Russian Society
and the Economic Turning Point:
opportunities missed, opportunities taken
Mikhail Dmitriev
President, Business partnership
“New Economic Growth”
Chatham House
London, 13 April 2016
Foreign debt deleveraging:
2 times larger in 2015 than in 2009
Foreign debt, beginning of the year, bln USD
Total
Government
CBR
Banks
Non-financial
companies
Source: Development Center of HSE, CBR
2
External debt redemption goes down,
so do domestic investments
Fixed investments
Yoy (LHS)
3 month av.
3
Gross foreign debt redemption goes down
but refinancing ratio for non-financial sector has been shrinking
(~70% Q3 2014, ~ 50% Q4 2014, ~ 30% Q1 2015)
4
The recession impacted consumption
stronger than the previous two
% YoY
Retail trade
Real wage
43 months
21 month
Fixed capital investment
GDP
Retail trade
Source: Institute of Economic Policy, Development Center of HSE
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
5
Corporate profits go up
Corporate profits, real terms (%)
Real wages (2012=100%)
Total
Industry
Manufacturing
Actual
Seasonally adjusted
Source: Institute of Economic Forecasting of Russian Academy of Sciences
6
Food sales fell deeper than non-food
Food consumption fell to the level of the beginning of 2008
Food and tobacco retail sales (2012=100%)
Actual
Non-food retail sales (2012=100%)
Seasonally adjusted
Source: Institute of Economic Policy, Development Center of HSE
Actual
Seasonally adjusted
7
Poverty and
inequality
is onincreased
the rise
Poverty
and
inequality
Self-assessment of well-being by households
Do not know
Can afford everything (second house, car, etc)
Can afford consumer durables (fridge, TV, furniture, but not car)
Can afford food and clothing but not consumer durables
Can afford food but not clothing
Even food is a problem
Source: Institute of Economic Forecasting of Russian Academy of Sciences
8
Import substitution: industrial inputs
Materials
(average import substitution ratio - 57%)
Machinery and equipment
(average import substitution ratio - 17%)
Food
Food
Textiles and clothing
Machine-building
Construction materials
Textiles and clothing
Machine-building
Chemicals
Steel
Wood
Wood
Construction materials
Non-ferrous metals
Steel
Chemicals
Non-ferrous metals
%
Import substitution ratio
Source: IEP
Import reduction
9
Potential damage from the banking crisis was
contained
Household savings
Loan to deposits ratio
Non-cash savings
FX purchase
Consumption
Source: Institute of Economic Forecasting of Russian Academy of Sciences
10
Public debt is the smallest among large countries,
fiscal deficit is checked,
Inflation is already below the long-term average and continues to decline
Fiscal deficit (-) in percent of GDP
CPI
CPI
Base inflation
Poly. (base inflation)
(fact)
(plan)
Federal budget
Regional and municipal budgets
Source: Institute of Economic Forecasting of Russian Academy of Sciences
11
Labor participation is at the onset
of a prolonged downward trend driven by accelerated
ageing
Dependency ratio, % (rhs)
Working age population, mln
Labor participation, mln
Employment, mln
Source: Institute of Economic Forecasting of Russian Academy of Sciences
12
Medium-term consensus forecast
Real GDP growth
CPI (Dec/Dec)
Rub/USD annual av.
Urals, USD/b annual av.
Source: Development Center of HSE.
13
GDP and wages may not recover until the next decade
$35
$35 p/bl
p/bl
$50
$50 p/bl
p/bl
Source: Development Center of HSE.
14
New drivers of growth:
Non-tradables and quasi non-tradables
Construction materials,
steel, infrastructure
equipment, power
generation, transport,
logistics,
telecommmunications
Residential and
commercial real estate,
infrastructure
development
Consumer and
business
services
15
A long “Laundry list”of potential reforms













Regulatory reforms for infrastructure
Retirement age increase
Enhancement of territorial labor mobility
Public sector restructuring
Elimination of barriers in construction and development
Urban planning modernization
Reform of municipal finance
Enhancement of commercial rental housing supply
Long-term finance development
Facilitation of exit an entry of companies
M&A regulation and infrastructure and protection of minority shareholders
Law enforcement reform
Reform of judiciary
16
A radical breakthrough in Doing business rankings
since 2012 Russia moved up by 70 positions - now well ahead of other BRICS and
better than some of the OECD members
Source: the World Bank.
17
The key question remains unanswered:
Will the window for economic reforms close without a chance to
escape from a middle income trap?
Pruchnik K. Middle Income Trap: What do we know about it,
Who’s in it and why? World Bank, 2014
18
Economic sentimens and approval ratings of V.Putin
strongly correlate
(surveys of Levada-Center)
Война с
Грузией
Source: Daniel Treisman
19
Economic sentiments and a trust to V.Putin
(VTSIOM survey)
%
Economic sentiments
Trust to V.Putin
20
Source: JPMorgan on VTSIOM data.
Consumer sentiments
have plummeted to historic minimums
21
Source: Rosstat
In 1990-2013 household consumption as a component
of national accounts increased 2.5 times
GDP, 1990 =100
GDP, 1998 =100
Gross fixed capital formation, 1990 =100
Gross fixed capital formation, 1998 =100
Household consumption, 1990 =100
Household consumption, 1998 =100
Source: Human development report – 2014. Analytical Center of the Government of Russia.
22
Top priority of current consumption
Requests to V.Putin, April 2016
Rise the living standards and
resolve social problems
Improve the effectiveness of public
management
Stimulate economic growth and
employment
Address problems of culture,
science, health and education
Address problems of housing and
utilities
33
25
12
Housing and utilities
2
Infrastructure and local problems
2
Education and science
Restore Russia's might
1
International issues
Personal wishes
1
Crime and terrorism
No answer, irrelevant answer
26
5
21
Corruption and resentment against the
authorities
5
0
41
Econommic problems and inflation
16
Put an end to Chechen war
Income level, social protection and
pensions
10
15
20
Source: FOM, Levada-Center
25
11
10
6
4
1
Other questions, no questions
30
35
28
0
5
10
15
23
20
25
30
35
40
45
Ongoing increase in ut ilit y prices
94
Bad solut ions t o t he housing problem
81
Collapse of t he economy and agricult ure
75
Ev er- last ing t alk about ant icorrupt ion campaign wit h no real act ion t aken
70
Seeking t o ret ain t heir power in any way possible
67
Seeking t o get ev eryt hing f or t hemselv es and t heir relat iv es, clan syst em
66
Int roduct ion of Unif ied St at e Examinat ion
64
Inabilit y t o improv e t he enf orcement of law and order in t he count ry
62
Poor f ollow- up of decision implement at ion
62
Act iv e only during elect ions
60
Seeking benef it s only f or t hemselv es
58
Reduced number of gov ernment - paid univ ersit y st udent s
58
Disrespect f or t heir own count ry laws
57
Transf erring t heir money abroad
56
Inef f icient social policy
53
Improper police act ions
53
Endarkenment of t he people
52
Alienat ion f rom t he people
51
No care f or t he old people
49
Robbing t he people
48
The f act t hat civ il serv ant s are bet t er of f t han ent repreneurs
48
Uncert aint y of t he f ut ure
48
Good at st ealing and paying t o remain in power
48
Beadledom
47
Enslav ing t erms of mort gage lending
46
The f act t hat t his policy is only benef icial f or t he rich
46
Demagogy, only slogans and promises
46
Longing t o enj oy a bet t er lif e t han common people, caring f or t hemselv es only
45
The f act t hat Russia is giv en a raw- export s role in t he world
43
Only good at promot ing t heir own image
42
Inef f icient economic policy
42
Creat ing lif e condit ions t hat make people t hink how t o let t heir f lat in Russia
41
Ongoing inf lat ion in t he count ry t hat eat s up pensions and wages, and child benef it s
40
ing t o make a prof it f or t hemselv es, and f or t his purpose making deals wit h anybody
39
Ev er- last ing lies
36
Inabilit y t o build a prof essional army, weak army
35
M anagerial incompet ence – unprof essionalism
33
Irresponsibilit y, hollow promises
29
Do not know what needs t o be done
28
The f act t hat democracy in t he count ry is in danger as shown by t he lat est elect ions
22
Source: CSR
Source:
Center
Source:
CSRfor Strategic Research
Prowest ern v iews
22
Ignorance of t he hist ory and cult ure of t heir own people
Conf used
Eart hliness
2012: a short
lived shift to
development
agenda
21
15
13
24
2014: shift to threats
Breakdown of responses to question: “What do you think is the biggest threat to Russia now?”, %
Source:
Levada-Center
Price rise, general impoverishment of population
Economic crisis
Drawing Russia into military conflicts outside the
country
Rising unemployment
Growing tension in relations with Western
countries
Increased uncertainty regarding the future
Conflicts with neighboring/CIS countries
Increased dependence on the West, Russia’s
transformation into a third-rate power
Weakness, incompetence of country leadership
Arbitrariness of authorities
Russia’s colonization, plunder of national wealth
by foreigners
Civil war
Breakup of Russia into separate regions
Other
Difficult to answer
Feb.
08
51
22
Jan.
09
55
59
Jan.
10
47
39
Jan.
11
62
30
Jan.
12
58
38
March
13
55
26
Jan.
14
49
29
Jan.
15
54
49
14
8
7
6
9
6
12
33
30
56
43
42
40
30
31
26
12
5
3
3
5
4
7
22
8
22
13
14
5
17
6
20
6
22
4
12
9
16
13
15
7
11
12
16
15
11
11
14
20
7
8
15
17
14
18
20
19
16
18
13
12
9
9
17
6
10
14
12
14
12
8
18
6
10
3
5
7
5
2
9
9
8
3
10
8
4
8
10
6
5
4
14
6
9
5
12
5
7
7
6
3
6
25
Source: Levada-Center .
Mar. 00
Mar. 01
Mar. 02
Mar. 03
Mar. 04
Mar. 05
Mar. 06
Mar. 07
Approve
Mar. 08
Mar. 09
Mar. 10
Mar. 11
Mar. 12
Mar. 13
Mar. 14
Mar. 15
Jan. 16
Feb. 16
Mar. 16
But Putin’s approval ratings hold
Approval of V.Putin
Disapprove
90
80
70
60
50
40
30
20
10
0
26
The erosion of political approval has begun from the bottom up
Do you approve the activity of the head of your region?
Approve
Disapprove
70
60
50
40
30
20
10
Mar. 16
Feb. 16
Jan. 16
Mar. 15
Mar. 14
Mar. 13
Mar. 12
Mar. 11
Mar. 10
Mar. 09
Mar. 08
Mar. 07
Mar. 06
Mar. 05
Mar. 04
Mar. 03
Mar. 02
Mar. 01
July 00
0
27
Source: Levada-Center .
Approval of the State Duma
Do you approve the activity of the State Duma?
Approve
Disapprove
80
70
60
50
40
30
20
10
Mar. 16
Feb. 16
Jan. 16
Mar. 15
Mar. 14
Feb. 13
Mar. 12
July 11
Mar. 05
Aug. 04
Mar. 05
Jan. 02
Mar. 01
Mar. 00
0
28
Source: Levada-Center .
Approval of the Government
Do you approve the activities of the governemnt of Russia?
Approve
Disapprove
70
60
50
40
30
20
10
29
Source: Levada-Center .
Mar. 16
Feb. 16
Jan. 16
Mar. 15
Mar. 14
Mar. 13
Mar. 12
Mar. 11
Mar. 10
Mar. 09
Mar. 08
Mar. 07
Mar. 06
Mar. 05
Mar. 04
Mar. 03
Mar. 02
Mar. 01
Mar. 00
0
Approval of D.Medvedev
Do you approve the activities of D.Medvedev as a PM?
Approve
Disapprove
80
70
60
50
40
30
20
10
Mar. 16
Feb. 16
Jan. 16
Mar. 15
Mar. 14
Mar. 13
Mar. 12
Mar. 11
Mar. 10
Mar. 09
Mar. 08
Mar. 07
Dec. 06
0
30
Source: Levada-Center .
Back to the future:
top priority of current consumption
Requests to V.Putin, April 2016
Rise the living standards and
resolve social problems
Improve the effectiveness of public
management
Stimulate economic growth and
employment
Address problems of culture,
science, health and education
Address problems of housing and
utilities
33
25
12
Housing and utilities
2
Infrastructure and local problems
2
Education and science
Restore Russia's might
1
International issues
Personal wishes
1
Crime and terrorism
No answer, irrelevant answer
26
5
21
Corruption and resentment against the
authorities
5
0
41
Econommic problems and inflation
16
Put an end to Chechen war
Income level, social protection and
pensions
10
15
20
Source: FOM, Levada-Center
25
11
10
6
4
1
Other questions, no questions
30
35
28
0
5
10
15
31
20
25
30
35
40
45
THANK YOU FOR ATTENTION!
32