Tuesday, September 16, 2014

Lidia Kelly — Russia needs government investment to avoid recession, says former finance minister

Russia risks slipping into recession because the government is not investing enough in the economy to weather Western sanctions, former finance minister Alexei Kudrin said on Tuesday, criticizing the strategy so far.
A strong advocate of liberal reforms, Kudrin has become almost the only voice in the Russian elite to question economic policy since the Ukraine crisis, counting on his long-term close ties to President Vladimir Putin to protect him from censure.
Taking aim at the generous spending pledges Putin made when he returned to the presidency in 2012, Kudrin said Moscow did not have the funds to invest in an economy, which was flagging before the West imposed sanctions over Russia's role in Ukraine.
"In a difficult moment like this, it would be useful to increase government investments. This is exactly what the market needs now. To cut government investment now and increase pay is inappropriate," he told a foreign business conference.
Somebody gets it.

Reuters
Russia needs government investment to avoid recession, says former finance minister
Lidia Kelly

9 comments:

Dan Lynch said...

Russia recently raised its VAT and added a 3% sales tax. Dunno if they have kicked in yet.

Economics does not seem to be their strong point.

Tom Hickey said...

Russia runs a trade surplus as a net exporters of commodities, as well as a fiscal surplus, and the debt to GDP ratio is under 8%. They have a lot of room to maneuver if they realize it.

Calgacus said...

But it seems that Kudrin gets it worse than others, not better. He wrongly believes there is less maneuvering room, not more.

"Kudrin said Moscow did not have the funds to invest in an economy"

"The government's support is limited, bound by continued large social spending," said Kudrin, who has long been a critic of Putin's pledges to tackle the gap between Russia's rich and poor by increasing wages." (Horrors! The serfs might not be starving!)

"The sanctions that have been imposed are going to have an impact over one, or two years, because they have cut investment opportunities,"


Like how, dude? Exports are a cost, only useful to obtain the benefit of imports. So it could drive up prices of imports or substitutes. Forcing import substitution creates an investment opportunity.

From an interesting comment there: It is very difficult to judge a person from the outside, but they say that, as a finance minister, Mr. Kudrin had spent tax revenues on buying American dollars and other securities. And on the question of the scarce military expenditure, he replied that Russia had not been threatened. And this was despite the fact, that the movement of NATO to the East began a long time ago. If they (Mr. Kudrin) were spending more money on education and science, industrial production and agriculture, maybe now we would not be in such a dangerous position.

On the other hand, Deputy PM Dvorkovich and other unnamed current officials seem to have their heads screwed on much straighter.

Tom Hickey said...

Right, he is a neoliberal.

A strong advocate of liberal reforms, Kudrin

He gets it about public investment but doesn't understand sectoral balances.

Putin has basically said that he plans to use the sanctions for import substitution and pivoting toward the Global South, and he regards sanctions as an opportunity to do that.

Now he needs to realize that he has the fiscal space to make up for the fall in FDI and capital flight.

Tom Hickey said...

Military defence spending will rise in 2015 by 21.2%

Armament is also a major Russian export industry.

Ralph Musgrave said...

I'm sick and tired of politicians the world over (and numerous economists) who keep claiming that government funded "investment" is the only way, or the best way out of a recession. The reality is that that there are several other forms of spending that enable a country to raise demand: government CURRENT rather than capital spending, plus increased PRIVATE spending.

Plus infrastructure investments sometimes take years go get going, by which time they may just exacerbate the next boom.

Perhaps the Mike Norman site could organise an international "Our politicians are the dumbest in the World" contest. Eurozone countries should do well given the number of fatuous solutions to the EZ's problems that are doing the rounds there. Then there's a large number of "balanced budget" and debt-phobe politicians round the world who should do well. My person entry would be David Cameron, and in support of my entry I'd cite an article by Johann Hari entitled "Why do we remain silent as Cameron preaches Voo-doo economics?"

Unknown said...

"The reality is that that there are several other forms of spending that enable a country to raise demand: government CURRENT rather than capital spending, plus increased PRIVATE spending."

yeah but you didn't explain why increased government 'current' (consumption?) spending is better than govt investment spending. Private spending is good, but how do you increase that in a recession? Are certain forms of private spending perhaps less beneficial that public investment?

Overall, I'm not sure what your point is.

mike norman said...

Substantially raising domestic investment while ending most petroleum sales to the West is the best way to make a mockery of US/European sanctions. It's exactly what I have been saying.

Tom Hickey said...

Right, as Russia can do this in two ways.

First, by transfers aimed at increasing domestic demand and also by using the sanctions to lower imports in order to bolster domestic production and investment.

Secondly, by using public investment to increase domestic production and investment, as well as to protect firms that are particularly hit by the sanctions.

MMT shows that there is no lack of funds to do this if the real resources are available, and Russia is resource rich, so it doesn't have the need for foreign exchange that other countries might.

Perhaps the reticence to do this fiscally is to protect the value of the currency. But Russia is in good shape fiscally by international standards, in spite of its low rating by the Western credit agencies. The currency will take a bigger hit if the sanctions are successful.

Or maybe they just don't get it.