Russian Prime Minister Dmitry Medvedev has spoken optimistically today about the current state of the Russian economy, predicting stable growth for 2017.
He is right to do so. As previously reported, Russia exited recession midway through 2016, and its economy appears to have been growing steadily in the second half of the year, especially in the final quarter. GDP contraction in 2016 for the whole year is now put at just 0.2%, significantly better than forecast.
I would add that a statistical review of Russian economic performance in 2015 – the worst year of the recession – suggests that the GDP contraction that year was 2.8% rather than the 3.7% previously thought, suggesting that the recession was significantly less severe that year and overall than was previously reported. If future revisions show the same thing for 2016 then it could be that the Russian economy grew overall that year.
Industrial production grew 1% overall in 2016, with a rising trend in December and January, with industrial output 2.4% higher in January than in January 2016 and with surveys showing business confidence rising. Agricultural output boomed in 2016, growing by 4%.
The critical factor depressing GDP in 2016 was the continued fall in real incomes that year. Whilst this is necessary in order to give the economy greater international competitiveness, it affected sales and of course caused real hardship for many people. However it seems the fall in real incomes may have finally bottomed out, though as Medvedev rightly says the apparent rise in real incomes in January is in large part the result of a single big one-off pension increase.
As I have pointed out repeatedly the Russian government’s current economic priority is not the GDP growth rate but the rate of inflation. This has now fallen to an annualised rate of 4.6% – a steeper fall than anyone (including me) expected, and better than even the most optimistic forecasts of last year. Even the pick-up in economic activity does not seem to have increased pressure on inflation, and the government’s and the Central Bank’s target figure of 4% annual inflation is now finally within sight.
The good economic news at the start of this year has persuaded the government to revise its economic forecasts for this year, with anticipated GDP growth of 2% now expected (above earlier forecasts) and with expectations that the budget deficit may be lower this year than expected.
An annual growth rate of 2% is unremarkable for an economy such as Russia’s and the Russian government’s objective is to increase the growth rate over time to an annual rate of 4%. That will however require significant cuts in interest rates. The Central Bank at its last session in January decided to keep its key lending rate at the extraordinarily high figure of 10%, giving Russia by a significant margin the highest real interest rates amongst all the major economies. With the government and the Central Bank remaining committed to achieving their 4% inflation target, the Central Bank has indicated that it does not intend to cut interest rates before the middle of this year.
A number of general points can now be made.
Over the last three years the Russian economy has surmounted sanctions and a collapse in oil prices which almost every Western economic commentator and analyst discussing the economy at the start of 2014 would have expected to have broken it. Moreover it has achieved this with a relatively short and by Russian standards shallow recession that caused no rise in unemployment and which led to no dramatic increases in bankruptcies, liquidations, mortgage repossessions or foreclosures. Western expectations of a credit crunch, of a crisis in the budget, of a general default, and of an imposition of capital controls, have all been proved completely wrong.
The economy is now growing despite the drag of real interest rates of more than 5%, something which no Western economy would be in a position to do.
Russia has been able to do this because of the decision in 2014 to float the rouble, the single most important economic “reform” carried out by Russia since the tax reforms of Putin’s first term, though it is never discussed in that way. The success of the policy of floating the rouble contrasts sharply with the way the economies of the southern Eurozone are being eviscerated by their inability to adjust the exchange rates of their currency to take into account economic conditions.
The success of the policy of floating the rouble would not however have been achieved if the Russian economy did not already possess inherent strengths which made it capable of benefiting from the policy. These include a very low debt position, making it possible for the economy to survive the high interest rates and to repay its foreign debt, a substantial manufacturing and agricultural base, which has made it possible for the economy to fill in the gaps in imports caused by the devaluation, and a financial system that is capable of providing the economy with financing at a time when because of sanctions it was effectively cut off from the capital markets of the West.
None of this was properly understood by the Western decision makers when they decided to impose the sanctions in 2014. This is because they made their decision based on a picture of the Russian economy which is popular in the Western media but which as events since 2014 have shown is actually almost entirely wrong.
Whether Western leaders and economic commentators are capable of realising this is another matter. The ideological and political investment in the false picture of “Putin’s Russia” as no more than a “gas station” or as a backward economic basket case is so great that I suspect Western leaders and economic commentators will struggle to put it behind them. News that Daimler is now opening a factory to build Mercedes cars in Russia however shows that some Western businesses have managed to do so. As the Russian economy’s growth accelerates more and more will gradually do so, and there will come a point when the reality is so obvious that it can no longer be disputed.
In the meantime this economic reality shows up the key point about the sanctions: for all the political agonising about them in Washington and elsewhere in economic terms they are becoming an irrelevance. They failed in their objective – to break Russia economically – and as Russia’s recovery since last summer shows Russia is perfectly capable of getting by despite them.