This document discusses macroeconomic preconditions for a new model of economic growth in Russia. It argues that Russia needs stable macroeconomic policies, especially in the areas of fiscal and monetary policy. For fiscal policy, it proposes a "New Budget Rule" based on long-term average oil prices to determine sustainable budget levels. It also advocates for monetary policy focused on low, stable inflation through inflation targeting. Overall, the document examines how macroeconomic stability can help Russia transition to a more diversified, productive economy and ensure continued development.
The paper first considers why central European countries wish to join EMU soon. The main reasons are the risk of macroeconomic instability they face outside the euro zone if they wish to grow quickly. At the same time, Central Europe is highly integrated as regards trade with EMU, so it is little exposed to asymmetric shocks that would require a realignment of exchange rates. Finally, it is argued that there is no cost in terms of slower growth from EMU accession, so that there is no trade-off, as has been claimed, between nominal convergence to EMU and real convergence to EU average GDP levels. Second, the paper assesses whether Central European accession to EMU would be disadvantageous to current members. It concludes that accession cannot increase inflationary pressure on existing EMU members, as has been claimed, but that slow growing members of EMU might suffer increased unemployment, unless they increase the flexibility of their labour markets. Incumbent members may also be unwilling to share power with Central Europeans in EMU institutions.
Authored by: Jacek Rostowski
Published in 2003
Macroeconomic Developments Report, December 2017Latvijas Banka
The document provides an overview of macroeconomic developments in December 2017, including:
- External demand continued to grow, supported by robust global demand and growth among Latvia's main trade partners, though UK demand weakened due to Brexit uncertainties.
- The ECB maintained interest rates and asset purchase programs as inflation remained below target. Financial conditions remained accommodative globally.
- Latvia saw strong economic growth in 2017, driven by external demand, private consumption, and recovering investment inflows. Wage growth outpaced productivity, however, weakening competitiveness.
Macroeconomic Developments Report. December 2014Latvijas Banka
The document summarizes macroeconomic developments in December 2014. It reports that growth was weak in many of Latvia's major trade partners in late 2014. The IMF lowered GDP growth projections for the Eurozone, Germany, Sweden, Estonia and Lithuania for 2014 and 2015. Latvia's exports to Russia declined in the first nine months of 2014, though exports to other countries increased. The ECB lowered interest rates and implemented new bond purchase programs to stimulate lending and the Eurozone economy. Latvian lending continued a slow downward trend in late 2014 despite ECB actions. Inflation in Latvia remained low at 0.5% in October 2014.
he paper examines theoretical literature, recent EMU accession examples, and current CEECs performance in search of the optimal currency regime for meeting the Maastricht criteria. Currency board arrangements seems to provide the fastest convergence. For other regimes, the markets may have theoretical and historical reasons to believe in the government's temptation to devalue on the ERM-2 entry. The government should announce the final date, and, possibly indicate the final exchange rate for the regime switch to avoid excessive currency and yield volatility. It should also underscore the central bank’s and EU authorities importance (even if non-existent) in the parity setting process to avoid excessive domestic debt inflation premium ahead of the accession. Recent experience shows that it will be easy to get rid of the remaining influence of cross rates on CEECs exchange rates.
Authored by: Mateusz Szczurek
Published in 2003
A risk report I produced on Russia for my International Banking and Finance unit, highlighting key sovereign and foreign exchange risks facing the country. Obtained the highest grade of all students for the assignment.
Vladimir N. Kniaginin, Director, Foundation Center for Strategic Research «North-West»
Economic Policy Dialogue among think tanks of emerging economies
"Macroeconomic Developments Report", January 2014Latvijas Banka
The document provides an overview of macroeconomic developments in Latvia and its major trade partners. Some key points:
- The IMF revised downwards GDP growth forecasts for many countries, particularly Russia, Estonia, and Finland. However, forecasts for the Eurozone were unchanged.
- In Q3 2013, exports and imports of Latvian goods contracted year-over-year due to weakening external demand and a strong base effect from previous years. Nevertheless, Latvia continued to expand its export market shares.
- In response to low inflation, the ECB and Latvijas Banka both unexpectedly lowered interest rates in November. Credit growth remained subdued as banks retained excess liquidity.
The document summarizes recent economic developments in Russia. It notes that while external factors like rising oil prices and capital inflows have provided some relief, domestic vulnerabilities remain. The economy contracted sharply in 2009 but the rate of contraction slowed in the third quarter. Expansionary fiscal and monetary policies are mitigating the downturn but risks remain from growing deficits, weak corporate balance sheets, unemployment, and an still recovering banking sector. Growth is forecast to recover to 4.3% in 2010 but the medium term outlook is muted without reforms to address financial imbalances and boost productivity and competition. Domestic demand from households and businesses remains weak.
The paper first considers why central European countries wish to join EMU soon. The main reasons are the risk of macroeconomic instability they face outside the euro zone if they wish to grow quickly. At the same time, Central Europe is highly integrated as regards trade with EMU, so it is little exposed to asymmetric shocks that would require a realignment of exchange rates. Finally, it is argued that there is no cost in terms of slower growth from EMU accession, so that there is no trade-off, as has been claimed, between nominal convergence to EMU and real convergence to EU average GDP levels. Second, the paper assesses whether Central European accession to EMU would be disadvantageous to current members. It concludes that accession cannot increase inflationary pressure on existing EMU members, as has been claimed, but that slow growing members of EMU might suffer increased unemployment, unless they increase the flexibility of their labour markets. Incumbent members may also be unwilling to share power with Central Europeans in EMU institutions.
Authored by: Jacek Rostowski
Published in 2003
Macroeconomic Developments Report, December 2017Latvijas Banka
The document provides an overview of macroeconomic developments in December 2017, including:
- External demand continued to grow, supported by robust global demand and growth among Latvia's main trade partners, though UK demand weakened due to Brexit uncertainties.
- The ECB maintained interest rates and asset purchase programs as inflation remained below target. Financial conditions remained accommodative globally.
- Latvia saw strong economic growth in 2017, driven by external demand, private consumption, and recovering investment inflows. Wage growth outpaced productivity, however, weakening competitiveness.
Macroeconomic Developments Report. December 2014Latvijas Banka
The document summarizes macroeconomic developments in December 2014. It reports that growth was weak in many of Latvia's major trade partners in late 2014. The IMF lowered GDP growth projections for the Eurozone, Germany, Sweden, Estonia and Lithuania for 2014 and 2015. Latvia's exports to Russia declined in the first nine months of 2014, though exports to other countries increased. The ECB lowered interest rates and implemented new bond purchase programs to stimulate lending and the Eurozone economy. Latvian lending continued a slow downward trend in late 2014 despite ECB actions. Inflation in Latvia remained low at 0.5% in October 2014.
he paper examines theoretical literature, recent EMU accession examples, and current CEECs performance in search of the optimal currency regime for meeting the Maastricht criteria. Currency board arrangements seems to provide the fastest convergence. For other regimes, the markets may have theoretical and historical reasons to believe in the government's temptation to devalue on the ERM-2 entry. The government should announce the final date, and, possibly indicate the final exchange rate for the regime switch to avoid excessive currency and yield volatility. It should also underscore the central bank’s and EU authorities importance (even if non-existent) in the parity setting process to avoid excessive domestic debt inflation premium ahead of the accession. Recent experience shows that it will be easy to get rid of the remaining influence of cross rates on CEECs exchange rates.
Authored by: Mateusz Szczurek
Published in 2003
A risk report I produced on Russia for my International Banking and Finance unit, highlighting key sovereign and foreign exchange risks facing the country. Obtained the highest grade of all students for the assignment.
Vladimir N. Kniaginin, Director, Foundation Center for Strategic Research «North-West»
Economic Policy Dialogue among think tanks of emerging economies
"Macroeconomic Developments Report", January 2014Latvijas Banka
The document provides an overview of macroeconomic developments in Latvia and its major trade partners. Some key points:
- The IMF revised downwards GDP growth forecasts for many countries, particularly Russia, Estonia, and Finland. However, forecasts for the Eurozone were unchanged.
- In Q3 2013, exports and imports of Latvian goods contracted year-over-year due to weakening external demand and a strong base effect from previous years. Nevertheless, Latvia continued to expand its export market shares.
- In response to low inflation, the ECB and Latvijas Banka both unexpectedly lowered interest rates in November. Credit growth remained subdued as banks retained excess liquidity.
The document summarizes recent economic developments in Russia. It notes that while external factors like rising oil prices and capital inflows have provided some relief, domestic vulnerabilities remain. The economy contracted sharply in 2009 but the rate of contraction slowed in the third quarter. Expansionary fiscal and monetary policies are mitigating the downturn but risks remain from growing deficits, weak corporate balance sheets, unemployment, and an still recovering banking sector. Growth is forecast to recover to 4.3% in 2010 but the medium term outlook is muted without reforms to address financial imbalances and boost productivity and competition. Domestic demand from households and businesses remains weak.
Macroeconomic Developments Report. June 2014Latvijas Banka
The document provides an overview of recent macroeconomic developments and forecasts for Latvia and its major trade partners. Some key points:
- The IMF revised down GDP growth forecasts for 2014 globally and for Russia, Finland, Lithuania and Estonia. Forecasts were upgraded for other countries except the US.
- Eurozone recovery is ongoing but constrained by high unemployment and debt. German growth is slowing. Estonian GDP fell in Q1 due to weak demand from Finland and Russia. Lithuanian growth relied on domestic demand.
- Latvian exports rebounded in early 2014 after declining previously, though confidence is falling due to Russian-Ukrainian tensions. Inflation and growth forecasts for Latvia were revised down for 2014.
IMF Working Paper - Evaluation of the Oil Fiscal Regime in Russia and Proposals for Reform.
Material disponibilizado pela assessoria do senador Lindbergh Farias.
http://www.imf.org/external/pubs/ft/wp/2010/wp1033.pdf
This document outlines Antonia Ficova's PhD research project on the impact of the debt crisis on the Visegrad economies. It provides an introduction and literature review on the eurozone debt crisis and its effects in the Czech Republic, Hungary, Poland, and Slovakia. It summarizes the situation in each country during the crisis, including deficits, debt levels, inflation, and public opinion regarding euro adoption. The methodology section outlines the research objectives, questions, data collection techniques, and timeline.
Russia’s dependence on oil and other natural resources is well known, but what does it actually mean for policy makers’ ability to control the economic fate of the country? This brief provides a more precise analysis of the depth of Russia’s oil dependence. This is based on a careful statistical analysis of the immediate correlation between international oil prices — that Russia does not control — and Russian GDP, which policy makers would like to control. I then look at how IMF’s forecast errors in oil prices spillover to forecast errors of Russian GDP. These numerical exercises are striking; over the last 25 years oil price changes explain on average two thirds of the variation in Russian GDP growth and in the last 15 years up to 80 percent of the one-year ahead forecast errors. Instead of controlling the economic fate of the country, the best policy makers can hope for is to dampen the short-run impact of oil price shocks. A flexible exchange rate and fiscal reserves are key volatility dampers, but not sufficient to protect long-term growth. The latter will always require serious structural reforms and the question is what needs to happen for policy makers to take action to get control over the long-term fate of the economy.
"Highlights":
* Manufacturing growth supported by nearly all sectors
* Exports regain pace
* Inflation boosted by global food prices growth while oil prices decrease
"In Focus":
* Comparison of the Baltic States' exports, author Daina Pelēce
The document summarizes the state of financial markets in Russia in November 2011. Key points include:
- Stock markets declined 1-9% in response to debt issues in Europe and slowing growth forecasts. The MICEX index fell 6.53%.
- Government bond yields increased as demand fell, despite high offered yields over 8%.
- The corporate bond market volume remained high but secondary market trading was stable, while yields remained around 8.75%.
This paper is focused on the development of a proper macroeconomic strategy in the process of Poland's accession to the European Monetary Union. It is argued that due to legal and political considerations Poland may not opt out from EMU participation. The country will however command net gains from participation in the eurozone, mainly due to reduced macroeconomic and microeconomic uncertainty. In order to achieve even higher gains it is necessary to reduce price and wage rigidities, eliminate constraints on free movement of labor, further promote trade links with EU and its diversification. Loss of monetary and exchange rate instruments will require responsive but generally conservative fiscal policy. Particularly, as Poland might experience major economic upturn at the outset in the EU membership, the country should achieve positive budget balance by this time. It will allow for fiscal expansion in case of future negative asymmetric shock or recessions. Fiscal policy should be therefore assigned to improve saving-investment balance and consequently current account, so that direct inflation targeting is well placed to achieve fulfillment of Maastricht price stability criterion. Real exchange rate is not an independent instrument to target current account, as real appreciation of domestic currency is unavoidable due to rapid productivity gains in Poland. Finally, the accession to EMU should follow promptly the accession to EU. Unilateral introduction of Euro is too risky for banking and real sectors. Slower process of joining EMU would hamper credibility of macroeconomic adjustment commitment.
Authored by: Arthur Radziwill
Published in 2001
Macroeconomic Developments Report. June 2016Latvijas Banka
This document provides a macroeconomic developments report for June 2016. It summarizes key developments in the external sector and exports, monetary policy and financial markets, domestic demand, aggregate supply, costs and prices, and the balance of payments for Latvia. It also includes forecasts for Latvia's GDP growth and inflation for 2016. Some of the main points covered include weaker-than-expected global economic growth in 2015, accommodative monetary policy decisions by the ECB, private consumption as the main driver of GDP growth in Latvia, and a revised downward GDP growth forecast for Latvia of approximately 2.0% in 2016.
This document discusses the impact of the global recession on energy markets. It makes three key points:
1) The 2003-2008 global economic boom overstressed energy markets due to insufficient investment in the prior decades.
2) While financial speculation influenced oil prices from 2007-2008, supply and demand remain the main market dynamics.
3) OPEC has managed to stabilize oil prices during the recession, with the current $60 per barrel price considered a success.
This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.
Authored by: Przemyslaw Kowalski
Published in 2003
This document discusses the fiscal positions and deficits of countries acceding to the European Union. It finds that most acceding countries are arriving with unstable fiscal positions and high budget deficits. The document analyzes how EU transfers and expenditures required for accession will impact the fiscal situations of these countries. It calculates the net financial position of each country based on EU transfers versus contributions to determine the overall fiscal effect of accession. The key finding is that negotiated EU transfers will barely cover the new budget obligations required for accession.
"Macroeconomic Developments Report", October 2013Latvijas Banka
The document provides a macroeconomic developments report for October 2013. It summarizes developments in Latvia's external sector and exports in the second quarter of 2013. Key points include:
- Latvia's exports continued to grow but at a slower annual rate due to weakening demand from major trade partners. Exports of base metals declined due to a factory closure.
- Imports declined in both volume and value as production and investment activity decreased. Imports of base metals and vehicles fell the most.
- Despite challenges, Latvia increased its share of world imports according to WTO data. The report examines economic conditions in Latvia's key trade partners.
Highlights:
- Current account reflects the recovering investment activity
- Annual inflation continues hovering around 3%
- GDP growth exceeds expectations and leads to revised forecasts
In Focus:
- Latvia 2017: Back to growth and structural reforms, by Mārtiņš Grāvītis
Latvijas Bankas "Monthly Newsletter", 10/2016Latvijas Banka
"Highlights":
* Substantial increase in high technology sectors
* Inflation is rising, but to a large extent owing to last year's developments
* External trade in August testifies to the power of Latvian cereal exports
"In Focus":
* #reformasLV or why Latvijas Banka cares about education and healthcare?, autors: Oļegs Krasnopjorovs
Macroeconomic Developments Report, June 2017Latvijas Banka
Based on data from Latvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation. The publication is available only in electronic form.
"Highlights":
* Healthy growth, but caution warranted
* Inflation growth decelerating
* Recovery of imports increased current account deficit
"In Focus":
* Does the financing from the EU structural funds improve the competitiveness of Latvian businesses?, autors: Oļegs Krasnopjorovs
This document is the April 2016 edition of the World Economic Outlook published by the International Monetary Fund. It finds that the global economic recovery remains too slow and warns of increased downside risks. The outlook projects continued moderate global growth of 3.2% in 2016 and 3.5% in 2017, below historical averages. Advanced economies are expected to see lackluster growth while emerging markets face difficulties like weak commodity prices and capital outflows. The report examines topics like the slowdown in global trade and capital flows to emerging markets. It also analyzes the macroeconomic effects of labor and product market reforms in advanced economies.
- Latvia's external trade retained moderate positive growth in the first nine months of 2014, despite political instability in neighboring countries and low external demand. Exports grew 2% while imports dropped 1.1%.
- The Latvian economy continued growing in the third quarter of 2014, with GDP up 2.2% year-on-year, driven by domestic consumption and a good tourism season boosting retail trade.
- Inflation dropped to 0.7% in October, slowed by falling fuel prices, though food prices remained impacted by Russian sanctions. Inflation is projected to be higher in 2015 due to electricity market liberalization.
Macroeconomic Developments Report. June 2014Latvijas Banka
The document provides an overview of recent macroeconomic developments and forecasts for Latvia and its major trade partners. Some key points:
- The IMF revised down GDP growth forecasts for 2014 globally and for Russia, Finland, Lithuania and Estonia. Forecasts were upgraded for other countries except the US.
- Eurozone recovery is ongoing but constrained by high unemployment and debt. German growth is slowing. Estonian GDP fell in Q1 due to weak demand from Finland and Russia. Lithuanian growth relied on domestic demand.
- Latvian exports rebounded in early 2014 after declining previously, though confidence is falling due to Russian-Ukrainian tensions. Inflation and growth forecasts for Latvia were revised down for 2014.
IMF Working Paper - Evaluation of the Oil Fiscal Regime in Russia and Proposals for Reform.
Material disponibilizado pela assessoria do senador Lindbergh Farias.
http://www.imf.org/external/pubs/ft/wp/2010/wp1033.pdf
This document outlines Antonia Ficova's PhD research project on the impact of the debt crisis on the Visegrad economies. It provides an introduction and literature review on the eurozone debt crisis and its effects in the Czech Republic, Hungary, Poland, and Slovakia. It summarizes the situation in each country during the crisis, including deficits, debt levels, inflation, and public opinion regarding euro adoption. The methodology section outlines the research objectives, questions, data collection techniques, and timeline.
Russia’s dependence on oil and other natural resources is well known, but what does it actually mean for policy makers’ ability to control the economic fate of the country? This brief provides a more precise analysis of the depth of Russia’s oil dependence. This is based on a careful statistical analysis of the immediate correlation between international oil prices — that Russia does not control — and Russian GDP, which policy makers would like to control. I then look at how IMF’s forecast errors in oil prices spillover to forecast errors of Russian GDP. These numerical exercises are striking; over the last 25 years oil price changes explain on average two thirds of the variation in Russian GDP growth and in the last 15 years up to 80 percent of the one-year ahead forecast errors. Instead of controlling the economic fate of the country, the best policy makers can hope for is to dampen the short-run impact of oil price shocks. A flexible exchange rate and fiscal reserves are key volatility dampers, but not sufficient to protect long-term growth. The latter will always require serious structural reforms and the question is what needs to happen for policy makers to take action to get control over the long-term fate of the economy.
"Highlights":
* Manufacturing growth supported by nearly all sectors
* Exports regain pace
* Inflation boosted by global food prices growth while oil prices decrease
"In Focus":
* Comparison of the Baltic States' exports, author Daina Pelēce
The document summarizes the state of financial markets in Russia in November 2011. Key points include:
- Stock markets declined 1-9% in response to debt issues in Europe and slowing growth forecasts. The MICEX index fell 6.53%.
- Government bond yields increased as demand fell, despite high offered yields over 8%.
- The corporate bond market volume remained high but secondary market trading was stable, while yields remained around 8.75%.
This paper is focused on the development of a proper macroeconomic strategy in the process of Poland's accession to the European Monetary Union. It is argued that due to legal and political considerations Poland may not opt out from EMU participation. The country will however command net gains from participation in the eurozone, mainly due to reduced macroeconomic and microeconomic uncertainty. In order to achieve even higher gains it is necessary to reduce price and wage rigidities, eliminate constraints on free movement of labor, further promote trade links with EU and its diversification. Loss of monetary and exchange rate instruments will require responsive but generally conservative fiscal policy. Particularly, as Poland might experience major economic upturn at the outset in the EU membership, the country should achieve positive budget balance by this time. It will allow for fiscal expansion in case of future negative asymmetric shock or recessions. Fiscal policy should be therefore assigned to improve saving-investment balance and consequently current account, so that direct inflation targeting is well placed to achieve fulfillment of Maastricht price stability criterion. Real exchange rate is not an independent instrument to target current account, as real appreciation of domestic currency is unavoidable due to rapid productivity gains in Poland. Finally, the accession to EMU should follow promptly the accession to EU. Unilateral introduction of Euro is too risky for banking and real sectors. Slower process of joining EMU would hamper credibility of macroeconomic adjustment commitment.
Authored by: Arthur Radziwill
Published in 2001
Macroeconomic Developments Report. June 2016Latvijas Banka
This document provides a macroeconomic developments report for June 2016. It summarizes key developments in the external sector and exports, monetary policy and financial markets, domestic demand, aggregate supply, costs and prices, and the balance of payments for Latvia. It also includes forecasts for Latvia's GDP growth and inflation for 2016. Some of the main points covered include weaker-than-expected global economic growth in 2015, accommodative monetary policy decisions by the ECB, private consumption as the main driver of GDP growth in Latvia, and a revised downward GDP growth forecast for Latvia of approximately 2.0% in 2016.
This document discusses the impact of the global recession on energy markets. It makes three key points:
1) The 2003-2008 global economic boom overstressed energy markets due to insufficient investment in the prior decades.
2) While financial speculation influenced oil prices from 2007-2008, supply and demand remain the main market dynamics.
3) OPEC has managed to stabilize oil prices during the recession, with the current $60 per barrel price considered a success.
This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.
Authored by: Przemyslaw Kowalski
Published in 2003
This document discusses the fiscal positions and deficits of countries acceding to the European Union. It finds that most acceding countries are arriving with unstable fiscal positions and high budget deficits. The document analyzes how EU transfers and expenditures required for accession will impact the fiscal situations of these countries. It calculates the net financial position of each country based on EU transfers versus contributions to determine the overall fiscal effect of accession. The key finding is that negotiated EU transfers will barely cover the new budget obligations required for accession.
"Macroeconomic Developments Report", October 2013Latvijas Banka
The document provides a macroeconomic developments report for October 2013. It summarizes developments in Latvia's external sector and exports in the second quarter of 2013. Key points include:
- Latvia's exports continued to grow but at a slower annual rate due to weakening demand from major trade partners. Exports of base metals declined due to a factory closure.
- Imports declined in both volume and value as production and investment activity decreased. Imports of base metals and vehicles fell the most.
- Despite challenges, Latvia increased its share of world imports according to WTO data. The report examines economic conditions in Latvia's key trade partners.
Highlights:
- Current account reflects the recovering investment activity
- Annual inflation continues hovering around 3%
- GDP growth exceeds expectations and leads to revised forecasts
In Focus:
- Latvia 2017: Back to growth and structural reforms, by Mārtiņš Grāvītis
Latvijas Bankas "Monthly Newsletter", 10/2016Latvijas Banka
"Highlights":
* Substantial increase in high technology sectors
* Inflation is rising, but to a large extent owing to last year's developments
* External trade in August testifies to the power of Latvian cereal exports
"In Focus":
* #reformasLV or why Latvijas Banka cares about education and healthcare?, autors: Oļegs Krasnopjorovs
Macroeconomic Developments Report, June 2017Latvijas Banka
Based on data from Latvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation. The publication is available only in electronic form.
"Highlights":
* Healthy growth, but caution warranted
* Inflation growth decelerating
* Recovery of imports increased current account deficit
"In Focus":
* Does the financing from the EU structural funds improve the competitiveness of Latvian businesses?, autors: Oļegs Krasnopjorovs
This document is the April 2016 edition of the World Economic Outlook published by the International Monetary Fund. It finds that the global economic recovery remains too slow and warns of increased downside risks. The outlook projects continued moderate global growth of 3.2% in 2016 and 3.5% in 2017, below historical averages. Advanced economies are expected to see lackluster growth while emerging markets face difficulties like weak commodity prices and capital outflows. The report examines topics like the slowdown in global trade and capital flows to emerging markets. It also analyzes the macroeconomic effects of labor and product market reforms in advanced economies.
- Latvia's external trade retained moderate positive growth in the first nine months of 2014, despite political instability in neighboring countries and low external demand. Exports grew 2% while imports dropped 1.1%.
- The Latvian economy continued growing in the third quarter of 2014, with GDP up 2.2% year-on-year, driven by domestic consumption and a good tourism season boosting retail trade.
- Inflation dropped to 0.7% in October, slowed by falling fuel prices, though food prices remained impacted by Russian sanctions. Inflation is projected to be higher in 2015 due to electricity market liberalization.
This document describes the design and implementation of a 3D printer that uses an Arduino board as its controller. It uses a PLA plastic filament fed through a thermoplastic extruder head mounted on a Cartesian XYZ positioning system. The electronics are based on the Arduino development platform and include a custom shield to interface with stepper motors and temperature sensors. The firmware runs on the Arduino and controls the stepper motors and extruder temperature based on G-code instructions generated from 3D models.
Las administraciones públicas pueden apoyar a los emprendedores de varias maneras: proporcionando subvenciones y ayudas económicas, ofreciendo formación y asesoramiento especializado, y creando espacios de coworking que faciliten la colaboración entre emprendedores.
La energía se mide en joules y depende de la potencia. Existen diferentes tipos de energía como la cinética, potencial, gravitatoria, elástica y mecánica. La energía mecánica puede ser conservativa o disipativa.
Development of dual phase steel and determination its of mechanical propertiesIAEME Publication
This document summarizes a study on developing dual phase steel through intercritical annealing and determining its mechanical properties compared to low carbon steel. Intercritical annealing involves heating low carbon steel to the ferrite-austenite phase region, then rapidly cooling to form a microstructure of ferrite and martensite, known as dual phase steel. Samples were heat treated through intercritical annealing at temperatures from 740°C to 840°C and times from 0 to 2 minutes, then tested for hardness, toughness, and microstructure. The results showed that specimen hardness and toughness increased with higher martensite content, which depended on the intercritical annealing temperature and time.
El documento describe los servicios y productos de The New Music Center, un estudio de música que ofrece estudios de grabación para músicos profesionales y principiantes, así como equipos musicales como guitarras, bajos, teclados, baterías y amplificadores. El estudio cuenta con diferentes tipos de estudios como estudios caseros, estudios profesionales y estudios de proyecto, además de salas de juego y otras comodidades.
Transparent bi-colour level gauges use two coloured glass filters and a light source to clearly indicate the water and steam levels in high pressure systems up to 225 bar. They have a simple design with few components that provides a long-lasting and reliable indication. The gauges are available in different sizes and connections to suit various steam applications and vessel connections.
O documento descreve as atividades realizadas no laboratório de informática educacional da Escola Municipal Pio XII em 2013, incluindo avaliações de educação física ministradas pelo professor Cleberson e o trabalho do professor de informática educacional Roberto Azevedo de Brito, que citou Benjamin Franklin sobre a importância do conhecimento.
Tc klinger magnetic level gauge principles and application rev 2 ccherylteooo
This document provides information about magnetic level gauges manufactured by Klinger Limited. It discusses the operating principles, components, materials used, and benefits of magnetic level gauges. The key components are the float, chamber, and indicator. The float contains magnets and moves up and down the chamber to indicate the level. Various materials can be used for corrosion resistance. Magnetic level gauges offer benefits like easy readability, leak resistance, and ability to withstand high pressures and temperatures. They are used across many industries like power, oil and gas, chemicals, and more.
"Can You Hear Me Now?" Public Speaking and the Power of Words
Learning objective: Increase presentation skills and personal development
The confident speaker, despite title or position, will have a competitive edge over just about everyone. Cultivating the ability to communicate, choose your words carefully, and engage people is the best investment you could ever make. The Science of presenting is the ability to organize, choose, and convey important information in a meaningful way. The Art of presenting is using your personal talent, personality, and resources so your audience will listen and stay engaged. Both are critical, even when presenting highly technical information. Learn how to take the lead and motivate the masses by conveying your message with passion and inspiration.
At the end of this seminar, participants will be able to:
a. Examine specific tools for organizing material
b. Practice ways to present technical information
c. Deliver and design a short presentation
d. Explore mental coaching techniques to address fear
e. Identify best practices of visual aids (i.e., PowerPoint)
O documento fornece orientações para educadores do 1o ao 5o ano sobre alfabetização, letramento e currículo. Ele enfatiza a importância de práticas interdisciplinares de leitura e escrita, discute os conceitos de alfabetização e letramento, e fornece diretrizes para os blocos pedagógicos do 1o ao 3o ano com foco em diferentes eixos temáticos.
This document summarizes the results of a survey on soap operas. It finds that:
1) Soap operas are seen as appealing mostly to females. However, the director wants to consider how to appeal to males as well.
2) Most see soap operas as appealing to adults, though most respondents were teenagers.
3) None of the respondents reported fully enjoying soap operas, indicating potential bias.
4) The survey will help the director target themes in their new soap opera trailer to a younger audience and understand how the audience views existing soap operas.
La Guerra Civil Española comenzó el 18 de julio de 1936 cuando un grupo de militares se sublevó contra el gobierno de la Segunda República. La guerra dividió a España en dos zonas: la zona republicana, que incluía las regiones más industrializadas y pobladas, y la zona rebelde, que controlaba las regiones agrícolas menos pobladas. La guerra duró hasta el 1 de abril de 1939, cuando las fuerzas franquistas derrotaron finalmente a la República.
Glass level gauges provide direct visualization of liquid levels in vessels. They were invented in 1888 and offer advantages over electronic level indicators such as no electronic components to fail. Main components include a glass body with reflex or transparent glass, isolation valves or cocks, and optional accessories like illuminators. Models are available for a wide range of process and steam applications up to 225 bar pressure. New products include solar-powered illuminators and gauges combining glass and guided wave radar indication.
The Russian economy experienced a sharp decline due to the global financial crisis. GDP growth fell to 5.6% in 2008, lower than the previous decade. Investments and internal demand decreased substantially. The crisis impacted Russia's monetary sector as the Central Bank sold foreign reserves to support the rouble amid capital flight. Stock and debt markets also declined sharply. While oil revenues had built a large budget surplus, revenues declined in 2008, shrinking the surplus. The crisis threatened political stability as the ruling party saw declining support in regional elections. However, state control over large firms and property rights increased. Overall the crisis posed major challenges to Russia's economic and political systems.
The efforts to stabilize the Moldovan economy after the crisis of 1998 have been largely successful. The country avoided international default as current account position radically improved, cooperation with international financial institutions was re-established and a significant primary fiscal surplus was achieved. As a result, the exchange rate was stabilised and inflation substantially reduced. Moreover, several important structural reforms were implemented and privatisation of key-industries pursued with much more determination than previously. However, only economic growth would bring real solutions to the persistent problems of external and internal imbalances of the Moldovan economy and would allow the country to face its heavy debt burden in the future. Unfortunately, prospects for sustainable growth remain weak, as the most important issues that constrain private entrepreneurship and investments have not been effectively tackled. These issues include: lack of territorial integrity, ineffective legal system, widespread corruption and rent seeking. It is unlikely that these problems can be solved until the Moldovan parliament assumes full ownership of reform process.
Authored by: Larisa Lubarova, Oleg Petrushin, Artur Radziwill
Published in 2000
Russia's Lost Decade? Challenges to Growth, Recipes for AccelerationAndrey Shapenko
The Russian economy today is going through a critical stage. The growth model, which catapulted the country into the world’s top ten economies’ list has been exhausted and most experts believe that Russia is facing a long period of low or no growth. While the world is moving forward, Russia’s standing still. Hovering anxiously in one place means its economy is becoming smaller and is further increasing its competitive gap.
The ailing economy is often blamed on the falling oil prices combined with the economic sanctions that were imposed on Russia in 2014. However, the array of challenges that the economy is facing today is much broader than that, and the recession in Russia has deeper roots.
This report represents an attempt to discuss those roots and to summarize economic agenda that the country's leadership will face on the way to restart growth, amid the 2018 presidential elections. This agenda will define economic and fiscal policy over the next 5-10 years, and thus will impact anyone who is doing business or going to invest in the country.
Financial instruments statistics important for central banks, and especially for the National Bank of Poland because if the statistical system imposes a responsibility on the central bank it must meet all the requirements of statistical excellence. This is a very important argument, but only a formal one for our interest in this subject. There is a second stream of motives for addressing this problem in central banks. Experience gained over the last decade shows clearly that financial instruments, especially those issued by enterprises, are becoming increasingly important for monetary transmission mechanisms and for financial stability. Among other things, there is empirical evidence that corporate bond spreads lead real economic activity. The situation in the financial instruments market is also meaningful for the general condition of the credit market, as bonds are close substitutes for banking credit. Development of the financial instruments market also contributes to the so-called financial market deepening effect, with multiple consequences for transmission mechanisms.7 It should be noted that, owing to the wide variety of channels through which financial instruments can interfere with monetary policy operations, the central banks are interested in collecting detailed information on these instruments. In practice it results in a complexity of standards for financial instruments security statistics that central banks are expected to meet.
After two years of recession, Russia's economy is projected to return to growth in 2017 as higher wages boost consumption and lower interest rates support investment. However, structural issues continue to hinder diversification, and the recovery remains dependent on stable oil prices. Fiscal and monetary policy should be further eased to support the recovery, though fiscal space is limited without economic reforms. The strength of the recovery will be constrained by a lack of structural reforms and poor business climate inhibiting diversification from oil.
Russia's transition to a market economy was difficult and led to a serious financial crisis in 1998 as fiscal reforms failed and budget deficits increased reliance on short-term borrowing. Lower oil and mineral prices along with the Asian financial crisis exacerbated problems, causing rapid currency devaluation, capital flight, and debt payment issues. However, Russia weathered the crisis relatively well, with GDP growth, currency and inflation stability returning by 2009 as investment increased. While still dependent on oil and gas exports, Russia has made progress paying foreign debts and building currency reserves, aided by budget, trade, and current account surpluses. In 2008, Russia split its Stabilization Fund created in 2004 to balance the budget during oil price drops into a Reserve Fund
Russia - sharp slowdown and protacted recoverySwedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
At the beginning of 1990s the Soviet successor states started to transform their financial sectors to meet the needs of the emerging market economies.
Following a decade of transition, results differ. Although the Baltic States were able to build quite successful financial systems, in the CIS countries financial systems remain a major obstacle to economic growth. The hyperinflations of the early 1990s, the financial scandals that followed the collapse of monobank systems, and subsequent incomplete progress in constructing non-bank financial institutions and effective regulatory structures have had adverse consequences. These include weak bank balances sheets, high real interest rates, and poor access to capital for small enterprises and start ups. With a few exceptions, nontransparent regulation, inadequate disclosure frameworks, and weak protection of shareholders rights continue to limit investor participation in CIS financial markets. The absence of effective threepillar pension systems further limits the demand for domestic debt and equities.
Fortunately, there are signs of improvement. Bank lending and deposits are growing in many CIS economies, the proportion of bad debt in bank credit portfolio is falling, and lending and deposit interest rate spreads are diminishing. The solid economic growth recorded since 1999 in many CIS countries is helping memories of the 1998 financial crisis to fade, and stock exchanges in some CIS countries are currently at or near record levels. Financial systems in CIS economies may be moving toward the successful frameworks put in place in the new EU member states. However, because they have not benefited from the extensive foreign direct investment that recapitalised banks in Central Europe, financial stability in many CIS countries remains open to question.
Authored by: Elena Golodniuk
Published in 2005
MLC Corporation, a US company, was considering expanding its business in Russia in 2008 given growth in Russia's energy sector. Its options were to expand exports, build a manufacturing plant in Russia, or wait out economic uncertainties. In 2008, MLC derived most of its revenues from Russia. While Russia saw strong GDP growth, the global financial crisis emerged that year, with concerns about its potential impact on Russia including a leadership change, energy prices, US-Russia relations, and effects on the Russian economy. MLC eventually decided to invest in Russia by building a manufacturing plant and distribution center, taking advantage of Russia's economic growth despite risks from the global crisis.
Private capital flows and foreign direct investment (FDI) to developing and transition economies has soared throughout most of this decade. In 2008 net private sector capital flows reached an estimated $619 billion (from a record $900 billion in 2007) while FDI accounted for an estimated $580 billion. Some of this capital has headed to the Commonwealth of Independent States (CIS), a region whose prospects have improved considerably since the 1998 Russian financial crisis. Although the amount of capital flows into the CIS has been largely insignificant prior to and shortly after the crisis, currently their share of global private capital flows has averaged a more impressive 13%. Attracted by the region’s decade long growth, international investors began investing in the CIS to exploit potentially lucrative investment opportunities.
Published in 2009
Japan and Russia: Contemporary Political, Economic, and Military Relations
Speaker: Elena Shadrina, Associate Professor, Waseda University
Presentation: What to Expect for Russia-Japan Relations: Contemplation against a Backdrop of Social and Economic Situation in Russia
The document summarizes opportunities for increasing energy efficiency in Russia. It notes that while Russia has experienced strong economic growth in recent years, there remains a significant gap in energy efficiency compared to other major economies. The document outlines Russia's energy industry and consumption patterns. It also describes recent reforms to legislation and public policy that aim to develop the energy efficiency sector and stimulate investments in priority areas like building efficiency and reducing transmission losses. Overall opportunities for foreign investors in the growing Russian energy efficiency market are estimated to exceed $30 billion.
This document provides a macroeconomic developments report for June 2015. It discusses developments in Latvia's external sector and exports, monetary policy and financial markets, domestic demand, aggregate supply, costs and prices, and the balance of payments. It also provides GDP growth projections for Latvia's major trade partners in 2014-2016 and concludes by revising Latvia's GDP growth forecast for 2015 down slightly to 2.0% while also lowering the inflation forecast.
1. The document provides an overview of Kazakhstan's financial system, including its monetary, exchange rate, and banking systems. It discusses Kazakhstan's financial markets and performs a SWOT and risk analysis.
2. Some key points are that Kazakhstan adopted a floating exchange rate system in 2015, has abundant natural resources but a resource-dependent economy, and faces political, exchange rate, and sovereign risks.
3. The SWOT analysis notes opportunities in infrastructure development and agriculture exports through China's Belt and Road Initiative, but threats include unsustainable water management and transitioning away from hydrocarbon dependence.
The document summarizes the Russian banking crisis that began in 2008 and the subsequent economic crisis in 2014-2015. It provides background on the structure of the Russian banking sector and describes the effects of the global financial crisis in 2008, including a stock market decline, rising unemployment, decreased GDP and industrial production. It also outlines government anti-crisis programs and timelines of the crises, noting that the 2014-2015 crisis was driven by a reduction in oil prices, sanctions, and a devaluation of the ruble.
This document provides a landscaping report on financial inclusion in Russia. It discusses the demand for and usage of formal financial services in Russia, noting that remote, rural, older and lower-income populations face greater financial exclusion. It also examines the supply landscape, including banks, microfinance institutions, payment service providers and financial infrastructure/initiatives. Key challenges include expanding access to underserved areas, improving financial literacy and consumer protections, and determining the long-term impacts of recent legislation on financial inclusion. The report provides an overview of the evolving financial inclusion ecosystem in Russia.
This document provides a landscaping report on financial inclusion in Russia. It discusses the demand for and usage of formal financial services in Russia, noting that remote, rural, older and lower-income populations face greater financial exclusion. It also examines the supply landscape, including banks, microfinance institutions, payment service providers and financial infrastructure/initiatives. Key challenges include expanding access to underserved areas, improving financial literacy and consumer protections, and determining the long-term impacts of recent legislation on financial inclusion. The report aims to analyze opportunities and recommendations to further advance financial inclusion in Russia.
This document provides a landscaping report on financial inclusion in Russia. It summarizes that access to formal financial services has increased rapidly in recent years but remains unequal, with remote, rural, older and lower-income populations most excluded. It also notes initiatives to improve financial literacy and establish a financial ombudsman to strengthen consumer protection. The report then analyzes demand and usage patterns before examining the landscape of various financial service providers, infrastructure developments and challenges and opportunities to further advancing inclusion in Russia.
This paper employs a standard Tobin-Markowitz framework to analyse the determinants of capital flows into the CIS countries. Using data from 1996-2006, we find that the Russian financial crisis of 1998 has had a profound impact on capital flows into the CIS (both directly and indirectly). Firstly, it introduced a structural shift in the investors' behaviour by shifting the focus from the external factors to the internal ones, e.g. domestic interest and GDP growth rates. Secondly, it also drastically changed the impact of a number of explanatory variables on capital flows into the CIS. Political risk was found to be the second most important determinant of capital flows into the CIS. Additionally, we report some strong evidence of co-movement between portfolio flows into the CIS and CEEC, coupled with strong complementarity between global stock market activity and portfolio inflows into the CIS. Interestingly, external factors tend to be of a higher significance than internal factors for the largest members (Russia, Ukraine and Kazakhstan) of the CIS; whereas domestic variables tend to have a greater impact on the capital flows into the smaller CIS countries.
Authored by: Oleksandr Lozovyi
Published in 2007
Macroeconomic Developments Report. December 2015Latvijas Banka
Based on data from tLatvijas Banka, Central Statistical Bureau of Latvia, Ministry of Finance, and Financial and Capital Market Commission, this publication assesses developments of the external sector and exports, financial market, domestic demand and supply, prices and costs, and balance of payments, and provides forecasts for the economic development and inflation.
Similar to CASE Network Studies and Analyses 450 - Macroeconomic Preconditions of the Realization of a New Growth Model (20)
The report examines the social and economic drivers and impact of circular migration between Belarus and Poland, Slovakia, and the Czech Republic. The core question the authors sought to address was how managing circular migration could, in the long term, help to optimise labour resources in both the country of origin and the destination countries. In the pages that follow, the authors of the report present the current and forecasted labour market and demographic situation in their respective countries as well as the dynamics and characteristics of short-term labour migration flows between Belarus and Poland, Slovakia, and the Czech Republic, concentrating on the period since 2010. They also outline and discuss related policy responses and evaluate prospects for cooperation on circular migration.
Podręcznik został opracowany w celu przekazania trenerom i nauczycielom podstawowej wiedzy, która może być przydatna w prowadzeniu szkoleń promujących pracę rejestrowaną. Prezentuje on z jednej strony korzyści z pracy rejestrowanej, z drugiej – potencjalne koszty związane z pracą nierejestrowaną. W pierwszej kolejności informacje te przedstawiono w odniesieniu do pracowników najemnych (rozdział 2), podkreślając w sposób szczególny to, że negatywne konsekwencje pracy nierejestrowanej są ponoszone przez całe życie. Ze względu na specyficzną sytuację cudzoziemców pracujących w Polsce konsekwencje ponoszone przez tę grupę opisano oddzielnie (rozdział 3). Ponadto zaprezentowano skutki dotyczące pracodawców z szarej strefy z wyodrębnieniem tych, którzy zatrudniają cudzoziemców (rozdział 4). Uzupełnieniem przedstawionych informacji jest opis działań podejmowanych przez państwo w celu ograniczenia zjawiska pracy nierejestrowanej w Polsce (rozdział 5) oraz prowadzonych w Wielkiej Brytanii, czyli w kraju będącym liderem w walce z szarą strefą (rozdział 6).
European countries face a challenge related to the economic and social consequences of their societies’ aging. Specifically, pension systems must adjust to the coming changes, maintaining both financial stability, connected with equalizing inflows from premiums and spending on pensions, and simultaneously the sufficiency of benefits, protecting retirees against poverty and smoothing consumption over their lives, i.e. ensuring the ability to pay for consumption needs at each stage of life, regardless of income from labor.
One of the key instruments applied toward these goals is the retirement age. Formally it is a legally established boundary: once people have crossed it – on average – they significantly lose their ability to perform work (the so-called old-age risk). But since the 1970s, in many developed countries the retirement age has become an instrument of social and labor-market policy. Specifically, in the 1970s and ‘80s, an early retirement age was perceived as a solution allowing a reduction in the supply of labor, particularly among people with relatively low competencies who were approaching retirement age, which is called the lump of labor fallacy. It was often believed that people taking early retirement freed up jobs for the young. But a range of economic evidence shows that the number of jobs is not fixed, and those who retire don’t in fact free up jobs. On the contrary, because of higher spending by pension systems, labor costs rise, which limits the supply of jobs. In general, a good situation on the labor market supports employment of both the youngest and the oldest labor force participants. Additionally, a lower retirement age for women was maintained, which resulted to a high degree from cultural conditions and norms that are typical for traditional societies.
Until now, the banking sector has been one of the strong points of Poland’s economy. In contrast to banks in the U.S. and leading Western European economies, lenders in Poland came through the 2008 global financial crisis without a scratch, without needing state financial support. But in recent years the industry’s problems have been growing, creating a threat to economic growth and gains in living standards.
For an economy’s productivity to increase, funds can’t go to all companies evenly, and definitely shouldn’t go to those that are most lacking in funds, but to those that will use them most efficiently. This is true of total external financing, and thus funding both from the banking sector and from parabanks, the capital market and funds from public institutions. In Poland, in light of the relatively modest scale of the capital market, banks play a clearly dominant role in external financing of companies. This is why the author of this text focuses on the bank credit allocation efficiency.
The author points out that in the very near future, conditions will emerge in Poland which – as the experience of other countries shows – create a risk of reduced efficiency of credit allocation to business. Additionally, in Poland today, bank lending to companies is to a high degree being replaced by funds from state aid, which reduces the efficiency of allocation of external funds to companies (both loans and subsidies), as allocation of government subsidies is not usually based on efficiency. This decline in external financing allocation efficiency may slow, halt or even reverse the process, that has been uninterrupted for 28 years, of Poland’s convergence, i.e. the narrowing of the gap in living standards between Poland and the West.
The economic characteristics of the COVID-19 crisis differ from those of previous crises. It is a combination of demand- and supply-side constraints which led to the formation of a monetary overhang that will be unfrozen once the pandemic ends. Monetary policy must take this effect into consideration, along with other pro-inflationary factors, in the post-pandemic era. It must also think in advance about how to avoid a policy trap coming from fiscal dominance.
This paper is organized as follows: Chapter 2 deals with the economic characteristics of the COVID-19 pandemic and its impact on the effectiveness of the monetary policy response measures undertaken. In Chapter 3, we analyse the monetary policy decisions of the ECB (and other major CBs for comparison) and their effectiveness in achieving the declared policy goals in the short term. Chapter 4 is devoted to an analysis of the policy challenges which may be faced by the ECB and other major CBs once the pandemic emergency comes to its end. Chapter 5 contains a summary and the conclusions of our analysis.
Purpose: This paper tries to identify the wage gap between informal and formal workers and tests for the two-tier structure of the informal labour market in Poland.
Design/methodology/approach: I employ the propensity score matching (PSM) technique and use data from the Polish Labour Force Survey (LFS) for the period 2009–2017 to estimate the wage gap between informal and formal workers, both at the means and along the wage distribution. I use two definitions of informal employment: a) employment without a written agreement and b) employment while officially registered as unemployed at a labour office. In order to reduce the bias resulting from the non-random selection of
individuals into informal employment, I use a rich set of control variables representing several individual characteristics.
Findings: After controlling for observed heterogeneity, I find that on average informal workers earn less than formal workers, both in terms of monthly earnings and hourly wage. This result is not sensitive to the definition of informal employment used and is
stable over the analysed time period (2009–2017). However, the wage penalty to informal employment is substantially higher for individuals at the bottom of the wage distribution, which supports the hypothesis of the two-tier structure of the informal labour market in Poland.
Originality/value: The main contribution of this study is that it identifies the two-tier structure of the informal labour market in Poland: informal workers in the first quartile of the wage distribution and those above the first quartile appear to be in two partially different segments of the labour market.
This document provides a comparative analysis of the rule of law and its impact on economic development in Poland and Germany. It finds that while both countries have strong rule of law frameworks de jure, there are significant differences de facto, with Polish firms showing less trust in the state and courts compared to German firms. Empirical analysis suggests higher levels of investment and economic development in Germany can be partially attributed to firms' greater recognition of the rule of law's ability to reduce transaction costs. Erosion of the rule of law in Poland since 2015 has likely negatively impacted investment and capital accumulation compared to Germany.
The report analyzes the VAT gap in the EU-28 member states in 2018. It finds that the total VAT gap in the EU was an estimated €137 billion, representing 12.2% of the total VAT liability. This is an increase compared to 2017, when the gap was €117 billion or 11.2% of the total liability. The report examines VAT revenue, total VAT liability, and VAT gap estimates for each member state from 2014 to 2018. It also conducts econometric analysis to identify factors influencing VAT gap levels across countries.
The euro is the second most important global currency after the US dollar. However, its international role has not increased since its inception in 1999. The private sector prefers using the US dollar rather than the euro because the financial market for US dollar-denominated assets is larger and deeper; network externalities and inertia also play a role. Increasing the attractiveness of the euro outside the euro area requires, among others, a proactive role for the European Central Bank and completing the Banking Union and Capital Market Union.
Forecasting during a strong shock is burdened with exceptionally high uncertainty. This gives rise to the temptation to formulate alarmist forecasts. Experiences from earlier pandemics, particularly those from the 20th century, for which we have the most data, don’t provide a basis for this. The mildest of them weakened growth by less than 1 percentage point, and the worst, the Spanish Flu, by 6 percentage points. Still, even the Spanish Flu never caused losses on the order of 20% of GDP – not even where it turned out to be a humanitarian disaster, costing the lives of 3-5% of the population. History suggests that if pandemics lead to such deep losses at all, it’s only in particular quarters and not over a whole year, as economic activity rebounds. The strength of that rebound is largely determined by economic policy. The purpose of this work is to describe possible scenarios for a rebound in Polish economic growth after the epidemic.
A separate issue, no less important, is what world will emerge from the current crisis. In the face of the 2008 financial crisis, White House Chief of Staff Rahm Emanuel said: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.” Such changes can make the economy and society function better than before the crisis. Unfortunately, the opportunities created by the global financial crisis were squandered. Today’s task is more difficult; the scale of various problems has expanded even more. Without deep structural and institutional changes, the world will be facing enduring social and economic problems, accompanied by long-term stagnation.
"Many brilliant prophecies have appeared for the future of the EU and our entire planet. I believe that Europe, in its own style, will draw pragmatic conclusions from the crisis, not revolutionary ones; conclusions that will allow us to continue enjoying a Europe without borders. Brussels will demonstrate its usefulness; it will react ably and flexibly. First of all, contrary to the deceitful statements of members of the Polish government, the EU warned of the threats already in 2021. Secondly, already in mid-March EU assistance programs were ready, i.e. earlier than the PiS government’s “shield” program. The conclusion from the crisis will be a strengthening of all the preventive mechanisms that allow us to recognize threats and react in time of need. Research programs will be more strongly directed toward diagnosing and treating infectious diseases. Europe will gain greater self-sufficiency in the area of medical equipment and drugs, and the EU – greater competencies in the area of the health service, thus far entrusted to the member states. The 2021-27 budget must be reconstructed, to supplement the priority of the Green Deal with economic stimulus programs. In this way structural funds, which have the greatest multiplier effect for investment and the labor market, may return to favor. So once again: an addition, as a conclusion from the crisis, and not a reinvention of the EU," writes Dr. Janusz Lewandowski the author of the 162nd mBank-CASE seminar Proceeding.
Dla wielu rodaków europejskość Polski jest oczywista, trudno jest im nawet wyobrazić sobie, jak kształtowałyby się losy naszego kraju bez uczestnictwa w integracji europejskiej. Szczególnie młode pokolenie traktuje osiągnięty przez nas dzięki uczestnictwie w Unii ogromny postęp cywilizacyjny jako coś danego i naturalnego. Jednak świadomość tego, jaki był nasz punkt wyjścia, jaką przeszliśmy drogę i jak przyczyniły się do tego unijne działania oraz jakie wynikały z tego korzyści powinna nam stale towarzyszyć. Bez tej świadomości, starannego weryfikowania faktów i docenienia naszych osiągnięć grozi nam uleganie niesprawdzonym argumentom przeciwników integracji europejskiej i popełnienie nieodwracalnych błędów. Dla tych, którzy chcą poznać te fakty, przygotowany został raport "Nasza Europa. 15 lat Polski w Unii Europejskiej". Podjęto w nim ocenę 15 lat członkostwa Polski z perspektywy doświadczeń procesu integracji, z jego barierami i sukcesami, a także wyzwaniami przyszłości.
Raport jest wynikiem pracy zbiorowej licznych ekspertów z różnych dziedzin, od wielu lat analizujących wielowymiarowe efekty działania instytucji UE oraz współpracy z krajami członkowskimi na podstawie europejskich wartości i mechanizmów. Autorzy podsumowują korzyści członkostwa Polski w Unii Europejskiej na podstawie faktów, nie stroniąc jednakże od własnych ocen i refleksji.
This report is the result of the joint work of a number of experts from various fields who have been - for many years – analysing the multidimensional effects of EU institutions and cooperation with Member States pursuant to European values and mechanisms. The authors summarise the benefits of Poland’s membership in the EU based on facts; however, they do not hide their own views and reflections. They also demonstrate the barriers and challenges to further European integration.
This report was prepared by CASE, one of the oldest independent think tanks in Central and Eastern Europe, utilising its nearly 30 years of experience in providing objective analyses and recommendations with respect to socioeconomic topics. It is both an expression of concern about Poland’s future in the EU, as well as the authors’ contribution to the debate on further European integration.
Poland’s new Employee Capital Plans (PPK) scheme, which is mandatory for employers, started to be implemented in July 2019. The article looks at the systemic solutions applied in the programme from the perspective of the concept of the simultaneous reconstruction of the retirement pension system. The aim is to present arguments for and against the project from the point of view of various actors, and to assess the chances of success for the new system. The article offers a detailed study of legal solutions, an analysis of the literature on the subject, and reports of institutions that supervise pension funds. The results of this analysis point to the lack of cohesion between certain solutions of the 1999 pension reform and expose a lack of consistency in how the reform was carried out, which led to the eventual removal of the capital part of the pension system. The study shows that additional saving for old age is advisable in the country’s current demographic situation and necessary for both economic and social reasons. However, the systemic solutions offered by the government appear to be chiefly designated to serve short-term state interests and do not create sufficient incentives for pension plan participants to join the programme.
The document summarizes the evolution of the Belarusian public sector from a command economy to state capitalism. It discusses how the Belarusian economic model has changed over time, moving from a quasi-Soviet system based on state property and central planning, to a more flexible hybrid model where the public sector still dominates the economy. The paper analyzes the role and characteristics of the state sector in Belarus and how it has developed since independence. It considers various theoretical perspectives for understanding statist economies like Belarus, but concludes that a new multidisciplinary approach is needed to fully capture the dual nature of the Belarusian economic system.
Belarusian economy has been stagnating in 2011-2015 after 15 years of a high annual average growth rate. In 2015, after four years of stagnation, the Belarusian economy slid into a recession, its first since 1996, and experienced both cyclical and structural recessions. Since 2015, the Belarusian government and the National Bank of Belarus have been giving economic reforms a good chance thanks to gradual but consistent actions aimed at maintaining macroeconomic stability and economic liberalization. It seems that the economic authorities have sustained more transformation efforts during 2015-2018 than in the previous 24 years since 1991.
As the relative welfare level in Belarus is currently 64% compared to the Central and Eastern Europe (CEE) countries average, Belarus needs to build stronger fundaments of sustainable growth by continuing and accelerating the implementation of institutional transformation, primarily by fostering elimination of existing administrative mechanisms of inefficient resource allocation. Based on the experience of the CEE countries’ economic transformation, we highlight five lessons for the purpose of the economic reforms that Belarus still faces today: keeping macroeconomic stability, restructuring and improving the governance of state-owned enterprises, developing the financial market, increasing taxation efficiency, and deepening fiscal decentralization.
Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.
Estonia has Europe’s most transparent tax system (while Poland is second-to-last, in 35th place), and is also known for its pioneering approach to taxation of legal persons’ income. Since 2000, payers of Estonian corporate tax don’t pay tax on their profits as long as they don’t realize them. In principle, this approach should make access to capital easier, spark investment by companies and contribute to faster economic growth. Are these and other positive effects really noticeable in Estonia? Have other countries followed in this country’s footsteps? Would deferment of income tax be possible and beneficial for Poland? How would this affect revenue from tax on corporate profits? Would investors come to see Poland as a tax haven? Does the Estonian system limit tax avoidance and evasion, or actually the opposite? Is such a system fair? Are intermediate solutions possible, which would combine the strengths or limit the weaknesses of the classical and Estonian models of profit tax? These questions are discussed in the mBank-CASE seminar Proceeding no. 163, written by Dmitri Jegorov, deputy general secretary of the Estonian Finance Ministry, who directs the country’s tax and customs policy, Dr. Anna Leszczyłowska of the Poznań University of Economics and Business and Aleksander Łożykowski of the Warsaw School of Economics.
The trade war between the U.S. and China began in March 2018. The American side raised import duties on aluminum and steel from China, which were later extended to other countries, including Canada, Mexico and the EU member states. This drew a negative reaction from those countries and bilateral negotiations with the U.S. In June 2018 America, referring to Section 301 of its 1974 Trade Act, raised tariffs to 25% on 818 groups of products imported from China, arguing that the tariff increase was a response to years of theft of American intellectual property and dishonest trade practices, which has caused the U.S. trade deficit.
Will this trade war mean the collapse of the multilateral trading system and a transition to bilateral relationships? What are the possibilities for increasing tariffs in light of World Trade Organization rules? Can the conflict be resolved using the WTO dispute-resolution mechanism? What are the consequences of the trade war for American consumers and producers, and for suppliers from other countries? How high will tariffs climb as a result of a global trade war? How far can trade volumes and GDP fall if the worst-case scenario comes to pass? Professor Jan J. Michałek and Dr. Przemysław Woźniak give answers to these questions in the mBank-CASE Seminar Proceeding No. 161.
This Report has been prepared for the European Commission, DG TAXUD under contract TAXUD/2017/DE/329, “Study and Reports on the VAT Gap in the EU-28 Member States” and serves as a follow-up to the six reports published between 2013 and 2018.
This Study contains new estimates of the Value Added Tax (VAT) Gap for 2017, as well as updated estimates for 2013-2016. As a novelty in this series of reports, so called “fast VAT Gap estimates” are also presented the year immediately preceding the analysis, namely for 2018. In addition, the study reports the results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). It also scrutinises the Policy Gap in 2017 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses.
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3. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
2
Contents
Abstract ........................................................................................................................... 4
Introduction ..................................................................................................................... 5
1. The Criteria of Macroeconomic Stability: ............................................................... 7
1.1. International Experience and Russia’s Specificities ........................................ 7
1.2. The New Budget Rule .........................................................................................10
1.3. Monetary Policy and Lowering Inflation ............................................................20
Bibliography ...................................................................................................................29
4. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
3
Dr. Sergey Drobyshevsky,
Head of the Center for Macroeconomics and Finance, Gaidar
Institute for Economic Policy (Moscow, Russia);
Dr. Sergey Sinelnikov-Murylev,
Rector, Russian Foreign Trade Academy under the RF
Ministry of Economic Development (Moscow, Russia) and Academic Director, Gaidar
Institute for Economic Policy (Moscow, Russia).
5. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
4
Abstract
The model of the Russian economy that was formed in the 2000s does not match a new
stable growth path, though it helped to calmly overcome the crisis of 2008 and 2009. The
state needs to provide stability in the fields under its direct control, i.e. the budgetary and
monetary policies. In the budgetary policy we consider the advantages and drawbacks of a
“New Budget Rule”, which is based on the long-term average price of oil. In the monetary
sphere, we vote for a policy of transition to inflation targeting and prioritizing low inflation
against the other goals of the monetary authorities.
This article has drawn upon materials which contributed to the revision of the Conception for
the Long Term Socio-Economic Development of the Russian Federation for the period to
2020” (“Strategy 2020”). The Russian version of this paper was published in
“Ekonomicheskaya politika”. 2012, № 9
6. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
5
Introduction
At present, the Russian and global economies are experiencing tough times. Although the
acute phase of the 2007-2009 crisis is over, the global economy continues to be beset by a
number of fundamental imbalances. Apart from the ‘exit strategies’ chosen by developed
countries, this situation has given rise to some serious new problems associated with the
impossibility of properly balancing the state budgets, stabilizing public debt and launching
mechanisms for economic growth stimulation. The unstable growth in developed economies
may cause a decline in the growth rate of leading developing countries; in 2012, the growth
rate of China’s and India’s economies slowed.
Russia entered the 2007-2009 global economic crisis with good macroeconomic indicators:
in 2000-2008, its average annual real GDP growth rate was 7%, the federal budget surplus
rose to 7% of GDP, its government debt was less than 15% of GDP, and its banking and
financial sectors were rapidly developing. However, over the entire 2000-2010 decade, the
Russian economy faced growing internal problems temporarily camouflaged by the high
revenues resulting from a very favorable situation on external raw materials markets.
These problems included:
— the national economy’s growing dependence on the prices of oil and other Russian
raw material exports. It should be specifically pointed out that this dependence was
increasing not only with regard to hard-currency revenues from exports, but also with regard
to their influence on the expectations of economic agents and on consumer attitudes in
Russia;
— the rapid strengthening of the real exchange rate of the ruble and the rising costs of
production. Despite pursuing a quasi-fixed exchange rate regime, the RF Central Bank did
not manage to successfully resist the upward trend displayed by the real exchange rate of
the ruble. The absence of competition on the labor market further accelerated the upward
trend in wages (in 2004-2007, the average annual growth rates of the real incomes of the
population amounted to as much as 11.9%);
— the pattern of economic growth in Russia, as well as in the majority of other
countries during that period, which was based on expanding consumer demand and on the
consumer credit boom that was taking place against the background of a low level of savings
in the economy. The lack of internal private savings forced Russian companies and banks to
7. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
attract external credits. As a result, by autumn 2008, the external debt of Russia’s private
sector had risen to almost 40% of GDP;
— the stable rise in the population’s welfare coupled with good macroeconomic
indicators. This situation did not create stimuli for the urgently needed institutional reforms;
the quality of Russia’s business and investment climate steadily deteriorated.
During the 2008-2009 crisis, these factors exacerbated the negative impact of external
shocks1, thus making the economic downturn in Russia one of the most severe in the world.
However, the ‘safety cushions’ created before the crisis in the budget field (the Reserve
Fund; Russia’s development institutions) and the monetary sphere (the international reserves
of the Bank of Russia)2 enabled Russia to pursue a sufficiently effective anti-crisis policy3 and
to avoid serious social shocks. As early as the end of 2011, the majority of indicators had
returned to their pre-crisis peak levels.
However, the prospects for further development of the Russian economy seem very
uncertain. The global economy is engulfed in a severe systemic crisis, and so nobody
actually knows when economic recovery will occur. Pervasive uncertainty about the future
increases the price volatility of Russian oil and other raw material exports, which the Russian
economy remains highly dependent upon. Apart from the internal problems of the
development of the Russian economy mentioned above, in the next few years Russia will be
faced with a number of new negative trends in its economic situation, including:
— the worsening of the demographic situation, related to a decline in the share of able-bodied
6
people as a percentage of its total population;
— the strengthened economic position of state-owned companies and banks, whose
business efficiency is low even by Russian standards
— the lack of sufficient access to world capital markets (enjoyed by other developing
countries);
1 Beside the shocks related to the fall in oil prices (which was very considerable owing to the low short-term price
elasticity of demand for energy carriers) and the fact that the global financial market had been effectively shut for
developing country borrowers, there existed yet another external factor which determined the extent of the
economic downturn in Russia. The factor in question is the decline in the physical volume of demand for
investment goods and primary processed raw products in developed countries. This decline in demand caused an
immediate profound slump in the export-oriented branches of Russian industry, including ferrous and nonferrous
metallurgy, the petrochemical industry, the timber and timber-processing industries, etc.
2 From a microeconomic point of view, the Reserve Fund should not be contrasted with the international reserves,
because the resources of the Reserve Fund constitute part of the international reserves of the Bank of Russia.
However, from an institutional point of view, it is quite reasonable to draw a distinction between the Reserve Fund
and the international reserves, because decisions concerning their management are made by two different bodies
(the RF Ministry of Finance and the RF Central Bank, respectively) in accordance with different legislatively
established procedures.
3 For more details, see Drobyshevsky et al., 2011.
8. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
— the increasing fiscal pressures associated with the budget commitments assumed during
the crisis4;
7
— the worsening of extraction conditions for energy resources and other mineral resources.
In principle, it would be impossible for Russia to overcome these numerous problems within
the framework of the pattern of economic growth that was established in the early 2000s.
‘The Strategy of Socio-Economic Development of the Russian Federation for the Period up
to the Year 2020’ (‘Strategy-2020’)5, developed in 2011 by the expert community at the
initiative of the RF government, has offered, in fact, a new model of economic growth based
on the promotion of macroeconomic stability, the de-stratification of the economy, and a ‘new
social policy’ (oriented towards increasing the level of human capital development). In the
present paper, we are not going to discuss the new model of growth in detail, focusing
instead on just one of its aspects – the creation of appropriate conditions for its
implementation.
1. The Criteria of Macroeconomic Stability:
1.1. International Experience and Russia’s Specificities
As regards creating a national policy aimed at the creation of macroeconomic conditions that
would ensure the stable and continual development of an economy, one should focus on two
crucial policy fields – the budgetary and monetary policies. In the majority of countries, the
requirements for macroeconomic stability in the field of budgetary policy are confined to the
introduction of a rule regulating the adoption of state budget decisions, while those in the
field of monetary policy – to the setting of the monetary policy targets of the central bank.
In economically developed countries, the budget rule usually sets a ceiling for the state
budget deficit and/or on the country’s public debt. In accordance with the Maastricht criteria,
Eurozone member-countries must keep a tight rein on their budget deficit and total public
debt. In the USA, the total public debt is subject to a statutory limit; since the autumn of 2011,
4
On the eve of the 2008 crisis, in a period of exceptionally favorable conditions for overseas trade, which was
also a high growth era for the Russian economy, Russia’s federal budget expenditure amounted to approximately
18% of GDP, while general government expenditure amounted to slightly less than 34% of GDP. As a result of
the implementation of the package of anti-crisis budget measures in 2009, federal budget expenditure rose to
24% of GDP, while general government expenditure increased to 40.8% of GDP. By now, expenditure (of both
budgets) has dropped by approximately 2.5-3.0 p.p. of GDP, but it is still 3-4 p.p. of GDP higher than its pre-crisis
level.
5
For more details, visit Strategy-2020’s website, www.2020strategy.ru.
9. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
a debt-ceiling law has also been in effect in Spain (as an integral part of Spain’s
Constitution). In primary-commodity-exporting countries, budget rules are usually based on
the overtime redistribution of revenues from exports (via stabilization funds).
In the field of monetary policy, in addition to the level of inflation, the criteria of stability
include the dynamics of the nominal exchange rate of the national currency and the level of
interest rates.
We believe that the most precise, thorough, and accurate criteria of macroeconomic stability
are the Maastricht criteria, notwithstanding the currently adverse situation in the Eurozone
and the near universal abandonment of these criteria by European countries immediately
after adopting the euro. In our opinion, these criteria fully reflected all of the necessary
requirements concerning the economic policy of euro-candidate countries and Eurozone
members, and it is their violation (in the absence of any effective punishment instruments)
that is the cause of the deep crisis being experienced by Europe.
In the field of budgetary policy, as has already been pointed out, the Maastricht criteria set a
ceiling for the state budget deficit (no more than 3% of GDP) and the level of public debt (no
more than 60% of GDP). As regards the field of monetary policy, these criteria do not set any
strict quantitative limits on the level of inflation and interest rates. The level of inflation in a
given country should not exceed by more than 1.5 p.p. the average inflation level of the three
best performing member-countries of the European Monetary System (EMS) in terms of
price stability. Long-term interest rates on ten-year bonds issued by a country should not
exceed by more than 2 p.p. the average of the three best performing EMS member-countries
in terms of price stability. Also, Eurozone candidates have to comply with the following
requirements to the movement of the nominal exchange rate: participation in the European
Exchange Rate Mechanism II for a minimum of two years and a stable exchange rate vis-à-vis
8
the euro (with a fluctuation margin no greater than +/-15%).
When elaborating similar criteria of macroeconomic stability for Russia, the specific features
of its economy should be taken into account, namely its orientation towards the export of raw
materials, and its heavy dependence on world oil prices, which is especially true in regard to
Russia’s budget revenue. In particular, EU countries have relatively stable levels of budget
revenue (partly due to the changes introduced in their national fiscal systems), even though
this level differs from one country to another. An approximately 3% of GDP budget deficit
ceiling roughly corresponds to the range of cyclical budget revenue fluctuations experienced
by European countries over the past few decades. Thus, this criterion takes into account the
possibility of a drop in budget revenue during the low phase of the business cycle, but puts
limits (at least in theory) on the unjustified growth of budget expenditure.
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In Russia, budget revenue fluctuations are, for most part, related not to the business cycle,
but to the behavior of oil prices on the world market. Accordingly, the general level of budget
revenue cannot be characterized as stable: year-to-year budget revenue fluctuations can
amount to 5-7% of GDP, and it should be noted that budget revenue fluctuations caused by
changes in the external economic situation do not necessarily coincide in time with business-cycle
9
impacts.
Thus, as far as Russia is concerned, the most important budget criterion of macroeconomic
stability (the basis of its budget rule) is necessarily the budget revenue base level indicator.
In other words, the accuracy of this criterion is, to a certain extent, ‘guaranteed’ by its taking
into account the existing trends in the world market of raw materials. Such an approach
differs somewhat from the concept of structural and irregular revenue applied by the OECD6.
The structural part of revenue is usually understood as the average level of revenue
collected by the state, the irregular part of revenue – as a variable revenue component which
changes over the phases of the business cycle.
In this situation, a limit imposed on the budget deficit level is of secondary importance; it can
be established in order to emphasize the rigidity of the budget rule. Bearing in mind that the
budgetary system of the Russian Federation has a multi-tier structure topped by and
interlocked with the federal budget representing the budget of the ‘highest instance’; it should
be noted that maximum effect can be obtained when the budget rule is applied to the federal
budget.
The second budget criterion of macroeconomic stability is a limit on the public debt of the
Russian Federation. In Russian conditions, this limit should be imposed with a view not only
towards the predominantly raw-material bias of the Russian economy, but also towards the
level of development (or the depth) of its national financial sector and the fact that it belongs
to the group of countries with developing economies whose country ratings and levels of
attractiveness for international investors are approximately similar to Russia’s.
The third component of the budget rule (and the most important one for Russia) must be the
mechanism of over-time redistribution of revenues from the extraction and export of raw
materials (natural rent) to a sovereign raw material fund (or funds). Such a mechanism had
functioned in Russia before the 2008-2009 crisis, and it was due to that mechanism that the
redundant revenues were withdrawn from the budget and the national economy into the
Stabilization Fund (the Reserve Fund and the Future Generations’ Fund) during periods of
favorable world market conjuncture. In the event of a drop in world oil prices, this mechanism
6 For more details on the OECD’s approach, see Chouraqui et al., 1990; Giorno et al., 1995.
11. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
was made use of in order to address the issue of revenue shortfalls, and to finance the
budget deficit through loans.
As regards the requirements of macroeconomic stability in the field of monetary policy, we
believe that practically the only criterion applicable in this respect is the level of inflation
indicator. Until recently, Russia’s inflation had been high in comparison with OECD countries
and the largest developing economies; therefore, it is crucially important that it should be
steadily reduced to a comparable level. The two other Maastricht criteria in the field of
monetary policy – a limit on the level of interest rates and on the fluctuations of the nominal
rate of exchange of the national currency – are specifically designed for Eurozone
candidates, and are by no means fully applicable to Russia.
10
1.2. The New Budget Rule
The Russian economy’s continuing dependence on the situation in world raw-material
markets makes it difficult for this country to pursue a coherent domestic anti-cyclical policy.
The creation of the Reserve Fund and the singling-out of non-oil-and-gas revenues and the
oil-and-gas transfer were the first steps towards neutralizing the effects of internal cyclical
and external situational fluctuations. As shown by the 2008-2009 crisis, the Reserve Fund is
capable of fulfilling its intended role in smoothing over the effects of downfalls in the level of
natural resource rent and the other budget revenues that indirectly depend on the situation in
external markets.
However, if external shocks coincide with the effects of the internal business cycle, the
capacities of the Reserve Fund may turn out to be insufficient, and the government will be
forced to resort to large-scale market borrowing. The creation of a well-developed market for
government securities – primarily for domestic government securities – not only permits the
government to somewhat level down the fluctuations of irregular (cyclical) revenue, but also
makes it possible for the Central Bank to effectively implement its policy of managing interest
rates via operations in the open market.
The first budget rule was introduced in Russia in December 2003 concurrently with the
creation of the Stabilization Fund of the Russian Federation. This rule was designed to
regulate the surplus of the federal budget being accumulated in the form of balances of the
federal budget’s accounts with the RF Central Bank. The Stabilization Fund was formed by
pooling the excess revenues generated by the production and export of oil (revenues in
excess of the planned, theoretical revenues based on the long-term price of oil – either a cut-off
price or a base price). Those revenues were comprised of two components: revenues
12. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
from the export customs duty on crude oil and revenues from the mineral extraction tax on
oil. The actual amount of revenues to be transferred to the Fund was in direct proportion to
the excess of the actual rate of a relevant tax over its estimated rate determined by the
benchmark oil price (or cutoff price). Thus, the volume of deductions to the Stabilization Fund
was dependent on how high a current price of oil was over the benchmark price. The Fund’s
resources could be used to cover the federal budget deficit only if the oil price should
plummet below its benchmark price. However, if the accumulated fund volume should
exceed the Rb 500bn, the money could be also allocated to other purposes.
As of January 1st, 2004, the benchmark price was established at the level of $20 per barrel of
Ural crude oil, and as of January 1st 2006, the cutoff price was raised to $27 per barrel. In
spite of the continually rising oil prices, the cutoff price was no longer raised any further for
fear of mounting inflation and the budget’s increasing dependence on the foreign market.
From February 1st 2008, the RF Stabilization Fund was divided into the Reserve Fund and
the National Welfare Fund (NWF). The Reserve Fund became in effect the Stabilization
Fund’s functional successor, because it represents the part of the federal budget which
should be recorded and administered separately in order to effectuate the oil and gas
transfer in the event of insufficient oil and gas revenues for its financial coverage. The
Reserve Fund is formed out of the federal budget’s oil and gas revenues allocated in the
amount that exceeds the size of the oil and gas transfer approved for each financial year, on
the condition that the accumulated size of the Reserve Fund must not exceed the
established norm (10% of GDP); another source is the revenue generated by the
management (investment) of the Reserve Fund’s assets.
The National Welfare Fund (NWF) accumulates the oil and gas revenues of the federal
budget that exceed the value of the oil and gas transfer approved for the corresponding fiscal
year after the Reserve Fund reaches (or surpasses) its prescribed size. It also accumulates
the investment revenues of the NWF.
Thus, since 2007 Russia has been applying a budget rule based on transferring some part of
oil and gas revenues to sovereign funds and on using part of oil and gas revenues to co-finance
large-scale budget-funded social programs and to finance the federal budget deficit
by means of the so-called oil and gas transfers (Article 96.8 of the RF Budget Code). The
greatest advantage of such an approach is its simplicity – the authorized size of a transfer is
measured in percentage points of GDP, and therefore does not depend on the behavior of oil
prices. However, bearing in mind the conservative nature of budget planning, this rule is
effective only when oil prices fluctuate relatively widely: for example, in the 2000s, when oil
prices were steadily rising, the amount of the oil and gas transfer authorized in 2004 would
have lagged behind the actual inflow of oil and gas revenues into the RF federal budget by
11
13. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
the year 2008. But in this case, the amount of this transfer, almost inevitably, would have
been considerably revised upwards, because both the authorized amount and its revision are
difficult to substantiate from an economic point of view: such decisions are very prone to
subjective biases and lobbying pressures. Therefore, the application of such a rule cannot
set a sufficient limit on expenditure so as to achieve a balanced federal budget.
Moreover, the concept of an oil and gas transfer is based on a rigid peg to the two taxes that
represent the only source of the oil and gas revenues of the federal budget – the export duty
and mineral extraction tax. Correspondingly, any change in the main parameters of these
taxes (their tax bases, rates, and distribution by tier of the budgetary system) will make it
necessary to re-determine the size of the oil and gas transfer and to alter the budget rule.
We believe that more adequate to the task of achieving a balanced budget would be an
approach that takes into account all the direct and indirect channels through which oil prices
exert their influence on the level of budget revenues (prices for energy carrier exports, the
rate of economic growth, the population’s incomes, currency exchange rates, etc.). Besides,
it is advisable to take into account not only the revenues generated by current fluctuations of
oil and gas prices, but also the cyclical revenues dependent on a business cycle phase. In
this connection, it should be remembered that in the present Russian situation the business
cycle largely depends on the movement of hydrocarbon prices.
In light of the increasing diversification of the Russian economy and the structure of budget
revenue, the budget rule must take into account not only the benchmark oil price, but also
the parameters of the business cycle. In other words, in the medium-term perspective it will
be necessary to single out those structural budget revenues that are estimated on the basis
of the benchmark oil price and the average rate of GDP per business cycle growth. When
stabilizing the fluctuations of budget parameters caused by the latter two factors, it should be
remembered that, due to the unpredictable nature of the foreign economic situation, part of
the redundant budget revenue will have to be kept as reserves, while the budget parameters
in the course of each business cycle can be stabilized by borrowing, as is well illustrated by
international experience.
The approach to elaborating the budget rule on the basis of a benchmark oil price is more
complicated, for technical reasons, than simply fixing the size of the oil and gas transfer,
because in the former case the process of budget planning and drawing up the budget for
each financial year actually involves making estimations for two budget versions – one being
based on the expected prices of oil, and the other on the benchmark oil price. Consequently,
the volume of budget revenue pegged to the benchmark oil price will actually determine its
size’s ceiling, while the expected budget revenue volume will make it possible to plan the
12
14. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
amount of money to be transferred to the Reserve Fund or the amount of its possible
spending.
13
So, the budget rule must incorporate the following indicators:
— the benchmark oil price;
— accumulation/utilization of part of the revenue in the Reserve Fund;
— the ceiling for budget deficit coverage at the expense of net borrowing;
— the ceiling for the size of government debt.
Evidently, the issue of determining the benchmark oil price in the framework of this rule is a
key one. Fig. 1 demonstrates the movement of the price of Urals crude oil over the period of
1991—2012 and two versions of the benchmark oil price:
— benchmark oil price 1 — the moving arithmetic average of the oil price over the previous
decade;
— benchmark oil price 2 — the moving arithmetic average of the oil price over the previous 5
years.
15. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
14
Figure 1. Movement of Oil Prices in 1991—2012
Sources: BP; RF Central Bank; authors’ calculations.
As seen in this graph, in the 1990s and early 2000s, when the scale of oil price fluctuations
was relatively small, the two benchmark oil price indices were relatively similar. However,
from 2005 onwards, their movement began to display increasingly strong differences: the
five-year average price rather soon became close to the actual oil price level, while the ten-year
average price points to the need to moderate the size of budget expenditure.
Fig. 2 demonstrates the movement of hypothetical prices of Urals and the two benchmark oil
prices in 2010—2020 under two scenarios. The first one envisages a situation in which, from
2012 onwards, oil prices remain at $ 100 per barrel (in constant prices); the second one
predicts that in 2013, they will drop to $ 60 per barrel and thereafter remain at that level (in
constant prices).
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15
Figure 2. Scenarios of Oil Price Movement in 2010—2020
Source: authors’ calculations.
As seen in these two graphs, the average five-year benchmark oil price has practically no
downward effect on the volume of budget expenditure under the scenario that envisages oil
price growth (‘$ 100 per barrel’), while under the ‘crisis’ scenario (‘$ 60 per barrel’) the price
of oil becomes adapted to the new regime (declining below the level of scenario prices in
2018) at a faster rate than its ten-year average value. However, the accumulated volume of
acceptable budget expenditure in 2013—2017 is noticeably higher than the same index for
the 2013—2020 period observed in combination with the ten-year mean benchmark oil price
(17.6 against 15.1% of GDP). Besides, the allowed ceiling under the budget deficit rule in
combination with the five-year mean benchmark oil price may reach the level of 5.0—5.5% of
GDP, while in combination with the ten-year average benchmark oil price it can hardly go up
to 2.0% of GDP.
So, from our point of view, it would be more feasible to take as the benchmark the price of
Urals estimated as its sliding arithmetic mean value for a ten-year period. If that index is
applied as the benchmark, the most even distribution of the Reserve Fund’s accumulation
rate can be achieved, with the gradual and moderate spending of its resources in the event
of an unfavorable situation on the world oil market.
The accumulated Reserve Fund’s volume must be adequate so as to cover the federal
budget deficit for a period of two or three years. Then it will become possible to gradually
adapt the size of budget expenditure to its new level, thus avoiding its one-time shrinkage
over one budget period. The available estimates indicate that, to satisfy that condition, the
size of the Reserve Fund must amount to 6—8% of GDP. Thus, for example, our estimates
demonstrate that, under the so-called ‘crisis’ scenario (‘$ 60 per barrel’) when the price of oil
shrinks by 40% from its previous level, the Reserve Fund at 6% of GDP will be sufficient to
cover the budget deficit for a period of 2.5 years. As this particular scenario is based on the
17. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
prospect of a long-term decline in oil prices (they remain below the average ten-year level for
9 years), after the Reserve Fund is spent, it will become necessary either to revise the rule,
or to cover the budget deficit by borrowing on the market (in the event of a suitable market
conjuncture).
After the target size of the Reserve Fund is achieved and a favorable market conjuncture
ensures further growth of additional budget revenue, this money is to be transferred to the
National Welfare Fund. (An analysis of the goals and principles of its functioning would go
beyond the framework of this paper.)
It should be specifically pointed out that the concept of the intertemporal smoothing of oil and
gas budget revenues relies on the assumption that there are certain patterns in the
movement of oil prices and, consequently, that of budget revenue. If oil prices and budget
revenue fluctuate around their average values, and the favorable and unfavorable periods
are approximately similar in their duration, then the resources accumulated over a favorable
period (as a result of saving all the revenues in excess of their average level) would be
sufficient to replace the amount of budget revenue lost over the period when the price of oil is
low. However, it is well-known that the movement of oil prices is a non-stationary process (its
parameters, including mean value, dispersion and other distribution indices, being
changeable over time), and so it is impossible to correctly evaluate the duration and scale of
the fluctuation of prices in any direction. Consequently, the movement of Russia’s budget
revenue is also non-stationary. As in the case of oil prices, this circumstances make it difficult
to predict changes in the budget size. It is hardly possible to elaborate a budget rule
applicable to a non-stationary process and capable of stabilizing the size of budget
expenditure.
When the movement of oil prices is non-stationary, the resources accumulated over a period
of favorable external economic conditions are insufficient to provide even the average
volume of resources necessary for stabilizing expenditures over the course of an unfavorable
period (that will see both savings shortages and savings surpluses). The reason is that these
periods can be relatively long and of different durations; moreover, it is unclear which level of
revenues should be considered ‘average’, because this indicator changes over time7.
In such a situation, the afore-described budget rule, based on the (average multiyear)
benchmark oil price cannot ensure full stabilization of the federal budget. For all such effects
to be taken into account, it is necessary to introduce a more intricate asymmetric rule that
7 Here we discuss the non-stationarity caused by the behavior dynamics of the energy-carrier market. It should be
noted that a similar problem with the stationarity of trends, including business cycles, in macroeconomic time
series, formulated as early as 1982 by Charles R. Nelson and Charles I. Plosser (Nelson, Plosser, 1982), has not
been solved as yet (for more detail, see Maddala, In-Moo Kim, 1999).
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would exert a restraining influence on budget expenditures during periods of high oil prices,
and then would quickly adapt the budget to a lower level of oil prices during periods of
decline. In a period of high conjuncture, marked by revenue accumulation, budgetary
authorities can use a rule based on the (average multiyear) benchmark oil price. In a period
of low prices in world energy-carrier markets (especially when oil prices experience a sharp
fall by more than 20-30%), this approach can become counterproductive. Since the period of
low oil prices can be unpredictably long, one should not attempt to stabilize budget
expenditures at their average multiyear level. Budget expenditures should be planned on the
basis of actual oil prices or their forecasts, and on the amount of resources accumulated in
the Reserve Fund. By taking into account a number of factors, including forecasts of the
duration of the period of low prices, one should then determine a lower expenditure
trajectory.
Despite the above reservations, we believe that in the foreseeable future the over-time
balancing (stabilization) of the federal budget will actually be possible – to an extent. To
achieve these ends, the budget rule should ensure the conduct of a sufficiently conservative
budgetary policy during a period of favorable external economic conditions and should
mitigate, at the expense of the accumulated resources, the effects of economic shocks
caused by their worsening. In the event of a rapid and considerable worsening of the
situation in overseas markets, it would be advisable to abandon the symmetry of the budget
rule, which uses the average multiyear price of oil as a benchmark irrespective of whether
the current oil prices are low or high. Once this is done, it would be possible for the budget
projections to be based on lower oil prices, thus facilitating a quick adaptation of the budget
to unfavorable conditions on overseas markets.
The budget rule suggests that the federal budget should be balanced at the benchmark oil
price. However, such a rigid requirement is difficult to implement in practice. Firstly, the
simple rule does not take into account the particular phase of the business cycle in which the
economy is operating, which, as has already been pointed out, could necessitate heavy
borrowing in a period of low business activity. Secondly, the current volume of federal budget
expenditure is far above the ceiling determined on the basis of the benchmark oil price.
Thus, in the Budget Message to the Federal Assembly of the Russian Federation for the
period of 2013—2015, the volume of federal budget expenditure for 2013 is set at the level of
Rb 13.4 trillion, or approximately 20.4% of forecasted GDP; there is a possibility of a further
increase in budget expenditure during the procedure of approving the budget for 2013—
2015, although in accordance with the benchmark oil price ($ 68.6 per barrel), its 2013
volume must not exceed 16.5—17.0% of GDP. According to our estimates, a political
decision to cut the size of budget expenditure by more than 1 p.p. of GDP would be unlikely
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in the absence of any serious external shocks, and so at the given benchmark oil price the
budget can become balanced no earlier than 2016.
The document entitled ‘The Main Directions of Budgetary Policy for 2013 and the 2014-2015
Planning Period’ envisages that, in 2015, federal budget expenditure is going to be 2-2.5 p.p.
of GDP less than in 2012. Thus, the RF Government has declared its intention to relatively
quickly cut Russia’s budget expenditure. However, an analysis of the structure of budget
expenditure raises doubts as to whether or not this scenario is actually feasible.
In particular, the amount of public expenditure on national defense, national security and law
enforcement will be even greater in real terms, while cuts will be made, first of all, in the
expenditure items related to human capital investment (health care, education). Public
expenditure on the national economy and the housing and utilities sector will also be
reduced, while spending on social policy will remain practically unchanged8. It is doubtful
whether the announced cuts in expenditure can be carried out without some serious negative
social and political consequences. Most likely, the corresponding expenditures will be revised
upwards.
Thus, it is practically inevitable that Russia’s federal budget will run deficits in the period until
2016. Moreover, it should be noted that, quite often, the necessity arises to finance
unforeseen additional expenditures in the course of executing the federal budget. Therefore
we consider it possible that the federal budget based on the benchmark oil price should be
authorized to run deficits up to 2.5% of GDP until 2016, and up to 1% of GDP thereafter. So
long as the market situation permits, these deficits should be exclusively financed by market
borrowing, or at the expense of revenues from privatization – in order not to influence the
volume of allocations to the Reserve Fund.
The possibility for Russia’s federal budget to run a deficit and to finance it through borrowing
should be limited by means of imposing a ceiling on public debt. Estimates show that, if oil
prices fall to $ 60 per barrel and the depth of Russia’s financial sector remains unchanged,
Russia will be able to service and finance public debt in an amount not exceeding 25% of
GDP. Although this level is much lower than the existing criteria of a maximum level of
government debt (60% of GDP according to the Maastricht criteria; slightly more than 100%
of GDP in the USA), even this low level poses extreme danger to the Russian economy. It
should be not be forgotten that in August 1998, on the eve of Russia’s default, the volume of
8 In Strategy-2020, the expert community put forth the opposite concept of changing the structure of expenditure:
a reduction in expenditure on the ‘power block’ and an increase in expenditure on the budget items related to the
development of human capital, the improvement of national infrastructure and the environment, and the
implementation of the State’s social obligations.
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the GKO-OFZ market amounted to only 16.3% of GDP. Data on the budget deficits and on
the volumes of public debt in OECD countries are presented in Table 1.
Table 1. Budget Deficits and the Volumes of Public Debt in OECD Countries in
19
2011 (% of GDP)
Country
Central government budget
deficit
Government debt
Australia –3.9 22.9
Austria –2.6 72.2
Belgium –3.9 98.5
Brazil – 66.2
Canada –4.5 85.0
Chile 1.2 9.9
Czech Republic –3.1 41.5
Denmark –1.9 46.4
Estonia 1.0 6.0
Finland –0.9 48.6
France –5.2 86.3
Germany –1.0 81.5
Greece –9.2 160.8
Hungary 4.2 80.5
Iceland –4.4 99.2
Ireland –13.0 105.0
Israel –4.4 74.3
Italy –3.8 120.1
Japan –9.5 229.8
South Korea 1.8 34.1
Luxembourg –0.6 20.9
Mexico –3.4 43.8
The Netherlands –4.6 66.2
New Zealand –8.2 37.0
Norway 13.6 49.6
Poland –5.1 55.4
Portugal –4.2 106.8
Slovakia –4.8 44.6
Slovenia –6.4 47.3
Spain –8.5 68.5
Sweden 0.1 37.4
Switzerland 0.8 48.7
Turkey –0.3 39.4
UK –8.4 82.5
USA –9.7 102.9
Source: OECD; IMF.
The currency structure of public debt is extremely important: as the volume of public debt
approaches its upper limit, the share of debt denominated in foreign exchange should tend to
zero. In the event of unfavorable changes in the situation on the raw-material or financial
market, the greatest danger to the stability of public debt policy comes from the foreign-exchange
component of public debt, which can be instrumental in breaching the ceiling
imposed on public debt, and can even cause problems with refinancing.
Thus, a new budget rule that would be capable of ensuring macroeconomic stability or, at
least, not to become a de-stabilizing factor, can be defined as follows:
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The upper limit imposed on federal budget expenditure must be equal to the amount of
revenue estimated on the basis of the Urals benchmark crude oil price as a 10-year moving
average.
Federal budget revenue in excess of the revenue volume estimated on the basis of the
benchmark oil price must be allocated to the Reserve Fund. Its prescribed size is set at 6 to
8% of GDP, which makes it possible to finance the budget deficit over the course of three
years in the event of a 20-30% drop in oil prices. If the Reserve Fund’s volume exceeds the
above-mentioned levels, any further resources allocated should be transferred to the
National Welfare Fund.
For the period up to 2016, the deficit of the federal budget can be set at around 2.0-2.5% of
GDP, and later on – at up to 1.0% of GDP. It should be financed by revenues from
privatization and by debt financing (to be carried out predominantly in the RF national
currency).
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The upper limit of public debt should be set at around 25% of GDP.
1.3. Monetary Policy and Lowering Inflation
The main challenge in the field of monetary policy is the domestic monetary sphere’s
extremely heavy dependence on external conditions. Fluctuations in hydrocarbon prices and
revenues lead to fluctuations in the inflow of foreign exchange into the economy, and,
correspondingly, to fluctuations of the exchange rate of the national currency and of the
money supply volume. In order to reduce the economy’s dependence on these fluctuations, it
is necessary to create a new ‘nominal anchor’ which can serve as an alternative to the
exchange rate, and to make market agents confident of this ‘anchor’.
In a resource-dependent economy, it is difficult, for objective reasons, to simultaneously
maintain low inflation and constrain the fluctuations of the exchange rate. Thus, as far as
monetary policy is concerned, a choice must be made between two options – either to rapidly
reduce the rate of inflation, disregarding a number of short-term negative effects of such a
move, and thus to significantly improve conditions for domestic investment in the following
years; or to maintain a high short-term GDP growth rate, and suffer from a chronic shortage
of domestic investment in the medium-term perspective.
In the 2000s, both Russia and China implemented the latter approach to monetary policy.
Their monetary policies were aimed at making their domestic producers price-competitive in
the short-term. To achieve these ends, they stimulated economic growth by expanding
exports and promoting import substitution, while simultaneously keeping the exchange rates
of their national currencies at a low level. The results of such a policy were different in each
22. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
of the two countries. In China, the rate of inflation was considerably lower than in Russia due
to rapidly increasing demand for real money balances, large-scale sterilization of currency
purchase operations through the sale of the central bank’s bonds, and the established high
norms for mandatory reserves. Consequently, the currency inflow into China via the current
and capital accounts of the balance of payments and the accumulation of currency reserves
by the central bank affected the inflation rate’s growth and the Yuan’s real exchange rate
only slightly. In Russia, a similar policy triggered rapid inflation growth and strengthened the
ruble’s real exchange rate, thus eliminating the effect of all of the government’s efforts aiming
at promoting economic development.
When comparing the two policy scenarios (a quasi-fixed exchange rate with broad
fluctuations of money supply in response to fluctuations in the current or capital accounts of
the balance of payments or inflation targeting with broad fluctuations of the ruble’s exchange
rate), it should be borne in mind that, while planning their activity in a situation of low inflation
coupled with dramatic exchange rate fluctuations, economic agents (exporters and importers
alike) can use forward markets to hedge their currency exchange risks. However, the risks
associated with potential fluctuations in the inflation rate cannot be hedged. Thus, the
scenario based on a low inflation rate and considerable exchange rate fluctuations can, on
the whole, ensure a higher predictability level for market participants and, as a consequence,
better conditions for economic growth.
We believe that the latter scenario would be the best choice. In that case, the main priority
for the RF Central Bank in the medium term (until 2015) will be to bring down the inflation
rate and make monetary policy less dependent on external conditions. Thus, in particular,
Russia’s monetary authorities would have to achieve a rapid reduction — over a period of
1.5—2 years — of the inflation rate to less than 5% per annum. Thereafter it would have to
be maintained within the range of the ‘mean EU inflation rate + 1.5—2 pp’. As a lower
inflation rate can only be achieved by limiting money supply to the banking sector and by
increasing its value, the implementation of such a scenario would entail worsening, for a
short period, the terms for loans issued to the non-financial sector and the resulting
slowdown in the growth rates of investment in fixed assets and real GDP. However, on the
plus side, as early as 2014—2015, there will already be more favorable conditions for
economic growth than under the inertia-oriented scenario.
Here are the arguments in favor of the choice of inflation suppression as the main monetary
policy target. First, a high inflation rate creates strong incentives for current consumption and
low motivation for saving (as saved money is depreciating); so, the economy begins to feel a
deficit of ‘long’ money needed for big and long-term investments, which then has to be
replaced by short-term borrowings. Consequently, the risks increase under conditions of a
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resource-dependent economy. Secondly, when the inflation rate is high, it spoils the effect of
monetary policy by depriving the RF Central Bank of opportunities to regulate demand. It
also undermines trust in the national currency. Thirdly, a high inflation rate is associated with
high risks for investment planning (if inflation grows rapidly, the relative prices of different
commodities display different growth rates, and so errors are very probable both with regard
to estimations of a project’s profitability and the real value of borrowed money); this factor
brings down both the volume of investment and the potential rate of economic growth.
Fourthly, it becomes difficult to control poverty, and the population’s incomes begin to
diverge more impressively (inflation has a stronger adverse effect on the incomes of the
poor), thus escalating social tensions.
In spite of high public awareness of the aforesaid issues, Russia remains one of the world’s
leaders in terms of its inflation rate – even in comparison with the largest developing
economies (see Table 2).
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23
Table 2. Inflation in G20 in 2008—2010
(as % of previous year)
Country
2008 2009 2010
mean
per
annum
as of
end of
year
mean
per
annum
as of
end of
year
mean
per
annum
as of
end of
year
Argentina 8.6 7.2 6.3 7.7 10.6 11.0
Australia 4.4 3.7 1.8 2.1 3.0 3.1
Brazil 5.7 5.9 4.9 4.3 5.0 5.2
Canada 2.4 1.9 0.3 0.8 1.8 2.1
China 5.9 2.5 –0.7 0.7 3.5 3.5
France 3.2 3.2 0.1 0.1 1.6 1.6
Germany 2.8 1.1 0.2 0.8 1.3 1.3
EU 3.7 2.6 0.9 1.2 1.9 1.9
India 8.3 9.7 10.9 15.0 13.2 8.6
Indonesia 9.8 11.1 4.8 2.8 5.1 5.9
Italy 3.5 2.4 0.8 1.0 1.6 1.7
Japan 1.4 0.4 –1.4 –1.7 –1.0 –1.1
South Korea 4.7 4.1 2.8 2.8 3.1 3.0
Mexico 5.1 6.5 5.3 3.5 4.2 4.5
RF* 14.1 13.3 11.7 8.8 6.6 8.8
Saudi Arabia 9.9 9.0 5.1 4.2 5.5 6.5
South Africa 11.5 9.5 7.1 6.3 5.6 5.8
UK 3.6 3.9 2.1 2.1 3.1 2.6
Turkey 10.4 10.1 6.3 6.5 8.7 7.6
USA 3.8 0.7 –0.3 1.9 1.4 0.5
Source: World Economic Outlook database / IMF. * Data as of end of period provided by Rosstat.
To ensure that its monetary policy is compliant with the requirements for macroeconomic
stability, the Bank of Russia will have to resort to the measures enumerated below. Some of
them have already been implemented, and it would be prudent for the RF Central Bank to
remain consistent in its policy.
1. The RF Central Bank’s policy should incorporate some elements of modified (hybrid)
inflation targeting (in 2012—2014). In this connection, it will be necessary to ensure
the flexibility of the ruble’s nominal exchange rate relative to the bi-currency basket by
consistently lowering the volume of target (planned) interventions in response to the
ruble’s exchange rate’s intraday fluctuations. Until a complete switchover to inflation
targeting is achieved, it will be possible to keep the ruble’s nominal exchange rate
against the bi-currency basket as an operative target. Simultaneously, currency
interventions will be needed not only to level down the daily and intraday fluctuations,
but also those near the boundaries of a sufficiently wide currency corridor. An
important related measure will be to broaden the scope of refinancing to commercial
banks through operations with securities.
2. Money supply will have to be restricted until the inflation rate is brought down to 5%
per annum by means of maintaining the RF Central Bank’s rate of refinancing at a
level no less than 1 pp higher than that of the current inflation rate in per annum
terms, raising the interest rates on the Bank of Russia’s deposit and direct REPO
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operations, and imposing constraints on money supply by banks (restrictions on retail
crediting, differentiation of reserve norms by type of liability).
3. Institutional measures aiming at lowering the inflation rate will be needed (this sphere
is only partly controlled by the monetary authorities, and therefore the active
participation of the RF Government is essential). These include de-monopolizing the
economy, removing barriers impeding competition, taking action against cartel
agreements etc., reforming natural monopolies, revising the established ceilings for
regulated prices and tariffs — meaning pegging their level to the inflation target set
for a given calendar year. An obstacle to implementing a policy of rapid inflation
decline will be the necessity to eliminate the existing distortions in relative prices
(energy resources, regulated prices and tariffs), which is conducive to speeding up
the inflation rate.
One more noteworthy point is the necessity to increase the informative value and
transparency of the decisions made by the Bank of Russia’s Board of Directors
concerning monetary policy issues.
4. The RF Central Bank’s switchover to a fully-fledged regime of modified (hybrid)
inflation targeting (from 2015 onwards) will require that its target value be set at a
level no higher than 1.5 - 2 pp above the forecasted (target) inflation level set by the
European Central Bank. This measure will make it possible to reckon for the effects
of external price factors (fluctuations of the FAO Food Price Index, world prices for
energy resources, etc.).
Interest rates must become the principal monetary policy instrument. Changes in the volume
of money supply to the banking sector must be controlled by means of operations (pledges,
purchases/sales) in the market for ruble-denominated financial instruments. If will be feasible
to allow the ruble’s exchange rate against the bi-currency basket to float freely – with due
regard for the situation on the world raw materials markets and short-term capital movement.
As far as interventions on the currency market are concerned, a discretional policy can be
possible if geared by the movement of the fundamental factors (the status of the balance of
payments, the level of currency risks, and changes in the ruble’s real effective exchange
rate). In this regard, it would be unwise to establish rules for target (or planned) interventions.
Currency purchase (or sale) must be carried out predominantly in the interests of the RF
Ministry of Finance (in order to replenish or spend the Reserve Fund and the National
Welfare Fund). Similarly to the transition period, it will be feasible for the RF Government to
set, on a discretional basis, the ceilings for regulated prices and tariffs for each calendar
year, pegging their level to the inflation target set by the Bank of Russia.
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The implementation of this package of measures will make it possible to achieve several
important goals in addition to that of lowering the inflation rate by late 2013 to the level of 5%
per annum. Among these goals are the creation of adequate preconditions for the ruble to
perform some of the functions of a reserve currency (currency of foreign equity securities;
reserve currency for the central banks of Russia’s major partners in trade and the countries
situated in geographically proximal regions; currency of settlement of some trade
operations); the promotion of de-dollarization of the savings and debt obligations of Russian
economic agents in RF territory; and a gradual increase in the monetization level of Russia’s
economy (up to 70 -80% of GDP by 2020, depending on the level of the Russian financial
market’s development and the success of the project envisaging the creation of an
international financial center in Moscow).
As a result, as early as 2013 - 2014, the level of inflation in Russia may decline to 4.5 - 5.0%
per annum, and interest rates on credits to 7 - 8% in per annum terms. Meanwhile, the rates
on deposits will also drop to 5 - 6%, while remaining positive in real terms.
The actual implementation of that type of anti-inflation policy is difficult due to the necessity
to monetize the balance of trade if the RF Central Bank decides not to withdraw entirely from
the currency market, so as to prevent the exchange rate from fluctuating too sharply,
especially if currency inflow on the capital account resumes. This is done because the
increasing amplitude of the exchange rate’s fluctuations in conditions of a de-dollarized
economy pushes up the level of investor uncertainty in the size of their future yield, and so
may trigger speculative demand for currency. Similarly, the implementation of an inflation
targeting policy can be complicated by an inflow of foreign speculative capital triggered by
increasing interest rates and the expectations of strengthening of both the nominal and real
exchange rates of the ruble.
Another constraint associated with the switchover to inflation targeting is an asymmetrical
influence of the exchange rate on domestic prices. This effect is stronger when the ruble’s
exchange rate is declining than in the reverse situation. It results in speeding up the inflation
rate in periods of a lower exchange rate; however, when the exchange rate is on the rise,
there is no compensatory slowdown in the inflation rate.
And, finally, the implementation of an inflation targeting policy in the short term is seriously
hindered by increasing interest rates. This may result in a drop in the scope of crediting
granted to the non-financial sector, which would be followed by a slowdown in investment
and GDP growth rates.
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Thus, the policy of accelerated inflation decline may be associated with some short-term
negative effects, but then result in significantly improved conditions for domestic investment
growth in 2013 - 2020.
The inertia-oriented scenario, under which the inflation rate is maintained at its present level,
envisages a higher growth rate in the short term and a chronic shortage of domestic
investment in 2013 - 2020. The experience of the anti-inflation policy in the USA pursued by
the Reagan Administration and the Federal Reserve (headed by Paul Volcker) in the early
1980s testifies to the fact that the period of slower growth (if the anti-inflation policy is
implemented consistently and aggressively) does not exceed 1 - 1.5 years (see Table 3).
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Table 3. Anti-inflation Policy Parameters and Economic Growth in the USA
1981 1982 1983 1984 1985 1986 1987 1988
16.4 12.3 9.1 10.2 8.1 6.8 6.7 7.6
10.3 6.1 3.2 4.3 3.6 1.9 3.7 4.0
2.5 –1.9 4.5 7.2 4.1 3.5 3.2 4.1
1.9 3.9 5.9 4.7 5.0 4.9 3.1 3.0
Source: International Financial Statistics / IMF.
* * *
We have discussed the main conditions of macroeconomic stability that must be ensured by
the State in the fields directly under its control - budget and monetary policies. In our opinion,
the creation of such conditions is a necessary (but by no means the only) prerequisite for a
successful implementation not only of a new growth pattern, but also of stable economic
growth in principle. In our paper, we used the Maastricht criteria as an example of the criteria
(or conditions) of macroeconomic stability. However, given the Russian economy’s strong
dependence on raw materials, these criteria were seriously revised and adjusted.
In the field of budgetary policy, the requirements designed to ensure macroeconomic stability
may be stipulated in the framework of a new budget rule. Among other things, this rule
should determine the ceilings to be imposed on expenditure and the federal budget deficit
(on the basis of the benchmark oil price), the mechanism of and conditions for the allocation
of irregular revenue (natural rent) to sovereign raw-material funds and its subsequent use
through these funds, the mechanism of the functioning of these funds, and the upper limit to
be placed on the Russian Federation’s public debt.
At the St. Petersburg International Economic Forum held on 21-23 June 2012, RF President
Vladimir Putin and RF Minister of Finance Anton Siluanov put forth the new principles of the
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Russian Federation’s budgetary policy for 2013 - 2015, which to a certain extent are similar
to our proposals. Thus, in particular, it was announced that the oil benchmark for calculating
the upper limit to be imposed on federal budget expenditure should be based on the 10-year
moving average of the oil price; that surplus revenue should be allocated to the Reserve
Fund; and that a ceiling should be placed on the Russian Federation’s public debt. However,
the introduction of the new procedure for determining the benchmark oil price in 2013-2015
(on the basis of the 5-year moving average of the oil price) and persistent uncertainty about
whether or not the expenditure ceiling will be complied with, may considerably undermine the
effect of the newly adopted decisions. According to our estimates, in the next few years it will
be necessary to reduce federal budget expenditure by no less than 4 p.p. of GDP. The
current volume of expenditure emerged in 2008-2009, in the framework of implementing
packages of anti-crisis measures. As the consequences of the crisis are overcome, Russia
should return to a lower level of public expenditure. It should be noted that in 2007 and in the
first half of 2008, in the period when oil prices were on their pre-crisis high, the volume of
federal budget expenditure did not exceed 18.0-18.5% of GDP, about 3 p.p. of GDP less
than the planned volume of expenditure for 2013.
Given the extremely unstable state of the world economy, the high probability of crisis
escalation in the Eurozone and the possibility of a decline in the growth rate of China’s
economy, a drop in oil prices in the near future is a likely scenario. Under these conditions,
the RF government must urgently adopt decisions on restructuring Russia’s budget
expenditure in order to make it more efficient, and must develop a strict program for public
expenditure reduction (while taking into account possible anti-crisis measures) before the
expected drop in oil prices actually occurs.
Moreover, it is unlikely that the government will manage to preserve the current low level of
social and political tensions, if it gives financial priority only to the Ministry of Defense, the
Ministry of Internal Affairs, and the defense-industrial complex. Therefore, there is a risk that
expenditure will expand along all lines – from pensions, social benefits and welfare payments
to education, health care and science to road construction and other areas of public
investment.
The situation in the field of monetary policy is less troublesome. In the past two years, the
Bank of Russia made good progress in switching over to inflation targeting and increasing
the flexibility of the nominal exchange rate of the ruble. Over the course of 2011 and 2012,
inflation has dropped to 4.5-6.0% per annum, which represents a record low in contemporary
Russian history. However, in the summer of 2012, inflation risks escalated again, in response
to the government’s decision that prices and tariffs for goods delivered and services
rendered by natural monopolies should be raised from 1 July 2012. We believe that the
27
29. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
current trend in inflation will not radically change due to a number of factors, including the
monetary policy of the RF Central Bank. In the first six months the growth of M2 broad
money supply was as low as 1%, and the rate of refinancing considerably exceeded that of
inflation. However, the lack of progress in further reducing inflation and stabilizing it at less
than 5% per annum is a worrying sign.
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30. CASE Network Studies & Analyses No.450 – Macroeconomic Preconditions of the Realization...
29
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