08 June 2021

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department

Marcel Salikhov, Director of the Center for Economic Expertise of the Higher School of Economics, in an interview with Finversia.ru, spoke about the causes of inflation, unemployment, and also made a forecast about economic growth and sanctions against Russia.

- Marseille, how do you assess the overall state of the Russian economy? How long has the economy managed to recover? What criteria can be used to judge this?

- Almost all indicators of economic statistics, with the exception of inflation, are quite optimistic. This applies to both official Rosstat data and alternative data. For example, according to Rosstat, currently the volume of retail trade in physical terms is already 5-6% higher than the level of 2019. The unemployment rate, which peaked at 6.4% in August last year, fell to 5.2% in April. It is clear that oil production has begun to recover against the backdrop of the weakening of production restrictions under OPEC + and so on.

Based on our nowcast model (an estimate based on current operational indicators) of GDP, we assume that the Russian economy will grow by 4.6% y / y in the second quarter. Of course, the low base of the last year is of great importance here. However, excluding the seasonal quarter, we expect economic growth to accelerate in the second quarter of 2021. By the end of this year, GDP growth can be expected by 3.0-3.5% after falling by 3% last year. Thus, by 2022, the Russian economy should compensate for the "pandemic" losses and return to the 2019 level.

- Which industry can now be called a locomotive for recovery? Which one will follow - as a driver?

- The locomotives of the recovery are the commodity sectors, which are receiving significant gains due to the wide increase in world prices for raw materials, as well as a number of industries that are focused on domestic demand and have been accelerated in the context of the pandemic - food production, pharmaceuticals, e-commerce.

- How satisfactory is the situation with the recovery of real incomes? What will be their dynamics this year?

- The decline in real incomes of the population has continued since 2014. According to Rosstat, in 2020, real disposable money income of the population decreased by 3%. In the first quarter of 2021, the fall in real incomes continued due to accelerated inflation. This year, we can expect positive dynamics of real incomes against the background of economic recovery, but, according to our forecasts, it will not exceed 1-2%.

- What will the government do in connection with the fact that the Central Bank made a reversal of the monetary policy?

- Formally, the government should not do anything in connection with the U-turn in the policy of the monetary policy. Accelerating economic growth amid high inflation is a classic indicator for the transition to raising interest rates, which is what the Central Bank is doing at present. The government may loosen its budgetary policy to compensate for tightening monetary policy, but this is not currently planned.

To some extent, various budget-subsidized lending mechanisms (for example, the very widely discussed preferential mortgage) reduce the efficiency of the money transmission mechanism, that is, the effect of how much a change in the key rate affects interest rates in the economy. But while the introduction of new large-scale instruments is not expected. At the suggestion of the president, the preferential mortgage will be extended, but in general, its parameters are being tightened.

- Where will the government direct the increased oil revenues? And why is the ruble not strengthening with expensive oil?

- In Russia, there is a budget rule according to which oil and gas revenues from a price that exceeds the base price (~ $ 43.4 per barrel this year) go to the NWF. As part of this rule, the Ministry of Finance buys currency on the market when the current price exceeds the base price, as is the case now. In fact, the fiscal rule causes the Russian economy to "sort of" function at a price of $ 43 per barrel. Therefore, the increase in oil prices does not affect the exchange rate too much, as it happened this year.

- How will this affect inflation? How do you assess the rise in prices by the end of the year? And to what level can the Central Bank raise the rate?

- The global rise in commodity prices, a fairly rapid recovery in consumer demand and a soft monetary policy have become the main drivers of inflation acceleration since the end of last year, which led to the Central Bank starting to raise the key rate. So far, inflationary pressures remain quite high, but they are likely to subside in the second half of the year. We believe that by the end of 2021 inflation will be 5%, and the key rate will be 5.5%. This is the neutral level of the key rate according to the Central Bank's estimates.

- Until recently, many Russian analysts predicted the rate in the region of 70 rubles and even lower. However, now we are told that the rate will be, at best, below 72-75. How do you think the course will behave?

- A scenario in which the dollar rate may drop to 70 or even lower this year is quite possible. High oil prices still provide long-term support for the ruble. It is possible that in the coming months oil prices will increase further from current levels. The increase in the key rate also contributes to the strengthening of the ruble, as it increases the relative attractiveness of ruble assets for investors.

- What are the main risks for the ruble exchange rate in the coming months?

- It seems to me that the main risks for the ruble are sanctions risks. In mid-April, the United States imposed sanctions on Russian government debt, banning US companies from buying OFZs on the primary market. This did not affect the ruble exchange rate much, as this decision was long expected. Currently, market participants do not expect any new serious sanctions against Russia. However, if for some reason this happens, then a change in expectations may lead to a strong fall in the ruble exchange rate.

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