Downshifting

Sberbank chief German Gref caused a scandal at the Gaidar Forum last week by calling Russia a “downshifting” economy, and saying that Russia had been “defeated in the global competition”.

A long piece in Novaya Gazeta highlighted some of Gref’s comments:

“According to him [Gref], the technology gap between the leading economies and lagging countries may be greater today than in the era of the industrial revolution of the 19th century. And the only chance to fight for the future is to change the entire state system and all social institutions ranging from the education system, which today is not only ineffective, but works exclusively to export talent [brain drain]. Gref also described Russia as a “downshifter country” — the… term usually refers to a person who gave up a career and competition for a “life for themselves”.

Wikipedia defines “downshifting” as:

“a social behavior or trend in which individuals live simpler lives to escape from the rat race of obsessive materialism and to reduce the “stress, overtime, and psychological expense that may accompany it”.”

So what is the economic prognosis for 2016? Novaya’s journalist talked to Russian economists to find out.

  • Capital outflow: $50 billion
  • Sanctions will continue
  • No growth
  • Recession will last 4-5 years
  • GDP decline: 2-4% in 2016
  • Budget Deficit: not more than 5%?

Other predictions and factors:

  • This year will see a confrontation between the Finance Ministry, who want to adhere to an austerity policy, and other agencies, desperately clinging to their dwindling budgets. “…the 10% [budget cut] is clearly not enough”, says economist Sergei Hestanov.

Another possible source of revenue for the federal budget is partial privatisation. But the low price of Russian assets and the unwillingness [of the state] to give up control of “Gazprom” and “Rosneft” will encourage the government to ensure that the reserves are spend first, according to Mironov. In addition, the crisis situation in the economy reduces the demand for domestic assets, so the state does not have a real opportunity to bring in a lot of money through this tool, experts agree.

  • Printing money still seems like a radical idea… But if budget problems continue to grow uncontrollably, after 2018 [the presidential election], anything is possible.

“A deficit is a situation where the state cannot fulfill its obligations. This is most clearly expressed in the form of delayed pensions, and public sector wages [already a problem in certain regions]. A deficit of 3% is a critical value: in this range the budget remains stable and manageable, but as soon as that mark is passed, the risks are greatly increased,” says Sergei Hestanov.

  • The authorities will try to take all possible measures to keep the deficit within acceptable limits, but if oil prices hold out for a long time below $30 a barrel, it will rise above 5%.
  • If Iran does aggressively dump oil, prices could halve again to $14.5 per barrel. For the state this is a catastrophic scenario, at such prices oil companies are exempt from the tax burden, and the budget is deprived of a significant part of its revenues.

The key factors will be the indexation of pensions significantly lower than actual inflation, as well as a tougher business policy – the protracted nature of the crisis will force employers to cut costs more decisively.

In terms of the population, the main risk is still inflation, says Doctor of Economics Yevgeny Gontmakher. The rise in prices is felt by people much more than the official statistics tell us. The second point is what happens with the social benefits of the population, especially at the local level.

“In 2016, social factors override macroeconomics. If you approach the issue purely from accounting, the budget can be halved — cut costs — and that’s it. but this year will be a year of great social tensions. It won’t turn into an organised movement, but constant local outbursts, as we have seen in Krasnodar, where pensioners took to the streets, or the truck driver protests last year, will be significantly strengthened,” predicts Gontmakher.

So things are bad, and only going to get worse. And it’s too late to turn back the clock.

2 thoughts on “Downshifting

  1. Excellent analysis. The main culprit for Russia’s economic problems is of course sharply lower prices for oil and natural gas. Still, we must not forget that these economic problems are so stringent today only because there are sanctions in place for the RU banking sector which effectively blocks Kremlin to run into foreign debt and buy a few more years for the government.

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