Thursday, February 20, 2020

National Projects: Russia’s New Development Paradigm — Yaroslav Lissovolik

Russia’s new initiatives associated with sizeable increases in social spending and outlays on national projects as outlined by President Putin in his address to the Federal Assembly in the beginning of this year mark a new beginning in Russia’s economic policy. After extended periods of prioritizing the accumulation of savings and building of reserves, Russia’s economy is switching into spending mode, with greater weight accorded to economic growth compared to an overarching emphasis on securing macroeconomic stability in the past. In effect Russia’s economic model becomes more open and more geared towards development as compared to a defensive mode of economic policy, which sought to minimize external shocks and prioritize self-sufficiency and import-substitution.
Summary: The Russian leadership believes to have beaten back the sanctions and is now striking out on new path to build the domestic economy while also increasing exports....
Ultimately, within the new paradigm of Russia’s economic policy, which may be likened to a “Big Push” modernization effort (see Russia’s “Big Push paradigm”, Valdai discussion club, October 8, 2019) fiscal policy is likely to take precedence over monetary policy in delivering the growth stimulus. After amply showing that Russia is capable of notably increasing fiscal revenues and tax compliance the key goal is now to demonstrate the capability to attain modernization via significant increases in the efficiency of fiscal spending. In a way with fiscal policy shifting into spending gear, monetary policy is likely to be relatively more conservative with continued emphasis accorded to macroeconomic stability. The CBR is likely to closely follow the implications of fiscal loosening with respect to inflation and may limit the scope for further reductions in the key rate if inflation risks start to increase.
An important element of Russia’s “Big Push” to increase fiscal spending will need to be the maintenance of the fiscal rule and a rules-based framework more generally. This implies conservatism in allowing the change in the cut-off oil price for the budget’s fiscal rule operation as well as the existence of clear targets on the evolution of the overall fiscal balance and the non-oil budget deficit. The maintenance of the fiscal rule together with the relatively more conservative stance of the CBR are likely to be sufficient in ensuring the maintenance of the bulk of macroeconomic stability secured in the preceding years....
Analytics Valdai
National Projects: Russia’s New Development Paradigm
Yaroslav Lissovolik

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