“Until we see deviations from forecasts”: Deputy Minister of Finance Kolychev on the growth of the Russian economy and oil prices

- Vladimir Vladimirovich, because of the trade wars, the world economy is slowing down more and more, and many experts predict the onset of a global recession. How in these conditions does the Ministry of Finance assess the growth of the Russian economy in 2019? How seriously can the global slowdown affect the economy of our country?

- Indeed, the currently observed slowdown in the global economy is comparable in scale to what we saw for the last time in 2008-2009. The process takes place in almost all regions of the world. We are talking about the largest economies, such as the USA, Europe, China, and developing countries, too.

What do we see in Russia? Since last year, GDP growth rates have also slowed down. We ended the year 2018 with a growth of 2.3%, now in the first half of the year we grew by 0.7%, and by the end of the year, we expect to reach 1.3%. But the reasons for the slowdown, in fact, are slightly different. They are not so much connected with the global economy as with internal factors.

- What is the main internal factor in slowing down the Russian economy?

- I note that we expected this slowdown last year. It is due to the fact that the economy is short-term adjusted to those budgetary and tax policy measures that were adopted as part of the six-year economic program.

We expected GDP growth in 2019 to be weaker, but we consciously did so in the government. This was done in order to increase the growth rate to world average and higher in the following years in accordance with the decree of the president. While we do not see deviations from the planned forecasts.

- Can it really be that external factors will not affect the government’s plans for GDP growth?

In principle, the Russian economy is now more stable in terms of the impact of the global environment. I will give a few examples. Over the past year and a half, two price shocks in the oil industry have occurred in global markets. Last fall, oil prices in a certain period fell by 40%, and in the spring of this year - by 20%.

• Vladimir Kolychev on the sustainability of the economy to external shocks

Quotes later recovered, but nevertheless, before, our economy usually experienced such great shocks very painfully. They were accompanied by currency depreciation, accelerated inflation and a recession. This time we did not observe anything like this. The currency and financial markets remained stable, inflation declined, and economic growth continued.

In addition, we had two rounds of rather serious anti-Russian sanctions, which we also experienced without any critical consequences. In the future, from the point of view of the influence of commodity markets and the global economy as a whole, our Russian economy will pay less attention to this.

- What is the reason?

Firstly, this is due to the fact that the macroeconomic policy that has been built in recent years, it simply already automatically allows the economy to adapt to such shocks without damage. We have reserves that can be used to support the economy, and the currency is untied from oil quotes. All this provides stability.

Secondly, over the past few years, our competitiveness in the world market has noticeably strengthened. I am not talking specifically about the oil and gas sector. The price advantages of our companies have increased. Therefore, our economy will be less responsive to slowing demand in the foreign market. First of all, those with lower competitiveness will suffer.

- What kind of non-oil and gas companies are we talking about?

- These are our traditional industries in which Russia is strong in export — metallurgy, chemical industry. In these areas, in terms of competitiveness, we are the best.

Industry analysts often look at the so-called cost curve (cost associated with production. - RT ). On the left side of this curve are the lowest costs, and on the right side are the highest. When demand falls on the global market for products, the companies with the highest costs are the first to suffer. Most of our companies are in traditional export sectors - they are on the left side of this curve. That is, in the event of a global shock, Russian companies will be the last to experience a negative effect.

- You mentioned that oil prices are less and less affecting the dynamics of the ruble. This is largely due to the action of the budget rule. Given that even in the face of fluctuations in the energy market, oil prices have remained above $ 50 per barrel for more than two years, does the Ministry of Finance consider it possible to increase the price cut-off in the budget rule?

- First of all, the budget rule was made in order to untie our economy from oil prices. Previously, we received more oil revenues and we used them precisely through expenses, the currency strengthened, we began to buy more imported goods. This situation encouraged the well-being of our citizens as well.

But this growth was essentially an illusion: as soon as oil revenues fell, wealth immediately evaporated.

Therefore, the budget rule, which is now in force, it fixes the level of natural rent (additional income. - RT ), which is used in the economy. This natural annuity is fixed for a long period of time. We are not talking about the current or next year, but about the horizon of future generations. In this regard, changing cut-off prices would mean abandoning the entire structure to reduce the economy of oil prices. It seems to us that this is by no means necessary, if we want to maintain the stability of the economy to changes in external conditions.

- How does the Ministry of Finance assess the current situation in the oil market? Do you expect a drop in commodity prices?

- If we don’t even talk about some long-term horizons, and look at the next two years for five years, we will see a huge amount of unused supply in different countries. We are talking about the states of the OPEC + agreement, and the geopolitical-related reduction in supply that occurred in Venezuela, in Iran due to sanctions.

Now the volume of underutilized production is about 5-6 million barrels per day. To set the context for this figure, it is about five to six years of normal world oil demand growth. Today, demand for raw materials is growing by about 1-1.2 million barrels per day. That is, a huge overhang of underused production capacities has now formed.

Oil production outside these countries is growing by about 1.5-2 million barrels per day. That is, production growth today is already ahead of demand. And this creates the fundamental prerequisites for lowering oil prices. That is, it is only a matter of time before the quotes decline. In the end, all the same, fundamental reasons will take their toll.

Yes, now, under the OPEC + agreement, we are achieving price stabilization at a certain level, but ultimately, price ratios should be aligned to balance the market. This may take some time, and it would be rash to hope that prices continue to be high. In fact, the fundamental picture says quite the opposite. Rather, we should be more prepared to lower prices.

- To what equilibrium level can prices go down? What is worth preparing for?

- Equilibrium prices are about the same level or slightly higher than the cutoff price in the budget rule. In 2017, this figure was $ 40 per barrel in real terms, but due to global inflation of 2%, the value is indexed annually.

Can prices drop lower short-term? Of course they can. They always fluctuate around the equilibrium level, and in a stressful situation, they are likely to fall below. But we are ready for such a development of events.

• Vladimir Kolychev about a possible drop in oil prices

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

- In addition to the shocks of the commodity market, you also noted the financial stability of the economy. In early August, Fitch International Agency upgraded Russia's credit rating. What, in your opinion, is such a change in assessment connected with?

- This is due to the fact that over the past few years, in fact, the design of macroeconomic policy has been reformed from scratch. Now it automatically provides and guarantees the stability of the economy to external conditions in both financial and commodity markets. This, in fact, is a reflection of the work that has been done.

Now we are faced with a task of a completely different order - to accelerate economic growth without sacrificing what we have already achieved. In other words, it is already necessary to raise the economic growth rate to the world average — 3–3.5% per year.

The peculiarity of rating agencies is that they assess risks and should be skeptical of everything. Just as in 2014 everyone was doubtful that Russia could have stable inflation of 4% and a balanced budget with oil of $ 40 per barrel, just now everyone is skeptical that Russia can grow at a rate of 3–3. 5%. However, as the facts will prove otherwise, this will push the ratings even higher.

- How can upgrading ratings already affect the investment climate in Russia?

- Well, we see, first of all, a rather serious interest from foreign portfolio investors - those who invest in our securities. These are government bonds, and debt securities of large companies, and, of course, stocks. Since the beginning of the year, the Russian stock market has shown the best growth among all developing countries. That is, the influx of portfolio investment is already underway.

If we talk about the impact of ratings, then the situation can be compared with the issue of chicken and eggs. Usually due to the conservative approach of rating agencies, it is they who follow the market, and not vice versa. That is, markets are prompted at first, and then rating agencies, having already realized that improvements have already taken place, reflect it in the ratings. I think that now the same situation is happening.

- How do you think the Russian currency can respond to ratings upgrades and investment inflows.

Our ruble is now in free float. That is, neither the Central Bank nor the government intervenes in pricing in the foreign exchange market. Here a lot depends on the moods of world and domestic investors, and on the development of events in relations between large countries. Now the ruble is with less fluctuations, but it will still follow in accordance with these sentiments.

It is important to note that commodity markets no longer affect our currency. Now we have the opportunity to discuss the development and breakthrough agenda, rather than worrying about how our economy will respond to a drop in oil prices by 20%, 30% or 40%. Even in this case, as the example of last year showed, we will deal with the development agenda, and not respond to any crisis centers, simply because they simply will not exist.