Maxim Oreshkin: Investors believe in the Russian economy


Maxim Oreshkin, the Minister for Economic Development, spoke at the First Conference of Vnesheconombank Regional Managers.

Transcript of the Speech:

Good morning, everyone! I will try to briefly tell you more about the current situation in our economy and where we will move.

Here, in brief, is represented the crisis that the Russian economy experienced from the end of 2014, in 2015, and early 2016. It is clear that the economy is recovering. Especially, it can be observed in terms of GDP growth. Last months showed the steady trend. Even the annual growth rates of the Russian economy – August – 2.3%. In 2017, we generally expect the growth to be slightly above 2%. The growth is seen in the tradable sectors of the economy, which, in fact, had not so many problems during the crisis. It was due to the significant change in the exchange rates within the Russian economy. It is very important that also the non-tradable sectors, which failed mostly during the period from 2015 to 2016, are also recovering.

It is important that the investment activity, which was seriously reduced at the end of 2014 and in 2015, came out from the middle of the last year to the positive trend. It is the recovery. It is also very important that the investment growth should become stronger and the number of projects to be implemented in the Russian economy should become higher in order to move forward. According to our estimates, we need to attract nearly 5 trillion rubles per year as additional investments in comparison with the level of 2016 for reaching the growth rates above the world average.

The recovery, which is happening right now, occurs within a very favorable external background. Here, it is necessary to continue the following of accuracy. That is why all macroeconomic policies are built in the way to be ready for external shocks. There is also the inflation targeting policy of the Bank of Russia with a floating exchange rate, as well as new budget, which is submitted to the Government and will be submitted to the State Duma later in this month, is designed to be ready for the reduction of oil prices up to $ 40 per barrel or even lower. And the third element is the mechanism of foreign currency purchases, which was developed and implemented by the Ministry of Finance in February. The mechanism, which reduces the influence of volatility in oil prices on the domestic economy.

Our forecasts, which we have today, take into account a certain deterioration of the situation in the global markets, because if you look at different risk indicators, there you can see that the risk appetite is at its maximum within the global economy and global financial markets. The reduction in the balance of the Federal Reserve System begins. There is a gradual increase in the interest rates, so the risks of volatility within the global markets, of course, are increased too.

It is important to mention that, despite the sharp decline in oil prices within the past three years, the balance of payments in general is in a stable state and the capital is actively inflowing into the Russian market. For example, this year we have already seen several periods of fairly active inflow into the public sector, into the market of federal loan bonds. It all proves that the foreign investor believes in the Russian economy and its macroeconomic dynamics, so there is no need to expect any serious fluctuations within the following years. As for the macroeconomic policy, everything said, of course, forms the environment for stable dynamics and balance of payments, as well as stable dynamics in the foreign exchange market.

One of the big events, which are very important for the Russian economy within the following years, is, of course, the reduction of inflation below the level of 4%. In early 2015, not so many people believed, when the Central Bank announced that the inflation would be reduced from above 15% to 4% in 2017. In fact, those, who then believed in the story, earned enough money in the financial market by investing in the public and private debt instruments. Nowadays, we see the decrease in the dynamics of inflation. Currently, the inflation is 3.1%. We expect that the inflation will be 3.2% by the end of the year and then gradually return to the level of 4% - the target level of the Central Bank. Such change in the inflation dynamics is extremely important for the Russian economy and the investment process in the whole. Why? Firstly, as the inflation falls to the levels, where it has never been in the Russian Federation, and it opens the way for the lower level of interest rates. The week before the last, the Central Bank reacted by the subsequent decrease in the interest rate by 50 basis points.

More important thing is that the long-term inflation expectations of economic agents are becoming gradually stabilized. And it leads to the greater demand on behalf of economic agents in relation to the implementation of new long-term investment projects and the greater demand for the long-term lending and project lending from the financial system. It can be seen due to the dynamics of the key indicators of the banking system. It is clear how new long-term credit cycle is starting to form. We see the active growth in the mortgage lending. Here, the levels reached the maximum monthly level for the entire history. The interest rates are declining actively enough. Even the actual rate is already fallen below the level of 11%. And in the past month, the key banks announced that the rate would fall below the level of 10%.

It is very important to mention the level of debt burden as the percentage of GDP in the Russian economy is still low. In the past 2 years, there was the significant reduction in the burden on households and companies. And what is very important, today, the governance cluster remains extremely low. All of these form the strong basis for the following years in relation to the increase in the debt burden of the Russian economy. I always draw a parallel. It reminds me the situation in the American economy of the early 1980s, when the inflation, which was close to 20% in the USA (1980-1981), fell below the level of 4%. It led to the long-term credit cycle that lasted 25 years and largely formed the image of the US economy – the one, which we see today. Therefore, the Russian Federation has similar basic conditions. It is important to know how much we can use them, how much such credit cycle will take the form of the investment cycle and the cycle of implementing new projects.

One of the main tasks of the economic policy is to form a new credit cycle, which will support the global investment cycle. It is the reason why the programs, being currently implemented, including together with Vnesheconombank, are designed. For example, the project related to the Project Finance Factory. It is the task to create the platform from Vnesheconombank that will allow the greater amount of private resources to be used for financing the long-term investment projects, resources of the banking system and non-state pension funds, and other institutions that invest money. It is also the project on the infrastructure mortgage, which will support the inflow of private capital, including the inflow of debt capital into the development of the Russian infrastructure, and a number of other projects.

One of the serious limitations for the economic growth in the following years is the situation on the labor market, so one of the key responses to the limitations, which take place in keeping with the labor force, is the active investment process that will increase the production activity. We think not only about the investment process. We have a separate priority project, being recently approved by the Government, that is called the "Labor Productivity." And it is associated with the introduction of new management technologies in various sectors of the Russian economy. We start with the manufacturing in order to increase the labor productivity in all possible directions. Here, we are also very actively cooperating with Vnesheconombank within the framework of the labor productivity project: Vnesheconombank is responsible for the very important cluster related to the preparation and the implementation of the project for the creation of the Federal Competence Center, which will be established on the basis of Vnesheconombank.

It is briefly. We all have a lot of work to do, and I hope that with your help the credit cycle will have the investment nature and will allow the Russian economy to be developed.