The Russian government and the Bank of Russia faced a difficult choice of conditions for the further economic development of Russia. The authorities are considering two options for the economic transformation of the country: by increasing public spending or relying on initiative and private capital. Vedomosti writes about this with reference to the joint presentation of the Ministry of Finance and the Central Bank, which was presented to the government on August 30.
The option of economic development through increasing public spending is associated with high risks of rapid depletion of resources and undermining the sustainability of key sectors of the economy, coupled with an increase in the tax burden on business and the population. The authorities can increase spending with the help of two sources – the budget and reserves, namely the National Welfare Fund (NWF).
In order to increase spending with the help of the budget, the government will have to look for new sources of budget replenishment, namely, to increase existing and introduce new taxes, otherwise the budget deficit will grow significantly in the coming years. The active use of the NWF to stimulate the economy is limited, since in such a scenario, Russian reserves may be exhausted even before 2024, that is, in just a year and a half. Moreover, the volume of Russian reserves under the sanctions is not so large as to satisfy all the applications of state-owned companies and departments that could stimulate economic growth.
Moreover, the use of reserves to stimulate economic growth will lead to the abolition of the fiscal rule – the very mechanism of accumulation of reserves, as well as the discussed way to lower the overvalued Russian currency, which hurts the economy. The Russian authorities were ready to spend up to $70 billion on the collapse of the ruble, which they planned to take from the same sources as the money to stimulate the economy.
The second path for the Russian economy is associated with those attributes that the authorities have long denied: the development of small businesses, the attraction of private financing and investment. At the same time, the authorities themselves admit that it is “an unobvious task” to convince business of the investment attractiveness of the Russian economy in the current conditions. The presentation says that in order to restore business confidence, it is necessary to “adjust the investment climate and the financial market”, as well as create incentives using state support.
“This is a more complicated, but correct approach,” the authorities themselves admit.
Some sources of the publication in the government deliberately deny the position of the Ministry of Finance and the Central Bank, arguing that there are allegedly other opportunities for the development of the Russian economy, in particular, relying on export industries, which in the current conditions receive super profits. At the same time, the Ministry of Economics agreed that the development of the Russian economy in the near future should depend not on the public sector, but on the private one. The ministry emphasized the growing role of the stock market, which should serve as a driver of growth and a source of investment.
To increase this instrument, the financial sector (primarily banks) must receive a source of "long money" – insured deposits, pension savings and insurance resources. Under this condition, the economy will have a new source of long-term investment, according to the Ministry of Economy. However, the Russian authorities already have experience in urgently attracting private or quasi-private capital to finance budget deficits and investment projects. The most relevant example is the increased taxation of the “budget-damaged” Russian metallurgists, who received higher taxes in 2021 due to favorable market conditions.
The author of the idea, First Deputy Prime Minister Andrei Belousov, argued in 2021 that similar methods could be used in the future. The official demanded to increase taxes for businesses that do not spend on investments, it was about an increase in the load by 3-4%. Part of this idea has already been embodied in the withdrawal of windfall profits from Gazprom through a one-time increase in the mineral extraction tax (MET), which led to the collapse of Gazprom shares and the entire Russian stock market.
Experts agree that in its pure form, none of the options considered by the Central Bank and the Ministry of Finance will be used, analysts expect hybrid methods to solve the problem. Moreover, the Russian authorities have no simple solutions left: when spending increases, it will be necessary to qualitatively improve the system for monitoring the implementation of projects, introduce additional parameters for the quality of public administration, when the efficiency of the work of officials will directly depend on the implementation of the invested project. It will not work to increase the tax burden in the new conditions, since the key export sectors of the economy today can work efficiently and bring super-profits, but in the near future they themselves may need help from the state – with such prospects, it is too risky to increase the burden on business.
In principle, experts do not believe in turning the Russian economy onto a private rail: there are no conditions for the rapid development of private initiative in the country, and the main issue for the development of the private sector is guarantees for the safety of property, as well as the stability of tax conditions, which in the current conditions the authorities simply cannot guarantee . Nevertheless, experts agree with the position of the Ministry of Finance and the Central Bank that for the further development of the country it is necessary to rely on the private sector.
Bloomberg previously published excerpts from a "secret" government report that estimated the "real" collapse of Russian GDP. Under the inertial scenario, which included a drawdown in oil and gas revenues, the Russian economy will fall by 8.3% in 2023, and it will be able to return to pre-war levels if sanctions pressure is maintained only by the end of the decade.