From adaptation to maintenance therapy – Experts model the conditions for the return of GDP to sustainable growth

The HSE report “The Russian Economy Under Sanctions: From Adaptation to Sustainable Growth” describes the factors that allowed the Russian economy to adapt to the restrictions imposed, as well as a set of somewhat mutually exclusive conditions that can return it to sustainable growth. Many proposals of researchers from the HSE in various modifications have already been repeatedly voiced over the past 20 years, but have not been implemented under more favorable conditions.

The report, edited by Natalia Akindinova, director of the HSE Development Center Institute, concludes that in 2022 the Russian economy has adapted to the sanctions. The variety of adaptation factors cited shows that the HSE has apparently not yet decided which of them turned out to be the key one.

They named both the strength of market institutions, the competence of entrepreneurs, and the efficiency of government agencies, as well as the record growth in the value of exports against the backdrop of a jump in prices, which, with a decrease in imports, led to an expansion of the current account and a strengthening of the ruble.

But in 2023, the situation has changed, the authors state, “the global situation is deteriorating, the negative impact of sanctions restrictions in the form of a price ceiling for oil and oil products is increasing.” In addition, in April, the EU intends to introduce a new package of sanctions, primarily aimed at tightening control over already introduced restrictions.

As a result, exports are declining, imports are growing, the ruble is weakening, and budget revenues are declining. “Further expansion of budgetary programs to stimulate the economy can create excessive risks for macroeconomic stability. The completion of adaptation will depend on the adjustment of the economy, and especially the budgetary system, to a lower level of export earnings,” the HSE warns.

At the same time, they note that an artificial reduction in imports will slow down the building of new value chains and, negatively affecting the consumption of the population, can become a “significant factor in social tension.”

The only correct way, according to experts, is to encourage business initiatives instead of increasing the fiscal burden, developing alternative export routes, and expanding the practice of parallel imports.

However, according to the HSE, the opportunities for transition to growth in the medium term are associated with the development of products focused on the domestic market: the industry now has enough market competitive advantages, including price ones. The conditions for such growth are the preservation of the size of the middle class and an increase in its income, the growth of investments based on domestic savings, the restoration of the corporate bond market, and the creation of forms of long-term financing based on bank loans.

The HSE admits that the adaptation to the sanctions was largely achieved through not only rational regulatory measures, but also “activation of the state as an investor, buyer, and producer of goods and services.” Economists believe that the role of the state will remain key, warning, however, against a return to a planned economy or to a mobilization economy of the mid-20th century.

The state is invited to generate and quickly master innovations “along the front of economic activity” – it needs room for initiative, diversity, and experimentation to improve technologies and institutions, as opposed to further limiting the independence of recipients of state funds and reducing the boundaries of budgetary federalism. Proposing a transition “from intensive care to supportive care,” the HSE notes “an obvious contradiction between the current interests of adaptation and the prospective interests of development.” The authors of the work emphasize that this also applies to the education system, which makes a decisive contribution to the formation of human capital as the most essential prerequisite for sustainable economic growth.

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