«Until we see deviations from forecasts»: the Deputy Minister of Finance Kolychev about the growth of the Russian economy and oil prices

«Until we see deviations from forecasts»: the Deputy Minister of Finance Kolychev about the growth of the Russian economy and the price of neftaraka link
On 13 September 2019, 23:12

Vladimir Agoev
In 2019, Russia’s GDP will grow by only 1.3%, as the economy adapts to government stimulus measures. However, in the long run the authorities expect to reach a growth rate above the world average. This in an exclusive interview with RT in Moscow on the sidelines of the financial forum, told the Deputy Finance Minister Vladimir Kolychev. According to him, in the next few years, the world oil prices are significantly reduced. The economy will not experience effects even in the case of a drop in prices to $30 per barrel.

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  • © David Mdzinarishvili

— Mr President, because of the trade wars global economy increasingly slowed down, and many experts predict the onset of global recession. In these circumstances, the Ministry of Finance estimates the growth of the Russian economy in 2019? How serious global slowdown could affect the economy of our country?

— Indeed, are witnessing the slowdown in the global economy in its scope until compared to what we have seen in recent times in 2008-2009. The process occurs in almost all regions of the world. We are talking about the largest economies, such as USA, Europe, China, and developing countries too.

What we see in Russia? We have since last year, the GDP growth rate also slowed down. 2018 we have finished with growth of 2.3%, is now in the first half increased 0.7%, and by the end of the year we expect that we will reach 1.3%. But the delays really are a little different. They are connected not so much with the world economy, as with the internal factors.

— What is the main internal factor of the slowdown of the Russian economy?

— Note that we expect this slowdown in the last year. It is due to the fact that the economy adjusts to those short-term measures of fiscal and tax policies, which were adopted in six-year economic program.

We expect that GDP growth in 2019 will be weaker, but was it consciously in the government. This is done to ensure that in subsequent years to increase the growth rate to the world average, and higher in accordance with the decree of the President. Until we see deviations from the planned forecasts.

— Do external factors will not affect the government’s plans for GDP growth?

In principle, the Russian economy is now more sustainable, from the point of view of the global environment. Will give a few examples. Over the past year and a half in global markets, there were two price shock in the oil industry. Last fall, the oil price in a certain period fell by 40%, and in the spring of this year by 20%.

  • Vladimir Kolychev about the economic resilience to external shocks

Late quotations recovered, nevertheless, before such large shocks, our economy has usually experienced a very painful. They were accompanied by a depreciation of the currency, acceleration of inflation and recession. This time we had nothing to watch. Currency and financial markets remained stable, inflation declined and economic growth was preserved.

In addition, we had two rounds of pretty serious anti-Russian sanctions, which we also survived without any critical consequences. In the future, from the point of view of the influence of commodity markets and the global economy, the Russian economy will be less to pay attention to it.

— What is the reason?

Firstly, due to the fact that macroeconomic policy, which has been built over recent years, in automatic mode allows the economy without prejudice to adapt to such shocks. We have reserves that can be used to support the economy and the currency to get rid of oil prices. All this provides stability.

Secondly, over the last few years has significantly strengthened our competitiveness in the world market. Now I’m talking not about the oil and gas sector. Increased price competitiveness of our companies. Therefore, our economy will be less available to respond to slowing external demand. The first thing to suffer those who have a competitiveness below.

— What about the companies not the oil and gas industries is it?

Is our traditional industries, where Russia is strong on exports: metallurgy, chemical industry. In these areas in terms of competitiveness we are better than everyone.

Industry analysts often look at the so-called curve of costs (costs associated with production. — RT). To the left of this curve are the low costs and the right side is the highest. When on the world market, falling demand for products, primarily affects the company with the highest costs. Most of our companies in the traditional sectors of exports — to the left of this curve. That is, in the case of a global shock, Russian companies will be the last who will feel the negative effect.

— You mentioned that oil prices are less affected by the dynamics of the ruble. This is largely due to the implementation of fiscal rules. Given that even in the face of fluctuations of the energy market oil prices for more than two years remain above $50 per barrel, the Ministry of Finance considers whether it is possible to increase a price cut in the budgetary rule?

— First, the fiscal rule was made in order to decouple our economy from oil prices. Before we received more oil revenues, and we used them through the costs, stronger currency, we started to buy more imported goods. This situation spurred the well-being including our citizens.

But this growth was, in fact, an illusion: as soon as oil revenues fell, immediately evaporated and welfare.

Therefore, the budget rule now captures the level of natural resource rents (marginal revenue. — RT), which is used in the economy. This natural rent is fixed for the long period of time. We’re not talking about the current or following year, and on the horizon the next generation. In this respect, to change the cost cutoff would mean to abandon the entire structure to reduce the economy from the oil prices. It seems to us that in no case do not need to go if we want to preserve the stability of the economy to changes in external conditions.

— As the Finance Ministry estimate the current situation in the oil market? Do you expect reduction of prices on raw materials?

— Even if not to speak about any long-term horizons, and look for the next two years to five years, we will see a huge amount of untapped proposals in different countries. We are talking about States of the agreement on OPEC+, and bound with the geopolitics of the supply reduction that occurred in Venezuela, in Iran due to sanctions.

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Now the amount of underutilized production is about 5-6 million barrels per day. To set the context of this figure is approximately 5-6 years of normal global growth in oil demand. Today, the demand for raw materials is growing at about 1-1. 2 million barrels per day. That is now formed a huge overhang of underutilized production capacities.

Oil production outside of these countries is growing at about 1.5—2 million barrels per day. That is, the increase in production today is already ahead of demand. And this creates the fundamental preconditions for reduction of prices on oil. That is, it is only a matter of time when the price will drop. In the end, still the fundamental causes will take its course.

Yes, now in the framework of the agreement OPEC+ we achieve the stabilization of prices at a certain level, but ultimately the price ratio should be aligned to balance the market. It may take some time, and it would be reckless to hope that the prices will continue high. In fact, the fundamental picture says quite the opposite. Rather, we should be more prepared to lower prices.

— What the equilibrium level can drop prices? What should I prepare?

— The equilibrium prices are about on the same level or a little higher price cut in the budget rule. In 2017, the figure was $40 per barrel in real terms, but in connection with world inflation at 2% value is indexed annually.

If short-term rates to fall below? Of course I can. They always fluctuate around the equilibrium level, and in a stressful situation they probably will fall below. But for this development we are ready.

  • Vladimir Kolychev about the possible fall in oil prices

Over the past few years, we have accumulated a reserve of liquid assets more than 7% of GDP. This means that in 3-5 years the country may, without consequences for the economy to live with oil prices and $30 per barrel. If the oil shock will be short-term, and deeper fall in oil prices we will survive without any significant negative effects.

— In addition to shocks to the commodity market, you also noted the financial stability of the economy. In early August, the International Agency Fitch increased the credit rating of Russia. What, in your opinion, does this change the evaluation?

Due to the fact that over the last few years was, in fact, zero-reformed design of macroeconomic policy. She is now in automatic mode and guarantees the stability of the economy to external conditions both financial and commodity markets. It is, in fact, a reflection of the work that has been done.

Now we face the challenge of a very different order — to accelerate economic growth without sacrificing what we have already achieved. In other words, you need to have on the existing base to raise the growth rate of the economy to the global average of 3-3,5% per year.

The peculiarity of rating agencies is that they assess the risks and needs skeptical to treat everything. As in 2014, all with doubt about the fact that Russia can be a stable inflation of 4% and a balanced budget with oil at $40 a barrel, and now everyone is skeptical about the fact that Russia can grow at a rate of 3-3. 5%. However, as the facts will prove otherwise, this will push the ratings even higher.

— Like upgrade now may affect the investment climate in Russia?

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— Well, we see at first are quite serious interest from foreign portfolio investors — those who invest in our securities. This includes the government bonds, and debt securities of large companies, and, of course, promotions. Since the beginning of year the Russian stock market showed the best growth among all developing countries. That is, the inflow of portfolio investments is already underway.

If to speak about influence ratings, then the situation can be compared with the question of chicken and egg. Usually the conservative approach of rating agencies they follow the market, not Vice versa. That is the markets first prompt, but then the rating agencies, realizing that improvement has already happened, reflect them in the ratings. I think now is about the same situation occurs.

— What, in your opinion, the Russian currency may react to the rating upgrade and investment inflow?

The ruble is now in free swimming. That is, neither the Central Bank nor the government interfere in the pricing in the currency market. Here much depends on the attitudes of global and domestic investors, and from developments in relations between major countries. Now the ruble with fewer fluctuations, but will still follow in line with these sentiments.

It is important to note that commodity markets do not affect our currency. Now we have the opportunity to discuss the agenda of development and breakthrough, and not worry about how our economy will react to the drop in oil prices on 20, 30 or 40%. Even in this case, as shown by the example of last year, we will deal with the development agenda, not to respond to any crisis centers because they simply will not.

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