I discussed our most recent Russia growth outlook at a roundtable at the Higher School of Economics Conference on Apr. 2 with a number of Russian and international experts. This conference is one of the most important and prestigious economic conferences in Russia, and traditionally, the World Bank co-sponsors it as part of its outreach to other stakeholders.
The room was packed...
Conference participants stood at the door and outside the room to take part in this discussion. In fact, one of our panel discussants could not make it through the crowd and had to participate through email. After the events around the Crimea in early March, Russia’s growth outlook became one with much uncertainty attached to it. But the international community and Russian government still remain largely silent on its potential economic impact, besides taking notice of the immediate increase in market and Ruble volatility observed since. The World Bank is the first international organization to explicitly address this geopolitical risk and incorporate it in its growth forecast, apart from some local analysts. So of course, I decided to invite some of them for a public discussion on this topic, together with IMF, EBRD, Eurasian Bank and think tank representatives.
So what does our latest Russia Economic Report (RER) set out to do? It provides a spectrum of growth in our 2014 and 2015 forecast with two scenarios. Our low-risk scenario assumes a limited and short-lived impact of the Crimean crisis and projects growth to slow to 1.1 percent in 2014, and 1.3 percent in 2015. The high-risk scenario assumes a more severe shock to economic and investment activities from the Crimean crisis and projects a contraction in output of 1.8 percent for 2014, and growth of 2.1 percent for 2015. Our view is that growth anywhere between +1.1 and -1.8 could be likely for 2014.
The IMF agreed with the spectrum approach given the lingering uncertainty. Picking up on our RER conclusion that policy choices could tilt to short-term crisis management response and replace efforts to advance the medium-term structural reform agenda, Bikas Joshi, the IMF resident representative in Moscow, asked if macroeconomic policies that started being implemented in recent years (such as the fiscal rule) will be continued. While Russia’s macro fundamentals remain good, it does not take much for investors to lose confidence, and markets punish high uncertainty fast, for example, with higher cost for capital.
There was an astonishing agreement on the analysis of outcomes of our respective forecasts. But for the Russian government, it will be vital to come up with a consensus of policy choices soon. It was noted that formulating prudent policy proposals based on the government’s own risk assessment is necessary. We were also honored to have Prof. Evgeny Yasin, the President of HSE, and mentor of most market- oriented economists in Russia at the event. He concluded that based on experience, only two options appear likely: one of an increasing government role with higher fiscal expenditures and another, which would focus on an altogether smaller role of government and restarting of the liberalization agenda. He was less certain that the second option would be likely.
Our recent RERs ("Confidence crisis exposes economic weakness" and "Structural challenges to growth become binding") make a strong case that the choice needs to focus on increasing investors’ and consumers’ confidence in the economy, including prudent macro policies, rather than embarking on another short-lived fiscal stimulus, which embodies Russia’s previous growth model.