After extended periods of prioritizing the accumulation of savings and building of reserves, Russia’s economy is switching into spending mode, with greater weight accorded to economic growth compared to an overarching emphasis on securing macroeconomic stability in the past. In effect Russia’s economic model becomes more open and more geared towards development as compared to a defensive mode of economic policy, which sought to minimize external shocks and prioritize self-sufficiency and import-substitution. 

Russia’s new initiatives associated with sizeable increases in social spending and outlays on national projects as outlined by President Putin in his address to the Federal Assembly in the beginning of this year mark a new beginning in Russia’s economic policy. After extended periods of prioritizing the accumulation of savings and building of reserves, Russia’s economy is switching into spending mode, with greater weight accorded to economic growth compared to an overarching emphasis on securing macroeconomic stability in the past. In effect Russia’s economic model becomes more open and more geared towards development as compared to a defensive mode of economic policy, which sought to minimize external shocks and prioritize self-sufficiency and import-substitution. 

According to the Russia’s government, the overall size of spending the national projects is to reach 25.7 trn roubles, of which 13.2 trn roubles are to come from the federal budget, 4.9 trn roubles from the regional budgets and 7.5 trn roubles from extra-budgetary sources of financing. The three main sub-categories of national projects include human capital development (5.7 trn roubles), Improving the quality of economic environment (9.9 trn roubles) and economic growth (10.1 trn roubles). The largest national projects include health care (1.7 trn roubles), demographics (3.1 trn roubles), Construction of roads (4.8 trn roubles), Ecology (4 trn roubles), digital economy (1.6 trn roubles) and Infrastructure (6.3 trn roubles). 

The implementation of national projects and the prioritization of growth will call for a more open approach to investment not only with respect to the private sector, but also foreign investment. This in turn will necessitate the reinforcement and greater use of the framework of private-public partnerships (PPPs) as well as a more active competition policy with respect to tenders and state procurement associated with the implementation of large-scale investment projects. 

Another important dimension to the implementation of national projects will be their greater alignment with the longer term development priorities at the federal and regional levels of governance. Some of this work has already been done at the ministerial level, though there may be significantly more that needs to be done at the regional and local levels. Furthermore, there is also the need to establish more linkages within the national projects among their key components – for example the inter-relation between the “digital economy” national project and the national projects of “Labour productivity”, “Infrastructure development”, “International cooperation and exports”. Greater coherence among the main strands of national projects may allow for a more efficient implementation as well as improved tracking of the economic dividends associated with the implementation of these projects.  

Ultimately, within the new paradigm of Russia’s economic policy, which may be likened to a “Big Push” modernization effort (see Russia’s “Big Push paradigm”, Valdai discussion club, October 8, 2019) fiscal policy is likely to take precedence over monetary policy in delivering the growth stimulus. After amply showing that Russia is capable of notably increasing fiscal revenues and tax compliance the key goal is now to demonstrate the capability to attain modernization via significant increases in the efficiency of fiscal spending. In a way with fiscal policy shifting into spending gear, monetary policy is likely to be relatively more conservative with continued emphasis accorded to macroeconomic stability. The CBR is likely to closely follow the implications of fiscal loosening with respect to inflation and may limit the scope for further reductions in the key rate if inflation risks start to increase. 

An important element of Russia’s “Big Push” to increase fiscal spending will need to be the maintenance of the fiscal rule and a rules-based framework more generally. This implies conservatism in allowing the change in the cut-off oil price for the budget’s fiscal rule operation as well as the existence of clear targets on the evolution of the overall fiscal balance and the non-oil budget deficit. The maintenance of the fiscal rule together with the relatively more conservative stance of the CBR are likely to be sufficient in ensuring the maintenance of the bulk of macroeconomic stability secured in the preceding years.  

In the end, the shift in Russia’s economic policy during Putin’s fourth term may prove to be even more impactful and important than the reform effort undertaken in 2000-2001 during Putin’s first term. By emphasizing development and growth Russia’s economic policy horizons are becoming less myopic and more geared towards longer term goals. It may be still too early to talk about the emergence of an “economic ideology” behind Russia’s modernization effort, but at the very least there is now more of a vector to Russia’s economic policy. 


Source: Valdai

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