Interview conducted by Alexander Turshin. Translation by Nick Trickett.
Chief researcher at the Institute of Systems Analysis of Account Payments, Vladimir Osipov, on why we shouldn’t expect economic growth to follow.
It will soon be almost three years Russia’s lived under sanctions. But the expected release from them has become a constant theme of the discussion on TV and online. A consensus has even been outlined: everyone most often says that the end of sanctions is a year away. So? Do we wait and begin living?
It’s automatically suggested that the end of sanctions will lift and heal our stalled economy. The more so that oil and the ruble are growing. But is it worth it to count on such an effect? “Ogonyok” asked Vladimir Osipov, doctor of economic sciences and the chief researcher at the State Scientific Research Institute of Systems Analysis of Account Payments of the Russian Federation.
When sanctions are lifted, all will be good and we’ll start living better than before?
No, that won’t be the case. The main thing we need to understand is that the repeal of sanctions won’t help us. It may even hurt us.
Hurt us? Why?
Let’s start with a paradox: today the real sector of the economy finances the financial sector, although in a normal economy, it should be the other way around. The very biggest hit from the list of sectoral sanctions were the financial sanctions inflicted on us. But if they’re repealed, for which we’re striving, money won’t flow into the real sector of the economy or else crumbs will flow to it. Why? Because of how our financial sector is arranged.
Sanctions hit those companies, which deal in large part with speculation, and not with investments into industry and agriculture. Having received cheap money from the West, our banks and speculators carried out financial operations on the exchange market with a high percentage. If sanctions are repealed, they’ll simply continue their speculations, but in large volumes. Our financial markets have stayed the same, and nothing’s changed under sanctions.
The cause lies in the enterprises of different sectors of the economy with different profitability. Compare the level of profitability of an agricultural cooperative, a tank factory, and a broker’s office – they pay the same taxes (and in conditions of Russian jurisdiction, without the use of offshores to stash money abroad, taxes are generally not paid). In such conditions, money flows where profitability is higher, conditionally speaking, from the factory to the broker’s office. Certain economists maintain that on the exchange market or in bank deposits you can earn up to 60% a year. Others name the figure up to 1,000% a year. Of course, these are subjective evaluations, but we never receive objective data. For comparison: in developed economies, he who speculates on the exchange market pays taxes many times more than those working in the real sector. I add that after the imposition of sanctions stopped the inflow of money from abroad, all capital from Russian enterprises actually went to banks, where profit could be higher than in production. And if you now end financial sanctions, the money will still rush into speculation. For example, gamblers will start to buy shares of Russian companies and when the price rises, quickly sell. Our national currency would also be hit—we all remember how it collapsed in December of 2014.
What’s the connection there?
Speculators win on the difference in exchange rates. The bigger the difference, the more you win. In 2014, when the ruble collapsed, speculators won.
The president said then it was all trouble in speculation. But no one explained why it came to pass.
I think there was interest in it for a significant pool of banks and different individuals, both domestic and foreign. Even non-residents working until now in our financial markets.
So there is a way to make money?
It’s very easy to get money into here, even with sanctions, and just as easy to take it out. And what will be, when foreign financial markets are opened to our speculators? Pay attention to how many different schemes for the withdrawal of capital abroad the Central Bank has disclosed. “Kommersant” recounted one of these examples not long ago: two companies were litigating in Russia, one ours, the other foreign. The Russian company loses the lawsuit, the money goes abroad by decision of the court and the powers of the bailiffs. The scheme is amazing – all strictly within the law. And there’s nothing to do about it, even though people talk precisely about capital flight.
Is financing for our companies completely closed in the West?
No, our strongest state-companies are limited to 90-day terms for credits, which means that the possibility of refinancing credit taken before the introduction of sanctions remains. Our American and European partners, for that matter, hedged their financial institutions so that Russian corporations could meet their obligations.
And how do we fight financial speculation?
We need to overhaul the tax code. It shouldn’t be the same for everyone because in different sectors and even in different enterprises in one sector, there are different distribution costs and profit norms. It’s necessary to shift the tax burden from the sectors, whose growth is planned to provide financial speculation on speculative types of activity in the first place. For example, the introduce the Tobin tax (editor’s note: a system of taxes proposed by Nobel laureate James Tobin, which should reduce not only currency speculation, but deals with major risks connected to the financial market ).
But the sanctions weren’t only financial. Until now, for example, there’s a ban on the supply of equipment and technology oil and gas extraction . . .
Sanctions didn’t affect this sector so significantly. We have companies, which are more oriented towards foreign equipment, and others who used native equipment and technology. In any case not much time passed, and the renewal of equipment in this sector is not yet required. Besides, we can negotiated with OPEC over production cuts now. You have to understand in this, that oil production already can’t be a driver of growth, although this sector occupies a big part of our service-resource economy. One pity: the oil industry provided large incomes and it was necessary to shift taxes in that direction, providing growth for high-tech and knowledge-intensive sectors. But this wasn’t done. If they allow or don’t allow the supply of technology and equipment doesn’t have fundamental significance.
What matters then?
Calm and consistent work and a planning horizon. You’ll be surprised, but small and medium-sized businesses that won from the introduction of counter-sanctions don’t need the repeal of sanctions. More precisely, from the import substitution announced by our government in response to sanctions. In general, counter-sanctions are a normal, accepted response in the world. But there are a few subtleties, to which I want to bring your attention. This policy should be long-term, calculated for many years. We’re obligated to provide the domestic market domestic goods, and for that we need to develop production. Let’s allow that a producer starts a project to develop an enterprise, creating a new production line. A year is spent on installation, 3-5 years so that all equipment is purchased. In what conditions can the enterprise realize its economic model? In conditions of understanding the planning horizon. There you see the repeal of sanctions will change the alignment of forces on the market. The business plan won’t be succeed because it’s unclear who gives guarantees that Russian enterprises will maintain their share of the domestic market after the repeal of sanctions. Because it’s not understood how foreign suppliers will act on our market. Is it possible in such uncertain conditions to make decisions about investments in production? I think not.
And what’s the conclusion?
I think sanctions have shown us a bitter truth: our financial sector is deficient, it can’t provide long, cheap money to the real sector. It became especially obvious when the value of the ruble fell and the Central Bank unexpectedly harshly hiked the rate 17% in one night. It seems this was done for the fight with financial speculators, but as a result, speculators survived and production fell afterwards for 15 consecutive months. The number of bankruptcies of small and medium-sized businesses dramatically increased. They had to pay debts and credits, it was impossible to refinance, demand fell, the banks didn’t lend money to anyone . . .
We’ve again stiffly run into old problems mutually related to the government, society, and business. And in the context of economic sanctions and counter-sanctions, we have to understand the following: in an economic policy of impenetrable, abrupt movements, there’s volatility. Every decision should be weighed, thought through, and calculated. We’re used to the volatility of our currency and the price of oil, but it’s impossible to get used to the leaps in economic policy.
And many maintain that after the repeal of sanctions, economic growth will start . . .
It won’t start, there aren’t yet conditions for it. There are two main factors in the economy: capital and labor. Both have quantitative and qualitative characteristics. For capital, the volume of the base means of production and the quality of technologies, which we possess. To same with labor: the volume of labor resources and their quality. We’re now only worsening both of these factors by quantity and quality. Our workforce completely does not meet the demands of a modern economy. It’s worse for graduates of middle and higher educational institutions in terms of production, skills, and knowledge than it was 10 years ago. Add to this the state of our healthcare – this is also a characteristic of the work force. No investment, and it follows, no infrastructure. And the triggers of economic growth aren’t working.
But the Ministry of Economic Development promises us 2% GDP in 2017.
How will this be achieved? What, the expected inflow of investment? Even if money now goes into industry (which is doubtful), the effect will be over a certain time, 3-5 years. Are you expecting the implementation of new technology? Tell me who’ll do it. If they repeal technological sanctions, we’ll have to wait for the result of implementation. Are you counting on the influx of qualified labor and the end of the premature aging of the population? Explain to me on what basis. We’re not saying it’s impossible. We simply want to understand the mechanisms and factors of promised growth. They’re not yet visible. Tatiana Golikova, chairman of the Accounts Payment of the Russian Federation, says that if they accept a stimulus package for economic growth by May of 2017, as instructed in the President’s missive to the Federal Assembly, then what looks like unjustified optimism today will become reality.
The lifting of sanctions does not in itself lead to a resumption of economic growth. We have a different main problem – confidence. Without confidence in an economic, it’s impossible to do anything. Everyone’s tired of the fumbling bottom . . .
So what “soothes the soul?”
Not so much the repeal of sanctions as the predictability of government action for business and society. When what comes tomorrow is unknown, they won’t invest and consume today, they’ll save. We’re observing this right now. The lack of investment and demand slows down economic growth. As an idea, if they started the policy of import substitution, it follows to carry it to its logical completion. Otherwise the budget and state funds will have been spent in vain. Although, I must confess, it’s characteristic for our policy to grasp at one recipe, not follow it to the end, then to grasp at the exact opposite and again throw it away . . .
Meanwhile, it’s obvious after three years of sanctions: the prior economic policy built on a resource model is, it goes without saying, outdated, as well as its constituent tax and financial parts. A new model has, unfortunately, not been born. You shouldn’t talk about import substitution as a formulated policy—for now, it’s a set of necessary decisions conditioned by circumstances. Will they change or go back to their old ways?