We don’t need someone else’s crisis – Newspaper Kommersant No. 147 (7348) of 08/13/2022

The unfolding of the economic problems of the world into a scenario of a global economic crisis for the Russian economy will mean at least a two-year fall in GDP, a rather sharp zeroing of the current account as early as 2023, an extension of high inflation to the next year with a decrease in domestic demand until 2025. The “Global Crisis” scenario is considered by the Bank of Russia, which described it in the report on monetary policy, as likely as the accelerated adaptation of the Russian economy to sanctions pressure, and both of them are less likely than the baseline scenario, where only the next year is expected to be problematic.

On Friday, August 12, Deputy Chairman of the Bank of Russia Alexei Zabotkin presented the draft Report on the Common Monetary Policy for 2023 and for the period 2024 and 2025 budget process. The final version of the report will be presented in the fall, and it will obviously include as a constant the main unknown variable to date, which affects the monetary policy of the Central Bank, but does not depend on it – a new construction of the “budget rule”. Federal spending, which is discussed in a separate appendix in the report, has made up to a third of the contribution to the deviation of inflation from the Central Bank’s targets in past years. A decision on the parameters of the future “fiscal rule” is expected to be made public in the coming weeks. Nevertheless, the report on the monetary policy contains calculations by the Bank of Russia for two alternative scenarios for the development of the situation in addition to the base one, the figures for which have already been given (see “Kommersant” dated July 23), and the Central Bank’s explanations of how the operation of the transmission channels of the monetary policy has changed after March 2022 allow us to make assumptions about what the economy can expect in these scenarios and how the Central Bank can and intends to react to their implementation if they occur.

Scenario “Global Crisis” assumes a repeat of the crisis of 2008-2009: global GDP growth in 2023 is 0.1% (which implies a recession in the main economies of the world, except for China, where growth will simply be weak), inflation in the US and the eurozone will remain above 4% per year year-on-year in 2023 followed by a slow decline to 2%, low Fed rates and high ECB rates. In addition, for the Russian Federation, this scenario assumes further strengthening of trade sanctions and foreign policy pressure on the Russian Federation. The text does not indicate this, but it is obvious that we are talking about delaying the terms of the Russian military operation in Ukraine for a de facto indefinite period, or about a similar construction. All differences of this scenario from the base one are exogenous.

The calculations of the Bank of Russia show the severity of such a scenario for the Russian Federation in the following figures.

Global “stagflation” (the term in this case is approximate, the last realized scenarios of stagflation in the United States in the 1970s assumed a combination of GDP stagnation with galloping inflation of 10–15% year on year – a less serious inflationary shock is expected here) for the Russian Federation will mean first of all, a decrease in sales prices for Urals oil in 2023–2024 to an average of $35 per barrel. This is equivalent to an increase in the decline in exports in 2023 by 26–30% (with a continuation of the decline in 2024 by 14.5–16.5% and stabilization in 2025), a further collapse in imports in approximately the same parameters, and the collapse of the current account ( $39 billion surplus in 2023, $3-4 billion in subsequent years). The latter circumstance cannot but be accompanied by a strong depreciation of the ruble under the current monetary policy – the Central Bank does not provide calculations, but, obviously, this is a very strong depreciation of the national currency.

The severity of the scenario is reduced by the fact that the accumulated surplus of last year remains insurance for subsequent ones, so there is no catastrophic collapse of GDP in this scenario, but GDP in 2024 after falling by 4-6% in 2022 (this forecast is the same in all scenarios of the Central Bank, in Friday, Rosstat estimated the decline in GDP in the second quarter at 4%) should decline even more in 2023 – by 5.5-8.5%, the decline will last in this scenario until the end of 2024 (in 2025 – minus 2-3% GDP) and in 2025 will be replaced by stagnation at the level of 0–1% of GDP growth. It should be noted that the impact of the crisis scenario on the final consumption of households is somewhat softer, but longer.

Based on the comments of Alexei Zabotkin and the text of the report on the monetary policy, which analyzes in some detail the state of the transmission mechanism (the Central Bank on Friday also released a separate review on this topic, devoted to the current state of the transmission channels – the report, on the contrary, focuses on a qualitative analysis of how the the nature of the implementation of the monetary policy in the current market), one of the problems of the crisis scenario for the Russian Federation is the weakening of the manageability of the markets. In the baseline scenario, the Central Bank assumes that part of the transmission channels (“transmission” of changes in the key rate of the Bank of Russia and signals to financial markets) that have changed the nature of their work after the introduction of capital controls, sanctions, strong shocks will be restored – these are the credit and balance channels and the channel of expectations (wealth channel that works with stock markets is now very weak, “the importance of the currency channel has decreased”), while the main interest rate channel is slower and rougher, but will also recover. Under the conditions of the crisis scenario, Alexei Zabotkin explained, it can be assumed that the expected restoration of the operation of the channels will not happen or it will be very slow.

In practice, this means, first of all, that in the scenario of a global crisis, the Central Bank will be forced to change the key rate more and more sharply in order to control the work of the markets.

The second scenario “Accelerated Adaptation”, discusses the possibility of a faster than now adaptation of the market to the changed conditions of foreign trade – in essence, this is a scenario in which companies find new suppliers of intermediate imports and raw materials faster than now, sanctions pressure does not increase, and the balance of payments surplus decreases slightly slower than currently expected in the baseline scenario. In essence, this is a reflection of the economists of the Bank of Russia on the current inertial behavior of the economy in these aspects, which have to be translated into the base scenario, especially if we take into account (see “Kommersant” dated August 2) the “mutual expectations trap” described by the Central Bank, which may be an internal mechanism for the economy to choose a baseline rather than an adaptive scenario. It is worth noting the unusually high realism of the Central Bank’s scenarios in this version of the monetary policy report: if we consider the “best” oil price forecast at which it is close to the current one, then the Central Bank’s expectation of actual prices for Urals in 2023 at $70 per barrel looks exactly like this (in the future The Central Bank lowers the forecast to $55-60 per barrel, conservativeness in such forecasts is traditional for the Bank of Russia). “Adaptation” is scheduled in the same oil price scenario as the base case. It allows reaching the stabilization of GDP (minus two – plus one percent) already in 2023 with further growth of 2.5-3.5% of GDP in 2024.

“As a result, inflation returns to levels near the target by the end of 2023, with looser monetary policy compared to the baseline. In 2024–2025, the price growth rate will remain close to the target of 4% with the key rate in the neutral area of ​​5–6% per annum,” this is how the Bank of Russia promotes the “adaptive” scenario, for which, however, there are simply no decisions in the hands of the Central Bank— it depends mainly on corporate decisions and on the effectiveness of corporate and public administration in the Russian Federation. We note that the CBR has also cautiously assessed the short-term risks of this weakness. In the baseline scenario, the lower limit of inflation in 2022 is 12% per annum, the upper limit is 15%. In many ways, these three percentage points are based on the speed of restocking and the extent of disruptions to industry and trade already this year: shortages in supply chains that companies cannot (or will not) overcome will increase inflation, presumably to this level.

Dmitry Butrin