STRESS TESTS FOR STABILITY

"Frightful"! "Disa-strous"! The headlines of Russian newspapers and online publications have been full of these and other similar words for quite a few days now. They apply/are addressed to a new scenario for Russia' economic development as drawn up by the country's Economic Development Ministry for 2016-18. Indeed, according to "adjusted" scenarios, Russia will face a sharp budget deficit with a crude price of 40 dollars (the worse of two scenarios) and therefore a serious reduction in its expenditure side, inflation, further decline in the population's living standards and other such things that accompany a country depending on export of energy resources. Two other options - emission, i.e. an increase in money supply, or large scale withdrawal of funds from the National Welfare Fund (NWF) will not bring about a stabilization of the economy, let alone its growth.

According to updated forecasts from the Economic Development Ministry of the Russian Federation, the dollar rate of exchange will stay above R75 for three years. Nobody knows how much above. There has even been a rumour that the Central Bank has advised that banks should conduct stress tests based on a rate ranging from R100 to R120 per dollar. Inflation is predicted at 8.8 per cent in 2016, 7 per cent in 2017 and 6 per cent in 2018. Still, there is no guarantee that the government will be able to hold it even within these limits.

And there is more to come. While these forecasts were made simultaneously with reports on the downfalls at the stock exchanges of the USA and China, they still cannot take account of all consequences of those events. Essentially, all of the world's economies tied firmly to the dollar are waiting with bated breath for the next meeting of the United States Federal Open Market Committee to be held on 16-17 September. Increase in interest rates in the USA possibly followed by a rise in the price of the dollar may cause chaos which will affect the governments of developing countries, their financial institutions, corporations and even households. Over the past few years, they have borrowed trillions of dollars and therefore they will now be faced with a real growth of those debts in their local currency. Meanwhile, increasing interest rates in the USA will be pushing up the rates in the developing countries thereby further increasing the cost of debt servicing.

Many economists tend to think that, at the end of the day, the global market has never recovered from the 2007-09 crisis. There is a lot of evidence to this. The developing countries' economies are stagnating. Many currencies are badly devalued. Formally, the USA has got out of recession and overcome unemployment since 2009 but the rates of its economic growth are not high. Europe is in a state of recession or weak growth: 1.5 per cent at the most is planned for this year. 

At the same time, the governments have been building up their debts throughout the past decade. Today, the US national debt is about 18 trillion dollars (which is slightly above its GDP). The debt of the EU is 12 trillion euros (87 per cent of GDP). 

The situation is much worse for countries whose budget largely depends on revenues from the oil and gas sector of their economy. Whatever the reasons behind the collapse of the global prices for energy supplies, very few still believe that they might get back to their previous positions. And the simplest way to execute the revenue side of the budget is to devalue own currency, which is now taking place in Russia.

However, businessmen do not deem devaluation useful, whether it is sharp as in 1998 or smooth as in 2008-09. The first pattern has always been supported by only one to four per cent of businesses and the second by 10 to 13 per cent. According to different public opinion polls conducted recently, only two per cent of Russian industrialists want further weakening of the rouble. The majority demand a strong rouble as well as low taxes and interest rates on loans. However, during President Vladimir Putin's recent meeting with industrialists, one of the entrepreneurs suddenly asked him "not to let the dollar fall". Strange as it is, this request caused no objections from other entrepreneurs attending the meeting. 

Meanwhile, asked about hindrances to import substitution, businesses most often (62 per cent) point out the "absence of domestic equivalents of equipment and raw materials of any quality". This means that imports are needed in any event.  

At the same time, the Russian government is "torn" between two most important tasks to be solved: on the one hand, it is necessary to fill the budget, and on the other, to provide business with proper conditions to build new enterprises and modernize existing ones. There are only two sectors in which Russia can be relatively independent as of today: food production and light industry. All other sectors call for reindustrialization and modernization. 

It is the fault of the current economic model. As a result of deindustrialization that started in the early 1990s and lasted until recently, a large majority of means of production made in the country, such as machines and equipment, are much behind their Western equivalents in terms of quality. To produce something more perfect later, it is necessary to purchase machine tools and technologies in the West now. How can this be done, given the cheapening rouble and unprofitable interest rates on domestic loans while access to cheap foreign loans is blocked? 

"A weak economy cannot have a strong currency," Vasiliy Koltashev, director of the Centre for Economic Studies at the Institute of Globaliza-tion and Social Movements, has told the R+ magazine. "The rouble fell quite naturally and logically and not under the impact of global oil prices but under the influence of internal reasons, above all economic ones," the expert said. "There were external causes for crisis, too, but it began to unfold much earlier in Russia. It could have been predicted in 2012: gross domestic product was shrinking; last year saw redundancies in a number of industries, a fall in the realty market…" he said. 

Although countermeasures to Western sanctions encouraged Russian businessmen to some extent to open new production facilities and upgrade those in operation, there is much uncertainty among them as to whether or not the measures implemented by the government will last long. Are there any guarantees that, if the political component of the Russia-West conflict is somehow settled in the near future, it will not be followed by lifting of all kind of sanctions on both sides and the country will not be flooded with cheap goods and technologies? Even the prolongation of the ban on food import for another 12 months signed in August has a reservation that Russia is ready to revise this decision any time in case Western sanctions are lifted. 

It is all the more so as Economic Development Minister Aleksey Ulyukayev, as it has transpired, has a feeling that the Russian economy has touched rock bottom and cannot fall any more. If this is the case, Russia has only growth lying ahead, the official believes, although he has adjusted the growth outlook for next year from 2.3 per cent to between one and two per cent. As for the International Monetary Fund (IMF) supposing that Russia's economy will grow by 0.2 per cent, he described this forecast as too pessimistic. 

For his part, Vasiliy Koltashev holds a different opinion: "I think the GDP reduction will continue next year and will be even more significant than this year. The entire logic of the past few years demonstrates that the economy is shrinking. Business activity in society cannot be restored without efforts by the state. If no efforts are taken, a slump can be predicted. As regards predicting growth for next year amid decline, it has now become a tradition and a special art. It is clear that the BRICS states' economies, maybe except India as yet, are entering crisis mode. China's growth is slowing down: its indicators are the worst over the past 24 years. Brazil and the Republic of South Africa are in recession. A collapse of smaller economies is coming next and following the same scheme. Under such conditions, Russia which is still trying to solve its problems by exporting raw materials is unable to achieve economic growth next year," Koltashev said. 

So it appears that, being in the grip of economic crisis strengthened essentially by its political conflict with the USA and its allies, Russia will have to further weaken its national currency in order to avoid default.