It is altogether an act of faith to believe that Russia-a Bric economy, and a major commodity exporter-also sits at the Group of Eight?s high table. Yet, it is the only other G-8 economy (apart from Canada) that is actually expected to grow over 2009. The Russian growth, although lower than 2008?s, will be at par with Brazil?s. Only China and India will be doing better.
Still, it had only been last year (on November 18) that the World Bank slashed Russia?s 2009 growth outlook by more than half. The Bank had also wanted the rouble to fall further to assist exports and lower investment costs. Yet it had been the fear of rouble depreciation that impelled a $50 billion capital flight out of Russia?persuading the Central Bank to maintain (almost) usurious interest rates.
So, can a fiscal stimulus set things right? The IMF certainly thinks so. It feels that the joint stimulus G-20 is embarking upon will promote 2009 growth performance. It will be enhanced by 0.5-1.25%, says the Fund, and names China, Russia, and South Africa as the emerging economies best suited to propel such growth.
It is thus no surprise that the Kremlin has opted for a fiscal stimulus that amounts to almost 2% of GDP for 2009. The pivotal role of oil prices in all this can be inferred from the reality that most of the slowdown was concentrated in the last quarter of 2008, which is when expectations and economic activity have also obviously plummeted alongside the price (and off-take) of oil.
Clearly, inflation is the only indicator that seems to have responded as might have been expected to the stimuli. Officially said to have been running at 14%, the World Bank expects it to have been running at about 13.5%?or, well above 2008?s 11.8% goal of the government. That has been the obvious fallout of pump-priming amidst structural hiatuses and induced shortages. That is also why one must reassess World Bank?s praise for the Russian Central Bank?s actions on the liquidity front: the $15 billion that the latter pumped into the economy (over September-October 2008) made no difference, except for inflation. Clearly, therefore, there are other things to do first.
Russia must stop dumping subsidised items in international markets. That has already spoilt the markets for diamonds, oil, gas, metals and basic chemicals; and it might also queer the pitch in the field of executive jets. The avoidance of dumping might initially lose market shares, but it will yield the Kremlin serious gains.
Secondly, Russia must also spin off the metal-mining-and-hydrocarbon giants into private hands. (That such an experiment had failed the first time only underscores the value of the lessons that must have been learnt.) Privatisation and freer markets are just the things to recall fund managers who had started cutting exposure to Russia directly when commodity prices had started falling. But they will return directly once Moscow frees the parastatals. But will the top leadership buy this line?
One answer to that lies in oil prices, which have fallen to less than half of their summer-2008 highs. That has persuaded Zhelko Bogetich?World Bank?s chief economist for Russia?that rouble depreciation must persist while the economy remains dependent on hydrocarbon exports.
Meanwhile, president Dmitry Medvedev has been holding out hopes (threats?) that it would be feasible to force through the rouble as the sole trade and investment numeraire within the CIS. A regional reserve currency role like that would immediately raise the demand for roubles.
The second part of the answer is that Russia, unlike others of the Bric, failed to diversify while the going was good. As a result, mineral products, precious stones and ?articles thereof? comprise 80% of all exports?while chemicals, machinery and transport goods make up just 10%.
No other Bric economy is as narrowly dependent on commodity exports. Nor, therefore, is the demand for their exports as inelastic. Russian exports, however, are just that?making them less likely to respond to changes in the rouble?s exchange rate.
Finally though, all this seems to argue that the stimulus should be carefully handled if it is to steer clear of inflation, high-cost money and capital flight. The biggest risk would, in fact, be the temptation on the part of policymakers to ration credit even as they promote public spending and inject liquidity into the economy. That amalgam will ratchet up inflation?which is anyway forecast to rise in 2009. It also means the taming of inflation to 12% (or less) gets harder, while GDP growth drops. (Already at 6.2% over the third quarter of 2008, it is Russia?s lowest in three years; growth had been averaging an annual 7% ever since 2000.)
So, unless cautiously handled, the fiscal stimuli, automatic stabilisers and balance sheet subventions will only all worsen fiscal positions and lead to deteriorating official debt ratios and deficits. In short, fiscal costs mount. That holds even for Russia which is hurt both by falling of commodity prices (of oil in particular), plus the tighter constraints accompanying the drying up of capital inflows.
As for whether it can afford to do so, it can?given its hydrocarbon reserves and oil stabilisation fund. Only, it should not overstep the boundaries of inflation or, through the REER-route, excessive rouble appreciation.
One can even say that rouble depreciation and capital flight have saved Russia from itself. After all, Russian banks had been getting used to huge capital inflows and rapid credit expansion. But the tide has turned since September 2008; the reversal of the capital flows has greatly relieved the strain on Russia?s financial system, and cleared the way for productive investments.
The writer is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata. These are his personal views