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ECONOMY UPGRADE: Russia’s economic management receives multiple endorsements

Successful eurobond sale in September, credit upgrade by Fitch, and sharp improvement in World Bank Ease of Doing Business ranking, all confirm effectiveness of Russian government's economic policies, amidst strengthening recovery.

As economic recovery in Russia continues to gain hold, Russia has received authoritative endorsement both for its successful macroeconomic policies and for its rapidly improving business conditions.

The US credit rating agency Fitch on 14th October 2016 upgraded Russia’s rating from BBB- (negative) to BBB- (stable).

Normally I pay no attention to ratings decisions by US credit rating agencies, which have been proved repeatedly wrong, and which in Russia’s case are blatantly politicised. 

Back in 2015, during the worst period of the recession, I pointed out how obviously and completely wrong the decisions of the US credit rating agencies to downgrade Russia’s credit rating at that time were.

The market clearly agrees with me.  Fitch’s Russia rating is only just investment grade, whilst those of S&P and Moody’s actually give Russia a junk rating.  In spite of this – and as I predicted – Russia’s last eurobond issue in September was six times oversubscribed, with almost the entirety of the issue on this occasion sold to US investors.  Even the Western financial media has been finally forced to admit that Russia’s latest eurobond issue was a success.

If I refer to Fitch’s latest upgrade of Russia’s rating, it is not because I agree with Fitch’s rating of Russia (I don’t) but because of what Fitch has to say about Russia’s economic policy

“Russia has implemented a coherent and credible policy response to the sharp fall in oil prices. A flexible exchange rate, inflation targeting, fiscal consolidation and financial sector support have allowed the economy to adjust and domestic confidence to return gradually. The strength and quality of the policy response stands out relative to those of other oil producers similarly affected by the oil price shock.”

(bold italics added)

In other words Russia has responded to the oil price fall intelligently and successfully – more so than have the other oil producers. 

In his State of the Union address of 20th January 2015 US President Obama famously gloated

“today, it is America that stands strong and united with our allies, while Russia is isolated with its economy in tatters.”

Judging by the success of its latest eurobond issue, and the credit upgrade Russia has just been given by Fitch, neither the market nor even Fitch agree with him.

Meanwhile Russia’s World Bank Ease of Doing Business ranking continues its rapid rise. 

In 2011 Russia’s ranking was 123 in the survey out of 183.  By 2014 it had risen to 62 out of 189, by 2015 to 51 out of 189, and in this year’s survey it has risen again to 40 out of 190. 

When I discussed last year’s survey I made the point that the dramatic improvement in Russia’s World Bank Ease of Doing Business ranking is simply incompatible with Russia being the corrupt kleptocracy of the West’s imagination

“In corrupt kleptocratic oligarchies courts do not function efficiently, contracts are not performed and enforced, rights of minority shareholders are not protected, and people are not able to register their property easily and do not pay their taxes.”

I also pointed out that the rapid improvement of Russia’s World Bank Ease of Doing Business ranking proves that the claim that Russia is not “reforming” its economy is quite simply wrong.  Russia is not only continuously reforming its economy, but it is doing so successfully

“……the demand for more and more “reforms” simply ignores the fact that reforms are in fact being carried out.

Anyone who reads through the World Bank’s annual surveys will see that they are all about “reforms”. It is precisely because Russia is carrying out “reforms” that its ranking is rising so fast.

To be clear, modernising the court system, introducing a new bankruptcy law, simplifying procedures for connecting to the electricity supply, and passing laws on registering property and on administering bankruptcy, are reforms.

They may lack the drama of breaking up Gazprom, but academic research, historical experience and the World Bank all say the same thing: it is these sort of unexciting reforms that in the end are the ones that make a difference and which produce results.

In other words Russia is reforming, and it is doing so successfully, in a methodical and purposeful way.

Doing so requires hard work and unremitting attention to detail. The Russian authorities deserve credit for successfully doing it, not the criticism for doing nothing that they normally get.”

I also made an extended point about what Russia’s ranking in the World Bank Ease of Doing Business survey says about the overall level of Russia’s society and economy.  The continued advance in Russia’s ranking to 40th in the world shows that this point remains valid, so I reproduce it here in full

“The second point is that if one looks at what sort of countries now outrank Russia in the survey, it turns out that they are – broadly speaking – the three Asian industrial giants: Japan, Taiwan and South Korea, the two Asian city states of Hong Kong and Singapore, and the traditional and well established industrialised societies of the West: the US, the three rich countries of the British commonwealth (Canada, Australia and New Zealand) and most (though not all) the states of the EU – in sum what was once called “the first world”.

If one removes the one indicator where Russia scores especially badly, Trading Across Borders – for which there are special reasons (see above) – Russia becomes even more clearly aligned with these “first world” countries rather than with those countries that make up what used to be called “the third world”.

The Russian government’s target is to achieve 20th place in the World Bank’s ease of doing business survey by 2018. That may be too optimistic, though it is worth pointing out that the target for this year was 50th, which Russia only missed by one place.

If Russia does achieve a ranking of 20th in the world by 2018 then it will be right in the middle of the “first world” group of countries rather than just outside it. At that point it will also have one of the best business climates in the world.

Even if Russia does not achieve 20th position by 2018, the pace of improvement in the rankings is so fast it suggests Russia will break in fully in terms of quality of its business climate into the list of “first world” countries before long.”

Inevitably, as Russia’s position in the World Bank Ease of Doing Business survey has rapidly improved, some commentators both in the West and Russia have cast doubt on the survey, even though its methodology is rigorous (originating apparently with Harvard University) and even though it is based on thorough field work.   Needless to say these are the same commentators who regularly cited the survey when Russia’s ranking in it was poor.

There is in fact no reason to think the rapid rise in Russia’s position in the survey does not reflect actual business conditions.  As I said in my discussion of last year’s survey, its results were anecdotally confirmed to me in a meeting I had with a group of local businessmen in Perm. 

A far more authoritative person has now come forward and said the same thing.  This is German Gref, the single individual who is perhaps best informed about conditions for businesses in Russia because he is the CEO of Sberbank, Russia’s biggest bank, which is the national (as opposed to local) bank that small businesses in Russia are most likely to look to for credit. 

Gref stands politically at the farthest liberal end of the spectrum of Russia’s political and economic establishment, and he is far from shy about criticising the government, which he does frequently.  Yet in a meeting with Putin on 4th August 2016 he confirmed the improvement in business conditions in Russia

“I think that the environment that we will have in place by the end of 2016, when all of the legal amendments take effect, will mean that Russia will be offering one of the most interesting and technologically convenient environments for small businesses.”

(bold italics added)

Because of the extremely poor relations between the West and Russia, Russia’s economy and its economic management are continuously and relentlessly criticised in a way which plays well to Western prejudice but which grossly distorts understanding of the country and its government.

Russia’s highly conservative macroeconomic policies emphasising tight budget discipline (the federal budget deficit at the peak of the recession was 3% of GDP, roughly the same as that of the US and below that of Britain during their ‘recoveries’, with the Russian government planning to cut the deficit by 1% of GDP over each coming year), low taxes (income tax is levied at a flat rate of 13%), high real interest rates (currently around 4% above inflation), open financial markets, low debt (government debt in Russia is 17.7% of GDP compared to 104% in the US, 229% in Japan, 89% in Britain, 96% in France and 71% in Germany), low external debt (roughly 20% of Russia’s GDP, compared to 114% of the US’s, 570% of Britain’s, 220% of France’s, 145% of Germany’s and 60% of Japan’s) and floating exchange rate, have in reality enabled Russia – as Fitch says – to adjust rapidly and very successfully to the fall in oil prices.

At the same time the rapid improvement in business conditions shown by the rapid rise of Russia’s ranking in the World Bank Ease of Doing Business survey shows that Russia is also working hard and successfully at getting its microeconomic conditions right.

In other words the people who run Russia’s economy know their job and by and large they do it well. 

That does not mean they are infallible.  In my opinion interest rates are far too high, with the 4% inflation target for next year in danger of becoming a fetish. 

However compared to the appalling mismanagement one sees elsewhere, far from being the collapsing kleptocratic empire of Western fancy, Russia looks like an island of stability and good sense.

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Alexander Mercouris
Editor-in-Chief atThe Duran.

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