Russian Economy General News: #13

Sometimes hearing what this red haired idiot is pushing out of his sausage fingers makes me wonder if he is not a Russkie asset

Where are the limits of Russian economic growth?, by Dmitry Skvortsov, economic observer, for VZGLYAD. 02.03.2025.

With the current interest rate, there can be no talk of any investment in expanding production. The potential for rapid expansion of production has been largely exhausted by 2023–2024, and the previous growth rates can no longer be achieved with simple measures. But measures are not always simple.

The results of 2024 have not yet been summed up, and the official Rosstat figures on the growth of the Russian economy have not yet been published. But the IMF has already increased its estimate of Russian GDP growth (at purchasing power parity) from 3.6% to 3.8%. The estimate of the Russian Ministry of Economic Development is slightly higher - 3.9%. But for 2025, IMF experts predict a noticeable decline in economic growth (to 1.6%).

On the one hand, there is nothing new in this approach. In January last year, the IMF predicted that Russia's GDP would grow by 0.3% in 2024. In April, the forecast was raised to 0.7%, in July - to 1.5%, and in October - to 2.2%. And the result could be around 4%.

The IMF also increased its forecast for 2025, but the predicted growth rates of the Russian economy should still be significantly lower than in the past year – only 1.6%. The Central Bank of the Russian Federation agrees with the IMF experts and predicts Russia's GDP growth within 0.5-1.5% in 2025 and 1.0-2.0% in 2026. And these forecasts were made public even before Trump's latest threats to collapse oil prices, which provide a significant portion of the Russian budget's revenues (threats to which the oil market has barely reacted).

As for macroeconomic forecasts, the Central Bank was very conservative in its assessments last year as well. But this time, other experts agree with it. For example, in the October consensus forecast of the Price Index Center, GDP growth in 2025 is expected to be at the same level as in the Central Bank forecast.

Before the New Year holidays , the Minister of Economic Development Maxim Reshetnikov assessed the prospects for 2025 as follows: "As for expectations for next year, the main challenge is the policy of cooling the economy... from January-February we will begin to feel its consequences more clearly." This policy was promoted by the Central Bank as the only possible way to combat inflation. And in order to implement this policy, the Central Bank of the Russian Federation raised the rate to 21%.

Many industrialists rightly point out that with such an interest rate, there can be no talk of any investments in production expansion. In fairness, it should be noted that high inflation also does not promote investments in production (with a long payback period). One thing can be unconditionally agreed with: in 2023-2024, the potential for rapid production expansion was largely exhausted, and now the previous growth rates can no longer be ensured by simple measures.

Sources of economic growth

The growth of the Russian economy in 2023-2024 was caused primarily by the growth of state expenditures in the defense industry and investments in infrastructure. This includes expenditures on the restoration of liberated areas of new Russian regions, and state co-financing of the creation of new production facilities (both related to the production of weapons and key production facilities in the import substitution program). For this purpose, a mechanism of preferential industrial mortgages was even invented, allowing companies to stretch out the costs of the "zero cycle" for the construction of workshops and infrastructure, so that a significant part of them falls on the period when production has already been launched and begins to generate profit.

Nevertheless, the main increase in industrial output was achieved due to a more complete utilization of existing capacities. Over the past three years, these reserves have already been largely exhausted, and now the only source of growth in the physical volumes of industrial output can be the introduction of new production capacities or a significant increase in labor productivity at existing production facilities. This is impossible without their technical re-equipment (which also requires investments).

Technical re-equipment is becoming an urgent imperative not only for defense industry enterprises and the most important industries that ensure technological sovereignty. The growing labor shortage is affecting transport and public utilities enterprises, the agro-industrial complex and the service sector. And companies have only two possible responses to this challenge: either raising wages in an effort to win the competition for personnel, or technical re-equipment, which, again, requires investments.

The question is where they will come from. It is clear that there is no reason to count on a serious influx of foreign investment. If they come from friendly countries, then only in a limited circle of enterprises/industries, about which the corresponding intergovernmental agreements will be reached. Domestic investment at the current Central Bank rate is possible only at the expense of one's own profit. At the same time, if there is a choice, then export-import operations or currency speculation provide greater profitability (and in a short time) than investment in the real sector. The third source of investment - money emission - is not even discussed yet: from the point of view of most economists, this will only accelerate inflation, which cannot be overcome anyway.

Fighting inflation is worse than the disease

Is the overheating of the Russian economy (as the Central Bank claims) the root cause of inflation, or is it of a different nature? This question is the subject of heated debate.

Representatives of the industry using imported components (whether from China or obtained through third countries via parallel imports) rightly claim that the primary reason for the growth of their costs is the growth of the dollar exchange rate. Therefore, they say, inflation in our country is mostly cost inflation. And high rates only increase the costs of export-import operations, i.e. contribute to the growth of inflation.

However, some overheating of the labor market still exists. The shortage of personnel leads to wage competition, as a result of which companies that have no restrictions on wage costs lure workers from industries where flexible formation of the wage fund is impossible (for example, in many government agencies, Russian Post, etc.). As a result, even those companies that have no reserve for profitability are forced to raise wages. And for them, the increase in costs leads to an increase in prices.

A high rate somewhat reduces the volume of loans to the population, i.e., in theory, it should reduce demand. But against the backdrop of rising salaries, this does not actually happen. That is, high rates primarily hit those who are unable to make large purchases without a loan, without leading to a macroeconomic result.

Secondly, high rates hit the budget, which, within the framework of preferential lending programs, compensates enterprises for part of the interest rate on bank loans (and citizens for part of the interest rate on preferential mortgages). As a result, it turns out that with the money that the budget spends on preferential mortgages when buying an apartment for one family, it would be possible to buy three apartments for three families. But in the current scheme, this money goes to the bank. The story is similar with preferential loans to enterprises.

In these conditions, the government is forced to change the forms of industrial support. As the Minister of Economic Development Maxim Reshetnikov said about plans for 2025, "for investment loans, we will switch to a mode of not directly subsidizing the interest rate, but providing a capital grant depending on the volume of investment. That is, a businessman will have a choice between his own and borrowed funds for the part of the project that is not covered by the subsidy. If you want, take out a loan, if you want, take it out of your pocket."

But what if the investment project is important for the country, the entrepreneur does not have enough money “in his pocket”, and the interest rate on the loan does not allow for attracting investments on a repayable basis?

Banks are useless for industrial development

Simply lowering the key rate will not help in this situation. The current Russian banking system was created in the post-Soviet years in the image and likeness of the American one. That is, the cornerstone was to obtain maximum profit in the shortest possible time through financial transactions. Therefore, the main sources of income for our banks are lending to the population, currency speculation (pardon me, currency exchange transactions...) and lending for trade and procurement activities (including export-import transactions).

Another important source of income for Western banks is participation in IPOs and managing the money of depositors/investors on the stock market. For Russian banks, this is not a very important source of income, since before the introduction of sanctions, Russian companies preferred to conduct IPOs on Western platforms (and mainly with the participation of Western banks), and the capital of domestic investors (no matter - private or corporate), trusted to Russian banks, was not of such a size that it would be possible to receive a noticeable income in the overall balance from their servicing. And the equity capital of most Russian banks is not of such a size that they can play on the stock market, as they say, "with their own" (a bank cannot invest a significant share of its funds in one project).

Lending to industry by Russian banks was mostly limited to issuing loans to replenish working capital (and servicing the payment of salaries to workers, until “salary slavery” was abolished, that is, until the employer’s ability to determine which bank he would transfer the employee’s salary to was eliminated). Russian banks stopped issuing investment loans back in the 1990s (when the interest rate was high and investment projects specifically in industry were few and far between).

It should be taken into account that in the West, the bulk of investments in production projects come from the stock market: at early stages from venture investors, at mature stages – from IPOs. In our country, these mechanisms have not yet fully started working.

And in the US, it was the stock market that accumulated the majority of the dollar emission, which was directed through banks into the economy and supported economic growth.

In our country, if we direct emission money into the existing banking system, the banks will first of all spin the money in currency transactions (and it is not a fact that the ruble will not fall again because of this), then they will start distributing loans to the population. Well, they will issue loans to those enterprises that can provide "tasty collateral". So that if something happens, these enterprises can be bankrupted and the collateral sold. Most domestic banks simply do not have experience working with project financing, when money is allocated for the implementation of a project that should bring profit in the long term.

Russia needs development institutions

Russia needs new structures that could serve as conductors of investment in industrial projects (we will talk about the sources of these investments a little later).

Their function should be to allocate long-term loans for new investment projects. Naturally, at a rate that allows these projects to be implemented - that is, approximately 2-6%.

First of all, these could be state leasing companies that, for example, would help airlines buy aircraft produced in Russia, the United Aircraft Corporation would buy the machines needed to expand aircraft production, and so on down the chain. Moreover, equipment leasing should be available not only to large companies with state participation, but also to medium-sized enterprises. Those that have real import substitution projects or participate in the supply of components to large companies increasing production (it does not matter whether under state defense orders or within the framework of national projects).

Increasing production for domestic demand will sharply improve the country's balance of payments (which is already positive, by the way) and increase the volume of the domestic market (since not only the finished product will be purchased, but the entire chain of payments for semi-finished products and components will be serviced). That is, all the added value will remain in Russia, and not just the profitability rate of the importer and retailer.

This means that additional ruble emission will not harm the Russian economy. Therefore, state leasing companies can be financed through targeted emission (or, in extreme cases, through the National Welfare Fund - after all, the leasing company provides enterprises with funds on a repayable basis).

And there should be an opportunity to allocate money for a large project of integrated development of the territory, where enterprises will be created that process raw materials along the entire technological chain to the release of the final product. Now such structures simply do not exist, and it is not worth expecting that several commercial companies will be able not only to agree within the framework of an existing large project, but to create such a project. In fact, today we do not need Gosplan 2.0, since there is no task of transferring the entire economy to planned rails, but a State Corporation for Integrated Development, capable of creating long-term plans and attracting large and medium-sized Russian companies to their implementation.

https://m.vz.ru/opinions/2025/2/3/1311977.html