B&E: Stubbornly high inflation has always been a key concern of Russian households. How this will impact the economy going forward?
David Gray (DG): I do not see inflation increasing significantly. The government has a clear, and valid, belief that there are very large efficiency gains that can be realized in many sectors of the economy and that these should have a deflationary impact as costs can be cut. In part, this is about introducing greater competition, but it also reflects the relatively low level of productivity in many sectors and the impact of corruption and an over large state, both factors that are on the agenda to be tackled.
Russia’s reliance on commodities exports to pay for lavish spending has led to an excessively high and unsustainable break-even oil price, the level needed to balance the budget. In fact, it may need oil prices to average as much as $200 a barrel by 2018, compared with just over $100 this year, a seemingly impossible task. What’s the alternative way out for Russia?
DG: Some of the numbers being discussed may be slightly overstated and some of the mooted expenditures that support such ranges of expected “break-even” oil, may either be delayed or simply dropped. Nevertheless the economy is overly dependent on natural resources and the budgetary surpluses of the recent past are unlikely to return. The alternative way out is for the country to be successful in its policy of modernization and diversification – this is a huge topic that covers everything from privatization of state owned businesses, reforms in education, developments in the rule of law and open government, innovation strategy and a cultural reawakening of entrepreneurial activity. I believe that significant progress can be made, but it will also require massive political will, luck (sustained Chinese growth will help!) and hard work.
Don’t you think Russia needs to do away from its overdependence on the ‘Black Gold’ if it really wants to become a viable player on the global arena?
DG: Russia is not just dependent on Black Gold – it has huge proven reserves of virtually every valuable mineral. The resource curse can distort an economy, but can also be a tremendous advantage – the question is are you Norway or Nigeria? I believe that the growth of Asian economies, which is a virtual “given” in most medium term outlooks, cannot proceed without significant additional raw materials volumes coming on stream and that Russia is excellently positioned to meet a good share of those needs. This natural wealth can provide the country with a fantastic advantage for economic growth if used wisely.
