HSE experts identified five conditions of the new economic equilibrium


“The new reality is not the 2008-2009 crisis, not a crisis “pariah”, which often try to imagine what is happening in Russia in the West. It is a crisis as the first point of transition to a new economic equilibrium — to develop without constantly increasing flow of oil and gas rents,” said the rector of HSE Yaroslav Kuzminov presented Wednesday at the HSE April conference report on the Russian economy (in collaboration with the Director of the Institute “development Center” HSE Natalia Akindinova and scientific Director of HSE Yevgeny Yasin). In the report the authors provided five basic conditions for the transition to a “new equilibrium” in which the business is characterized by “normal expected rates of return”.

Five conditions

The first condition mentioned Kuzminov, reduction of inflation to 3-4%. The second is the possibility for large and medium businesses get the resources via loans or placing on the stock market, which requires the formation of domestic sources of “long money”. If for the large enterprises the alternative would be renewed access to world financial markets, medium-sized businesses have to rely only on “Russian money”.

The third condition is the reduction of political risks of business. According to experts from the HSE, we need at least 2-3 years, when the confrontation between the state and business would be permitted not only in favor of the state, to have formed a positive signal. The fourth item on the agenda was a partial “dismantling” of the existing system of control and supervision. Now the burden on business it is comparable to the judicial power system, said the rector of HSE: according to the experts of the University, control and supervision system in its current form “takes” from business about 2% of GDP per year.

Finally, it requires the renunciation of the Institute Sverdlovenergo “charity taxation” of business. By this the authors understand “forced charity”, when the heads of regions to Finance social and civil objects, actually forced to this business. “Such a public distribution list: you will the temple be repaired, you’re basketball team to Finance and so on”, — said the rector of HSE. This “charity” costs the business 2-3% of GDP, and up to a quarter of profits for some businesses, evaluate the report.

In 2000-ies have been achieved outstanding results, believes rector of the HSE, the economy has significantly exceeded the indicators of the Soviet labour productivity, income per capita, quality of life. Created a middle class, which is up to 40% of the population. However, due to the nature of growth were reinforced and bad institutions: in particular, “has survived and has found a second wind” inherited from the Soviet state paternalism in the social sphere. Social benefits are perceived by the population as derived from the free States, on this basis, formed the preferences of voters. As a result of attempts to reform the welfare system, implying the growth of responsible citizenship easily “torpedinous” through political mechanisms, said Kuzminov.

Second bad Institute “offshore capitalism”, which in Russia has a specific character: if usual care in a foreign jurisdiction due to the tax aspects, in Russia it serves as a form of risk insurance.

These factors create Russian business has very high standards for yield, said Kuzminov. In his words, “if in the countries with developed market economy 10-12% of the expected annual yield is for business normal psychological level to begin projects in Russia this threshold is 20, and even 30%”. Source of this profitability can speak only of natural resources, a monopoly position or the business of innovation, but the latter for Russia are not typical.

As a result, formed a kind of three-sector model of the economy, the report shows. High profitability of the commodity sector (13.7% in 2015, versus 9.9% in non-oil big business and 6.2% for small and medium) allowed the state to remove part of the natural rent, and then essentially to subsidize another big business (engineering, infrastructure construction), accumulating a Reserve Fund and fulfilling social obligations. But today, the possibilities of redistribution have been exhausted.

Inertial scenario

The report considers a reference scenario: it reserves “has” for 2-3 years, until a new presidential cycle are reproduced by the old institutions.

The cessation of “feeding” major non-oil business means “freezing” of the relevant industries. The reduction of funding for social programs (by the authors ‘ estimates, 30-35% in real terms, that corresponds to the state in 2006) entails a reduction in consumer demand, which provokes the freezing of the sectors oriented to domestic market — agriculture, food industry and retail. “In these conditions it is important, when and what from the major players will realize that the old institutions can no longer work,” write Akindinova, Kuzminov and Yasin.

Some conditions for change has already started. First, you can expect a reduction of inflation to 6-7%, which will serve as a “signal for lowering the bar of profitability when evaluating new projects.” Second, a global attack on the offshore complicate the withdrawal of capital from the country, which will also reduce the required rate of return. This is the starting conditions for the “dismantling” bad institutions, but to overcome the rest will require a change in policy. In particular, the establishment of institutions of long-term funds through raising the retirement age and the transition to a funded pension system.