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Knights of the Vine RUSSIA


The Russian Economy
Will enough soft-soap clean up the Russian economy?
Ian Mitchell

On September 21, the Association of European Businesses in the Russian Federation (AEB) held a morning briefing to give Odd Per Brekk, the Senior Representative in Russia of the International Monetary Fund, an opportunity to explain his view of the alternative scenarios for the future of Russian economic growth.

Mr Brekk’s essential message was that the economy is unstable, and that this is due as much to governmental mismanagement than uncontrollable external factors. Growth is 4% per annum and falling, 50% of GDP is under the control of the state; and the investment rate is far too low.

The direct causes of this situation are well-known problems like too much tax evasion, too much favoritism in government spending, too little institutional autonomy, lack of respect for property rights and so on. The indirect causes are simpler, namely inflation at 7.5%. If Mr Brekk had one big message it was that the focus of fiscal policy must move from the exchange rate control to inflation targeting.

When asked to comment on possible future exchange rate scenarios, he said, “We do not make predictions about the exchange rate.” Then he corrected himself and said, “At least we do not publish predictions about the exchange rate.”

That comment seemed to me to encapsulate the problem with this sort of meeting: there was too much soft-soap and not enough abrasive pot-scouring. For example, Mr Brekk said that Russia had had “a pretty good crisis”, even though the economy had contracted by 8% in 2009, much more than other comparable economies. Likewise, lessons had not been fully learned about how to avert a similar crisis in the future, yet the Bank of Russia had increased openness in its public reporting in a way which the IMF commended. There was something for everybody.

Mr Brekk presented three possible scenarios for future GDP growth. One was on current assumptions; one on the basis that the oil price dipped substantially; and one on the basis that it did not and the government started to get everything right managerially-speaking. However, the outcome in five years’ time was not hugely different in each case. Moreover, when asked which scenario he thought most likely, Mr Brekk said, “I am an economist so I cannot say one way or the other.”

When he was asked about corruption as an influence on economic decision-making and its impact on the economy, Mr Brekk would go no further than saying that the IMF simply considered it a factor in assessing the investment climate. Given that the recent Bank of Moscow bailout had cost $14 billion, or 1% of GDP, much of which is said to have disappeared abroad, that seemed glib—to put it mildly.

Over coffee afterwards, the feedback I got was that many people thought this smoothly technocratic analysis was largely irrelevant to the real world. We all know that if the Kremlin-White House axis wants something to happen, money will be thrown at it. And if it wants to stop something happening, it has ways of doing so. To try to assess Russian economic management on the basis of rational decision-making rather than the strength or weakness of particular interest groups seems to me to display either colossal ignorance (which I do not believe) or wilful disengagement from reality for reasons one can only guess at.

The point that corruption is central to any realistic consideration of Russia’s future economic prospects was, by coincidence, made the following day in a long article in the Financial Times on the question marks still surrounding the Bank of Moscow bailout. The FT piece ended by saying: “As Russia struggles to return to growth rates it enjoyed before the global recession, questions over potential systemic risks hidden in its opaque banking system are the last thing the country needs.” None of that had any place in the IMF analysis.

The AEB is to be commended for giving Moscow business people the opportunity to assess at first hand the quality of scrutiny carried out by the IMF on the Russian economy.

The PASSPORT prize for most soporific statement of the obvious was won by this quote (from Mr Brekk): “We think that with the right policies, Russia could do much better.”

PASSPORT Quality of Meeting Index (QMI)   %   Weighted
Delegates making notes   30   +60
Delegates not making notes but apparently paying attention   35   +35
Delegates looking round the room, or whispering to neighbours   15   -15
Delegates staring at their phones   15   -30
Delegates sitting with eyes closed and/or heads drooping   5   -15
QMI Total   +35

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