Russia: Experiences and Challenges

Abstract

I am going to talk about where the Russian economy is going and where it is coming from. I would like to dispell first of all two widespread myths: that the Russian economy is skewed by the high oil prices and that there is a lack of structural changes. Let us look first at the results of the central bank for this year. The increase in reserves expected this year is roughly equal to the revenue margin between normal oil prices and the high oil and gas prices that we now have in the international markets. It means that all the additional receipts from the high oil and gas prices are just accumulated in the central bank reserves and are not used to boost consumption or investment through imports. At the same time, owing to a very substantial trade balance, the central bank is in a position to increase the money supply, which is accepted by the industrial sector, and as a result of this increase, consumption, investment, and industrial production are growing, although the velocity of money in circulation, of course, is declining. This increase in money supply is the major vehicle of growth, but without a very prudent and very tight budget policy, it is difficult to use it. The overall budget surplus for the first nine months of this year for the enlarged government (equal to federal and local budgets and state pension funds) is close to 6 percent of GDP. The real source of growth, therefore, is a prudent, tight budget policy.