Shaky Stability
No. 4 2012 October/December
Sergey K. Dubinin

Doctor of Economics
Moscow State University, Russia
Faculty of Economics
Head of the Finances and Credit Department


ORCID: 0000-0001-8355-2633
SPIN-RSCI: 3881-6845


Е-mail: [email protected]
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The Russian Economy in the Context of the Global Crisis

The declaration of colossal losses on the subprime mortgage markets by the French bank BNP Paribas in August 2007 and the bankruptcy of the U.S. bank Lehman Brothers in September 2008 were the universally recognized omens of the looming global financial crisis. Five years have passed since then. The world is different. The economic life is now harsher, harder and sometimes beyond rational control on the basis of customary solutions that have taken decades to devise. Russia is no exception. Its economic problems are getting worse and very far from being resolved. But it is already clear at this point that we shall have to tackle them in close cooperation with partners and with due regard for global development trends.


In the summer of 2012 the Economic Development Ministry came out with its near-term economic growth forecasts. The inertial scenario was the main one. With a high degree of probability it predicted the GDP’s growth by an annual 3.5-4 percent. Alongside this the ministry published a worst-case scenario, pointing to the threat of an economic slump starting from 2013.

Unfavorable foreign economic conditions in case of a sharp worsening of the crisis in the European community are named as potential risk factors. Greater recession in the peripheral southern countries of the European Union, the growth of the debt crisis into a crisis of banking systems and the full or partial collapse of the euro area are fraught with a heavy fall in the demand for Russian oil, gas, metals and chemical products. Oil prices may plummet to 60 dollars per barrel. (For reference: on August 9, 2012 the Urals blend was trading at 114 dollars per barrel). According to Economic Development Ministry estimates, even in that case the Russian economy should fall by less than three percent of the GDP, and the probability of such a scenario is less than 20%.

Although many analysts say the main (inertial) economic development scenario is too optimistic, the dispute over specific parameters is not the crux of the problem. Very characteristic is the approach itself, in other words, the recognition of the fact that foreign economic risks are of decisive importance, and that growth in our country strongly depends on how the economies of the leading foreign trade partners will be developing.

Elvira Nabiullina, the then economic development minister, described Russia’s economic development factors at the beginning of 2012 in this way: “It was the foreign economic situation that accounted for half of Russia’s growth rates. The average growth rate was at 7%, and the contribution of the foreign economic situation was at about 3.5%.” At the same time she said that this sort of favorable situation will not happen again in the near future.

In 2000-2007 the investment boom on the basis of using incomes from foreign economic activity was the economic growth engine; it triggered not only a change of the level of individual incomes (on the average they were up 2.5 percent), but also propelled Russia into the group of medium-developed countries. In 2008 the GDP at PPP per capita stood at 14,767 dollars. In 2012 the growth of investment in the Russian economy measured approximately 8%, and it is expected to be at about 7% percent a year for years to come. Double-digit investment growth parameters are unachievable and the Russian economy is losing the potential of outpacing growth as compared with the most developed economies of the world.

Investments in projects addressed to domestic demand are expected to serve as a new source of growth and to enhance stability in the face of global crisis threats. Russia’s accession to the World Trade Organization makes investments in the national economy particularly crucial and timely.

The mechanism of forming national savings and their transformation in investments must be fully upgraded. This is what the genuine modernization of the Russian economy should be all about. The modern economy cannot be extracted from the global context. On the contrary, skillful employment of international financial mechanisms is the sole realistic option of the modernization strategy. On the one hand, Russia should be an attractive sphere of capital investment, and on the other, both businesses and the government should master methods of work on the world financial and trade markets allowing taking strong positions in cooperation with foreign partners.

Of course, the issue of the day is not restoration of the closed Soviet type economy, because it proved ineffective and unable to resist external negative factors. The economic turmoil in the USSR began with a slump in the world oil market. The Russian economy remains highly dependent on the volatility of oil prices. High on the agenda is the task of building up the competitiveness of the economy and its investment attractiveness. At the same time it is necessary to bear in mind that the price of oil on the world market today is a product of a complex combination of factors, and among them the demand for oil as a source of energy is important but far from the only one. The function of forming the commodity prices of raw materials, including crude, on the world market has largely moved to the financial markets of derivatives – options and futures of the exchange prices. In a word, the price of oil is determined in much the same way as the price of gold. In case of a considerable fall in the prices financial instruments get attractive to investors, and the influx of cash stabilizes their level.

The result of two rounds of qualitative easing, carried out by the U.S. Federal Reserve, looks odd. A major increase in dollar money supply entailed no noticeable inflation consequences for the U.S. economy. At the same time it was the pumping up of liquidity that played the decisive role in preventing a collapse of prices on the global financial markets.

Besides, oil is a rather “politicized” commodity. The budget incomes and spending of the leading oil exporters, such as Saudi Arabia and Russia, are determined on the basis of selected oil price forecasts. In Russia this level is above 100 dollars per barrel, and in Saudi Arabia, about 70 dollars per barrel. There is always a certain probability of the government influencing oil exporters with the aim to restrict supply. The general political situation in the Middle East, in particular, tensions over Iran, by no means contribute to lowering prices. Supplies of oil from Iran have already been excluded from the market context.

The dependence of the Russian budget on oil and gas incomes is, possibly, the brightest illustration of the importance of foreign economic situation. In 2012 the non-oil and gas deficit of the federal budget reached a level of 11.5 percent of the GDP. In 2008, on the eve of the crisis, it measured 2.7% of the GDP. The share of oil and gas revenues in the overall budget incomes was up from 46.5% to 52.8%.

The federal budget is unable to fund major investments. The whole investment program is confined to a handful of showcase projects – the 2014 Sochi Olympics, the APEC summit in Vladivostok, etc. According to the federal state statistics service Rosstat, the corporate sector is the main source of internal investments (42% of capital investments in fixed assets), while the state budget accounts for twice as less investments (18%). The main workload on the federal budget is redistribution of the incomes among social programs (compensation for the Pension Fund’s deficit) and redistribution of funds among regions.

In the summer of 2012 the government ministries submitted to the government a document entitled Budget Policy Guidelines for 2013 and for the Period of 2014-2015. The forecast amendments merely confirm the aforesaid trends. There is going to be a considerable increase (from 29% of all spending to 35%) in the share of budget allocations for defense and security. The responsibility of spending from the budgets of all levels on health care and education is to be shifted to the local (regional) level. The amount of subsidies from the federal budget is to undergo cuts. This means that social spending at the current level will be maintained at the expense of still greater cuts in investment spending.

The competitiveness of producers and providers of export products is determined by either low relative production costs of one unit of production (labor productivity and relative wage costs), or the innovative character of products and services that competitors cannot match. One has to state that low social costs – the level of wages, spending on pensions and social and medical insurance – in countries with emerging markets predetermine the level of their competitiveness against the background of competitors in the most advanced countries. The emerging economies as a matter of fact determine world social standards.

Research into the dynamics of competitive edges during the period of exit from the crisis in 2008-2011 by the Center of Development Institute at the Higher School of Economics produced the following results. In contrast to 2008, wages in Russia’s industries in nominal terms grew by 58%. The wage growth adjusted for the currency rate against the dollareuro basket was 35%. Russia has lost the advantages enjoyed by the other BRICS countries, but failed to achieve the positions of the countries that are the most advanced technologically. In a word, Russia can no longer afford to go on wasting time. It is only labor productivity growth, based on investments in new technologies, that can compensate for the accrued backwardness and dwindling competitiveness and become the engine of economic growth.


During the crisis slump households and companies reduced their spending, investment first and foremost. Alongside this they tried to cut, or at least to refrain from increasing indebtedness. Growing retail consumption of durables, households’ investment in real estate and mortgage lending were expected to herald an end to the crisis in Russia. Such processes have been underway in 2010-2012. However, greater investments and long-term borrowing by the corporate sector would be of still far greater importance to restoring economic growth. In the meantime, investment statistics and businesses’ debts are evidence of the opposite trend. Obviously both prefer to act with caution.

Russian businessmen in the so-called real sector of the production of goods and services and in the financial sector have manifested insufficient understanding of the very process of economic globalization and proved poorly prepared for confronting its challenges. To a still smaller extent Russia’s business and political elites are ready to consider globalization from the standpoint of potential opportunities. Purely defensive, conservative policies and business practices prevail, and in the best case they are aimed at retaining the gained positions on the world markets.

The ongoing economic crisis began with a slump of world financial markets. Of-the-cuff, improvised responses from the governments and central banks of the leading countries playing the role of financial centers were reasonable and successful by and large. The Bank of Japan, the Bank of England and the U.S. Federal Reserve launched qualitative easing programs to heavily increase money supply. These emergency measures worked. They prevented a rerun of the situation of 1929-1932, when the “real sector” of the leading world economies remained intact by and large and ready for operation, but stayed idle, because none of the owners of the fixed production assets was able to sell their products at a profit.

Eighty years ago financial risks were very difficult to assess. There was no chance of getting a loan, and ways of repaying it were anyone’s guess, too. Today’s situation is very much the same. The series of market bubbles and ensuing critical slumps of securities’ quotations generated the awareness of the need for having more reliable methods of assessing the risks of financial instruments transactions. Nevertheless, in the period of exit from the crisis the accelerated growth of amounts in the most risky transactions with derivatives continued. Whereas in 2007 the amount of derivatives of five largest U.S. banks exceeded the amount of other assets

33.6 times, in 2011 the excess measured 50.8 times. However, the transactions to hedge financial risks with derivative instruments are no longer recognized as absolutely reliable. The system of risk ratings has lost credibility with the investors.

In these critical situations Russia is faced with the task of devising the most reliable ways to plug into global cash flows. Russia would benefit from joining the system of world financial markets. Both businesses and the government need it. The point at issue is first and foremost the optimization of the existing ways of blending the Russian economy into the world financial context, and then, of building up its own potential as one of the world financial centers.

The international movement of financial (cash) flows depends on national financial systems’ “power of attraction,” expressed in the evaluation of the combination of risks and return on investment at local financial markets, i.e. it depends on the maturity of financial institutions, the attractiveness of the investment climate and competitiveness. The Russian government has quite unambiguously demonstrated its understanding of these tasks. Says First Deputy Prime Minister Igor Shuvalov: “It is necessary to create a business climate and form a social environment that would be more friendly towards businesses, towards the individual, and towards his potential of independence and creativity.”

To the customary list of negative phenomena, including the corruption-breeding “administrative rent,” over-bureaucratized procedures of registering new businesses and the risks posed by the law enforcement and judicial systems one should add the uncompetitive highly monopolized structure of Russian markets, another brake on the investment process. This refers to secret cartel agreements on commodity markets and the preservation of the excessive influence of natural monopolies on the economy’s development. This is precisely what makes the stimulation of aggregate demand very low-effective as a method of encouraging economic growth in Russia.

A considerable role in drawing domestic and foreign investors will belong to the state privatization program, to be implemented over years to come. For each group of enterprises there are to be procedures and rules of privatization of its own. The policy of privatization in different industries will strongly depend on the tasks that the country’s leadership expects it to achieve.

Heated debates are underway over whether it is possible or impossible to privatize the so-called strategic sectors and enterprises. Strategic industries should not necessarily be the property of the state. It is of fundamental importance to clearly describe in legal acts what a strategic industry is, and what methods can be employed by the state to control them. For instance, it is necessary to use long-term methods of setting the tariffs and prices of services and products in the industries of natural monopolies. The setting of such long-term (for 10-15 years to come) and clearly defined formulas would bring about conditions for the further privatization and for attracting investment. This will give the investor an idea of how the cash flow will be formed, and of how the investments can be repaid.

The overall liberalization of conditions for drawing foreign investors in combination with a lax regimen for those who dare venture into high-risk high-tech industries looks the most logical and effective approach to addressing the problems facing the Russian economy.


The Russian economy is generating mammoth savings. In the meantime they fail to be properly put to use in the national economy. As a result, the net capital flight from Russia in 2011 totaled 80.5 billion dollars. And an estimated 40 billion dollars to 90 billion dollars left Russia in 2012.

The excess of the export of capital over import has lasted for the past two decades and apparently it will continue for several years more. Reversing this trend and converting it into a net influx of credit and investment, preferably, in the form of direct capital investments (at present the share of direct investments in Russia is no more than ten percent of the amount of capital that comes into Russia) is a major strategic task. Administrative methods will not help. Foreign direct investments into the Russian economy are under very harsh government control. In 42 branches of the economy recognized as strategic a potential foreign investor is requited to get preliminary approval from a government commission to be able to participate in an investment project in case the desirable share exceeds 10%.

No ban on the transfer of funds to foreign partners or legislative decision to the effect that all companies belonging to relatives of civil servants should divest of foreign assets and capital be repatriated will work. The buildup of foreign debt today is the largest channel of attracting cash from outside the country. The overall corporate foreign debt has reached 545 billion dollars. The Russian government’s state debt at the end of 2012 is forecast officially at 48.4 billion dollars. Some analysts mention 57 billion dollars as the maximum.

Capital flight statistics should be interpreted correctly from the standpoint of the economic meaning of the ongoing processes. At present a large portion of Russia’s large and medium corporations is affiliated with business groups. The head offices of such holding companies are registered offshore. When Russian banks and financial companies purchase bonds and promissory notes of such companies or banks or issue loans to them, such transactions are shown on the balance sheets of creditors as lending to non-residents. Consequently, in the overall statistics of Russia’s balance of payments these transactions may be reflected as the outflow of capital, although the economic nature of such transactions is internal.

Of special attention are proposals to legalize assets of Russian residents in offshore jurisdictions. Such a measure may be applied, first and foremost, as a voluntary declaration by the owners of such assets of the size of their possessions and the place of registration; secondly, a clear statement of the end beneficiaries; thirdly, the payment of a lump sum tax (fee) into the Russian budget, equivalent to the tax on the dividends of joint stock companies; and fourthly, regular payments of the profit tax and individual income tax in the future. For its part, the Russian government might assume an unequivocal obligation not to resort to the legal or economic prosecution of the owners of foreign assets, and not to use the voluntarily disclosed information against them as a reason to launch such prosecution or as evidence in court.

As a result of such measures the “White Offshore” in Cyprus would turn into the largest source of investment into the Russian economy. In other words, it will be an investment into the Russian economy of the very same funds that have gone through offshore jurisdiction. This system should not be upset, because otherwise no such investment will come at all. The international channels of drawing investment into the Russian economy should not be ruined or plugged, but made stronger and wider.

Offshore zones (the very term in the Russian context has a slightly suggestive criminal meaning) have long become something absolutely ordinary in international practice. Without offshore companies it is impossible to implement major trans-national projects, such as Blue Stream and Nord Stream gas pipelines. For raising (mobilizing) the necessary financial resources by issuing securities there are to be created special companies in “white offshore’ jurisdiction, which is a standard international practice for investment banks. On the OECD list of “black” offshores there is not a single jurisdiction left. Just several years ago there were 40 countries on the “gray list.” Now there remain only two. The governments of offshore territories have assumed a commitment to meet OECD standards in terms of the transparency of tax systems and information transparency. All OECD countries have carried out work to conclude intergovernmental treaties on the exchange of tax information. There are no secrets regarding the beneficiaries of this or that holding company. It is just necessary to conclude agreements on their disclosure at the request of authorized regulators. But the Russian authorities do not do that.

The world business practice of creating special economic zones with offshore status has proved efficient not only in China with its in-fact offshore status for Hong Kong and in other countries with emerging markets, but in the first place in the United States (the state of Delaware), Britain (Jersey and Virgin islands, etc.) and the Netherlands. Russia’s attempts to offer a special tax regimen to investors helped boost the development of the automobile industry. The special tax regime for Technopark Skolkovo has already allowed for attracting research divisions of innovative firms.

It makes sense to move further in that direction. Technoparks should be created in all major university centers. But their work is impossible without a financial system capable of raising the necessary funds. The internal offshore status will, for instance, be very useful for implementing a program for the creation of an international financial center in Russia.

If Russian financial regulators are determined in earnest to develop an international market infrastructure, they should give thought to both technical (electronic) systems of communication and organizational and legal aspects. The participants in the trading should have a chance to not only conclude transactions at representative market prices, but also to get comprehensive post-sale maintenance. The registration of deals at the central depository where formalization will take just a few hours, high standards of the prompt consideration of disputes, and insurance against the loss of information are the essentials of how modern financial markets operate these days.

Market control should be outpacing – opportunities are to be reserved for performing transactions that are massively spread on the international scene, but are still seldom encountered in Russia. Among such operations are transactions with derivatives and hedging deals. If this market segment is not supported legally and technically on the Russian market, a large part of the market will drift to foreign platforms.

Innovations in the sphere of financial services – the market of derivatives, fixed date commodity instruments, risk hedging transactions and venture investment deals – the entire range of these instruments is tightly linked with high technologies. One type of innovation – technical – loses sense without the other – financial innovations.

Financial innovations in the sphere of derivatives on the financial and commodity markets over two pre-crisis decades created the necessary and sufficient conditions for building up investments in the countries of emerging markets. Innovations in the financial sector allowed for building up cash flows, without which it would have been impossible to build innovative modern industrial enterprises and ensure demand for their products.

The Russian economy will find it very hard to overcome the investment slump and growth slowdown, if the financial sector and the banking system in the first place as its backbone structure fail to overcome their obvious inability to reliably evaluate credit and investment risks and if they do not increase the reliability of banking institutions’ balances.

Russia’s banking system is to cope with such chronic diseases as covert intra-group lending among inter-connected enterprises, and the distorted, exaggerated presentation of equity on the bank balance sheets. This requires extra investments. The participation of foreign investors often raises hope for the introduction of certain managerial innovations. They keep a close watch on the observation of corporate governance rules and risk and complaints management. These issues are central to the development of the banking system. This sort of approach fully meets the requirements of the Bank of Russia.

The capital adequacy ratio of 10% is recognized normal by the Bank of Russia. Approximately 100 leading banks of the country fit in well with this supervision requirement. The average capital adequacy ratio (N1) in 2012 was 14.3%. The overdue debt was up somewhat to a tiny 4.2%. At the same time, international rating agencies are far more skeptical about the condition of Russia’s banking system. According to S&P, nearly all of Russia’s leading 30 banks need extra capitalization.

The Bank of Russia is looking for an opportunity to step up supervision practices in order to strengthen the banking system. As its instruments the bank has chosen the Basel II and Basel III principles. Supervisory agencies are unable to absolutely adequately assess the risks of the banking system’s credit portfolio. Consequently, registered capital buildup is selected as the main measure to make the banks stronger. Alongside this a new instrument has been used – stress test-ing of individual banks in modeling the economic situation on the basis of different scenarios. This sort of approach allows for developing risk assessment and offer clear requirements for each specific banking institution to meet.

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The Russian economy’s preparedness for the world economic growth slowdown cannot be rated on the basis of the reserves accumulated by the state. The Bank of Russia’s gold and foreign exchange reserves of 510 billion dollars, the stabilization and reserve funds of the government, equivalent to about 4% of the GDP, may be spent over less than two or three years in an unfavorable situation. A reliable mechanism of generating savings and transforming them into investments and competitive projects in the national economy is a vital need.