Two important facts—not correlated—are shaping early 2020 in Russia. The first one is President Vladimir Putin’s speech at the Duma and the change of government that surprised some commentators. This could be extremely important for coming years. The second one is the lowering of oil prices, due to the Chinese Coronavirus pandemic, a situation that could have significant economic consequences. They could be linked in the next few months.
A significant governmental change. New Russian Prime Minister Mikhail Mishustin, appointed just after the presidential address to the Duma, presented a new cabinet, mixing the old and the new. The key news was that the presidential economic advisor, Mr. Andrei Belousov, was appointed First Deputy PM. Belousov was known as a high-ranking civil servant, and for years he supervised Rostat, the state statistical agency. Before then, he was one of the major scientists (1991-2006) at the Institute of Economic Forecasting, one of the leading institutes of the Russian Academy of Sciences.
From June 2013 to January 2020, he held the position of presidential economic advisor. The new position he was appointed to had been held by Anton Siluanov, who retained his position of Finance Minister. The replacement of Siluanov by Belousov could mean that a turn toward more state intervention is on the horizon.
The new cabinet has been instructed to deliver on Putin’s growth agenda. Putin mentioned in his Duma speech that Russia’s growth should exceed the global average, starting in 2021, and continuing to 2024. This implies that Russia should deliver around 3%, y-o-y, GDP growth. Belousov’s appointment highlights that National Projects are considered the main tool for accelerating economic growth.
However, the actual problem faced by Russia’s economy is demand. The sharp rise in taxes, which took place during the end of 2018 and the beginning of 2019, seriously damaged growth potential. Growth fell to slightly more than 1% for 2019. Demand then had to be boosted, one thing clearly acknowledged by Putin. One can expect intensified construction activity to take place across the country this year.
The second fact is that two people with high-level regional experience joined the new Cabinet: Perm Regional Governor Maxim Reshetnikov (who in 2010-2017 worked in the Moscow City government) was appointed Economy Minister; and Deputy Moscow Mayor Marat Khusnullin (who in 2001-2010 was Construction Minister of Tatarstan) was appointed Deputy PM. This is also significant.
An important change in governmental priorities. The fact that formation of the new cabinet took a week, following the previous cabinet’s resignation, was a sign that the president’s decision was not known in advance and was taken quite abruptly. One can speculate that the main reason for this is the reduced geopolitical pressure on Russia.
Actually, since 2014, Putin has focused on solving the consequences of the Ukrainian crisis and the Crimea acquisition. Only since last December has that situation eased. Putin conducted a successful Normandy Quartet meeting in Paris and established constructive dialogue with the new Ukrainian president. Sanctions risk is likely to ease. That will allow Putin to refocus on domestic politics.
The president’s approval rating is now below 70%, according to a recent Levada-Center poll, well below 2014’s high of 80%-90%. This is a direct consequence of a badly managed pension reform and the 2018 tax hike. GDP growth was around 1% in 2019. Thus, we can expect the president’s attention to return to domestic politics, a move positive for economic growth in 2020-2021. However, the risk of overheating will build by 2022, as production capacities are constrained by low investment. The inflation rate is now about 3%/year. This is low for Russia, but it could move significantly higher by the end of 2020.
Thus, Belousov’s new position may create some friction between the cabinet and the Central Bank of Russia (CBR). The previous government’s economic team was unified by the view that without structural reforms, growth would remain weak and any stimulus would lead to overheating. But Belousov is a strong advocate of a powerful state, and he is probably willing to deliver on growth. So, it is possible that he will see CBR monetary policy as an unwelcome constraint. He clearly has a stronger hand than that of Mrs. Elvira Nabiullina, the CBR head. This could imply that fiscal consolidation is over. But that would also put a premium on state financial resources.
Oil prices, state resources and the Chinese Coronavirus. Here, we connect with the latest oil market developments. Oil prices fell last month, in the wake of the Chinese pandemic. Oil prices declined 12%, year-to-date, and they fell 4% in the last week of January, while some emerging currencies dropped 6%.
It is too early to predict how low prices will go. Nevertheless, this environment is not well-adapted to new governmental economic priorities. If oil prices had continued to move toward $70/bbl, potential tensions between the new government and the CBR would have eased. If oil prices go below $50 for several months, the potential conflict could become sharper.
Belousov’s position as First Vice-Premier is both a strategic asset and a strategic issue. As the leading economic decision-maker, Belousov will execute the president’s growth strategy. The way that he acts will be very meaningful. If he faces some kind of budget constraint and is instructed to go on, regardless of possible consequences, this could imply a significant turn toward a more directed economy. What would be helpful to know is to what extent Putin is serious about boosting Russia’s growth during the next year.
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