Rebound with simplification – Newspaper Kommersant No. 228 (7429) dated 12/08/2022

The latest Bulletin of the Bank of Russia, dedicated to economic trends, confirms the Central Bank’s early assumptions about the nature of stabilization in the Russian economy. An increased savings rate plays against inflation, despite the instability of this effect. The initial adjustment of the industry to the new conditions is going faster than expected, but does not cancel the accumulation of sanctions losses and does not lead to an increase in the potential of GDP. The deficit in the labor market at least softens the losses of households from what is happening, and in the next year or two, income from labor will be more specific than income from capital.

The Bulletin of the Bank of Russia “What the Trends Say” for November 2022 contains a lot of corrected observations and assumptions by analysts from the Research and Forecasting Department (DIP) of the Central Bank about how, upon closer examination, the picture looks fairly fast (in any case, somewhat faster than the summer forecasts of 2022 years) recovery in the industry, a relatively low fall in private demand and investment. Recall that the assessments of Central Bank analysts are quite critical of the essence of the processes in the Russian economy, but conservative and practically devoid of alarmism: these are assessments without enthusiasm about the process of structural shifts in the Russian economy under the pressure of sanctions, and without unjustified expectations of catastrophes.

In the current issue, the Central Bank DIP team confirms the previously expressed thesis that technological restrictions in the development of the economy, caused by sanctions primarily on the supply of engineering products from the EU, the USA, Great Britain, Japan and Canada (this is a reaction to the military operation of the Russian Federation in Ukraine), are reflected on the nature of the recovery. “Restrictions also have a long-term cumulative effect, steadily reducing the potential of the economy over time through a decrease in its productivity and efficiency,” the Central Bank states, urging not to expect much from “reverse engineering and parallel imports of investment goods”: import substitution in a single country without prospects for withdrawal products to foreign markets will not support the potential for GDP growth. In the short term, however, stabilization is evident: “the economy stabilized in Q3 after a decline in Q2 (+0.2% after -5.8%)” (seasonally adjusted quarter-on-quarter). This effect is heterogeneous, it has not been completely exhausted, most likely, in a stable state, part of the effect will continue to be observed, but this does not cancel the accumulation of sanctions damage, and the Russian economy will stabilize and even grow against the backdrop of a constantly declining technological level: import substitution will only limit the pace this decline. Finally, the Central Bank suggests not to forget that fiscal policy also plays a role in stabilization – incentives in the 2nd quarter of 2022 and policy easing from the 3rd quarter: the Bank of Russia does not directly state that without these actions of the White House there was no such rapid stabilization would have been achieved, but make it clear that this is probably the case.

The second effect in the economy that the DIP focuses on is the shortage of labor, which now increases labor income and dividends from capital, but then there will inevitably be a reverse “shift in gross value added in favor of capital income at the expense of labor income”. In practice, this means, among other things, smaller losses for households from a man-made crisis compared to the losses of investors, and for a number of income groups (not with high incomes – there are many owners in these groups who lose from sanctions restrictions), there may also be an unexpected gain from the current situation . In this regard, the Central Bank’s observations of the growth of the savings rate in the Russian economy since mid-2022 are interesting: in the third quarter of 2022, it reduced the inflationary background. “Now people tend to save more, despite signs of accelerating growth in nominal and real wages,” the Central Bank states, and analysts doubt the “increased attractiveness” of savings, therefore they consider a high savings rate “unsustainable”. However, “behind the façade of lower rates of growth in consumer prices, taking into account seasonality, the action of several multidirectional factors is hidden.” Thus, the Bank of Russia believes that in the market services, in contrast to the commodity market, in the second quarter of 2022 there was no “price flight”, which is largely responsible for the summer inflation surge after the spring devaluation of the ruble.

The future, in the expectations of the Central Bank, is not rosy and not catastrophic, although in the first half of 2023, according to external signs, its manifestations can be mistaken for “overheating”. In any case, if the “low-tech recovery” increases efficiency, domestic demand is fueled by the growth of gross demand and household incomes are not reduced, and the inflationary background is elevated – it will not only be easy, but also politically attractive to confuse such a picture with the real costs of growth.

Dmitry Butrin