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Wednesday, July 19, 2017

State Duma elections: economic growth in Russia will take place without liberals

In our country held parliamentary elections. “United Russia” has won, improving the result compared to the controversial 2011 elections. Sensation, although relative, was that the ruling party won a constitutional majority in the Duma.

photo: kremlin.ru

In the period from 2011 to 2015, “United Russia” has often been criticized for being, in fact, the presidential party, it supported the liberal model of the economy. The head of the party, Prime Minister Dmitry Medvedev is holding in the government a number of staunch liberals and followers of Yegor Gaidar. But whether his policy is really liberal?

Today in Russia, embodied a fairly optimistic scenario of economic development: “grey” stripe in the economy (as characterized her as Vladimir Putin in December 2015) for 8 months of 2016 is gradually “white”. By the end of the third quarter of 2016, the economy shows signs of recovery, as evidenced by statistical data and forecasts. GDP for the first quarter of 2016 showed decline, but, nevertheless, a decline in annual rate of only 1.2%. In the second quarter the rate of decline has slowed and amounted to 0.6 percent. And QoQ GDP for the II quarter increased to 0.7%. For the year is expected to decrease Russia’s GDP by about 0.7-0.8%, a downward trend has not yet overcome. In 2017 it is expected GDP growth of 1%.

Annual inflation in Russia for 8 months of 2016 amounted to 3.9% (in January-August 2015 (more than 12.9 per cent), and in August inflation amounted to only 0.1%, and in the end of the month in the country for the first time since 2011 there was deflation, albeit seasonal. Recall that in the first eight months of 2015, it was 9.8%. Annual inflation is expected at 6.5-7%. The slowdown in inflation in the current year due, primarily, with the rise of oil prices and stabilization of the exchange rate.

Question: what does liberalism? Stabilization of the exchange rate – the credit of Bank of Russia, the head of which, in accordance with our law, is approved by the State Duma. But the current head of the Central Bank Elvira Nabiullina has quite a tight monetary policy by limiting money supply through high interest rates. In countries such as India and South Africa (all included in the BRICS group, and Russia) the rate of inflation in consumer prices comparable to Russian (6-8% per year). However, in these countries, and interest rates are lower than in Russia, while at the level of 7-8%. In Russia, the key rate was recently lowered to 10%, on interest rates, we are ahead of some of our BRICS partners.

Why? Because in Russia, monetary policy is more restrictive than in these countries. But such a policy is a consequence of the high dependence of the Russian economy, including the exchange rate, the price of oil. Constraining the money supply, Russia’s Central Bank, on the one hand, restrains the increase in production, but on the other – and inflation expectations, not allowing the economy to fall into a tailspin of hyperinflation, which would lead to even greater impoverishment of the population, the decline in consumer demand. As a result, industries operating in the domestic market, in such circumstances, it would be much harder to grow. So the hard rate of the Central Bank cannot be called “liberal”, it’s just administrative. And this is different from the liberal policy of “quantitative easing” monetary policy in the West.

Restrictive monetary policy in Russia continues. Despite the fact that the Central Bank is on the Board of Directors meeting September 16, still reduced the key rate to 10% until the end of the first quarter of 2017 reduction rates can be expected, consider in Bank of Russia. In their opinion, the global crisis, and with it the Russian, is not yet ended, then a new wave of falling oil prices and rising inflation are still likely. But the Central Bank still has twice this year made the decision to lower rates in the aggregate by one percentage point it is in order to little to stimulate growth.

And the Bank of Russia did it. In August of the current year the volume of industrial production in Russia grew by 0.7% in annual terms, compared with July, the increase was 1%. In Russia, the maximum growth rate for the first 8 months of 2016 showed the production of agricultural machinery, manufacture of rolling stock for Railways, automobile industry, manufacture of clothes and footwear, vegetable oil, meat, fishery products, many types of chemical products. Many of these industries are growing in the double digits (for example, in August the production of agricultural machinery increased at an annual rate of 52%), while, as oil production shows an increase of only 1%, and gas production decreases. Yet at the same time, there was a decline in most sectors of industry, many sectors of engineering.

During the first eight months of 2016, there was also an improvement in the financial and banking sector. Thus, the aggregate profit of the banking sector over January-August 2016 has grown 7 times over the same period of 2015, to 532 billion rubles. due to the fact that due to the relative stabilization of the economy and the strengthening of the rouble exchange rate banks have less to create reserves for possible losses, as well as the fact that in the current year, due to lower interest rates again began to recover the demand of enterprises and population Bank credits. As you can see, the administrative methods of the Bank of Russia was effective.

However, the question of the dependence of the Russian economy and national currency to the price of oil is still left open. Since the beginning of the year, the ruble against the dollar has appreciated by 10%. Is it only due to the policy of the Central Bank? No, not only.

We cannot ignore the fact that the Russian ruble rose in price, and amid rising oil prices, and the price of oil began to strengthen the ruble, apparently, the deciding factor. Brent crude for incomplete nine months of 2016 have risen in price by 30.3% and is now trading above $45 per barrel (in year a few times to raise up to $50 and even exceeded this level).

Accordingly, the ruble strengthened, though more modest pace than the growth of oil. This was due to a number of factors, but primarily to the fact that securities on the stock exchange periodically sold not only currency to support the ruble, but the ruble to support key for our economy exporters of black gold and blue fuel. The cheaper national currency, become more competitive export products of the country, as you know. Thus, the Central Bank is forced to not only do what Central banks around the world conduct monetary policy, but also to maintain a balance between the stability of the ruble and stability of the dollar, but to undermine both the population and domestic exporters. So liberalism is very difficult to say.

According to our forecasts, the dynamics of oil prices may vary depending on a number of factors, for example, from the results of the OPEC meeting in Algiers in late September. The dependence of the rate of the ruble from oil, many believe due to the fact that in Russia the government, following the alleged liberal economic policy, leaving the economy unattended, allowing her to swim out of the crisis on their own depending on the dynamics of no one regulated the oil market, which is, in fact, securities market, i.e. futures.

But is it really? We believe that is not true. If we turn to the experience of dealing with the global financial crises of 1999 and 2009, we see that the impetus to growth recovery in the price of oil (by reducing oil supply on the spot market) was the reduction of oil production by countries-manufacturers of oil within the oil cartel OPEC. But it is common knowledge that the market in which a cartel – that is, collusion on the regulation of prices is not free market. Moreover, both times OPEC has decided on a radical reduction of oil production to 3-4 million barrels just due to the fact that the regulatory policy of the cartel was joined by another and independent oil producers, primarily Russia. So this year, Russia and Saudi Arabia ahead of the meeting of OPEC in Algeria have already agreed on joint action to regulate the oil market. And the agreement was signed at a high level – from Russia with participation of the President Vladimir Putin. Thus, the Russian government is involved not only in regulation of the economy, but even in matters of regulation in the world economy through accession to agreements on the reduction of production of black gold. About any economic liberalism there can be no question.

Now the dollar is in a rather narrow corridor 63-65 RUB, We believe that further movement of the ruble exchange rate against the dollar will depend on the dynamics of oil prices. If the price of oil will reach $55 per barrel and above, the Russian currency may strengthen to 62 rubles per dollar. However, by reducing the price of oil below $44 per barrel, the dollar can go to 66-68 RUB.

With the strengthening of the ruble is possible in the first place open for the manufacturing industry: engineering, chemical, petrochemical, textile industry. And also for the industries operating in the domestic market: retail trade, telecommunications, electricity, innovation and technological industry.

We believe that the constitutional majority that United Russia now have in Parliament will continue the same economic course. This means that the Central Bank will continue to pursue a very tight monetary policy, at least as long as the price of oil recovers.

At the same time “United Russia” will have in future to reckon with the growth of interest in the left parties of the socialist type (the Communist party, “Fair Russia”, another more radical Communist party received 2.5% of votes, the Russian party of pensioners For justice”). But liberal parties, such as PARNAS and Yabloko suffered a crushing defeat in the elections, despite criticism of the government in times of economic crisis, which theoretically may create the popularity of the opposition. This will mean that, most likely, the Parliament will take the course on confrontation tighter fiscal policy and measures such as raising the retirement age or raising personal income tax and VAT. We believe that the average (“median”) voter voted for the “United Russia” not because he believes its economic policy optimal and only true, but because he says it is liberal, and this “median” voter is absolutely right – there is no economic liberalism in the country. The time liberals have gone and will not return.

Natalia Milchakova,

the Deputy Director of the analytical Department Alpari

Elections to the State Duma 2016. Chronicle of events

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