Russia’s ‘Boring’ Economy Could Grow More, But Government Too Conservative

Russia’s government is known for being fiscally conservative. It’s one of the things foreign investors love about it. It’s also stingy. It’s one of the things that stops it from growing.

Russia is the slowest-growing economy in the big four emerging markets. Some dare call it the most “boring” emerging market, despite Russian investments like the VanEck Russia (RSX) exchange traded fund being up 28.8% this year and 51.3% over five years.

Russia needs to spend more, foreign investors believe. Spending more might even keep more Russians in Russia.

“There’s too much red tape. The government can’t get out of its own way,” says Alexei Kudrin, chairman of the Accounts Chamber of Russia and former finance minister.

Speaking at this year’s Russia Calling conference, an investment forum run by investment bank VTB Capital, Kudrin was a total wet blanket. While panelists lauded Russia’s stable economy and plus-1% growth rate, Kudrin reminded them that Russia could do more, and they are not.

Russia’s ‘Boring’ Economy Could Grow More, But Government Too Conservative

Gadfly in Moscow: Alexei Kudrin, head accountant for the Russian government, says the country is too … [+] conservative, and that’s why growth rates are so poor.

Andrey Rudakov © 2017 Bloomberg Finance LP

Picture China: It has abundant high-speed rail. It has ports run by artificial intelligence. It has free trade zones and—surely before the Russians—they’ll have a flying car.

Russia could do this, too, even if on a smaller scale. They need more Yandex’s, the all-purpose Russian tech name.

Russia’s provincial governments aren’t the spendthrifts their Chinese counterparts are, either.

Basically how it works is the Russian Treasury allocates money to the regions. Treasury is in charge of the cash management. If the region’s don’t spend the money by a certain time for whatever reason, they send it back.

“If you look at it from a big picture perspective, social or defense gets done spending evenly throughout the year. But capital spending, of which infrastructure development is one type, is more skewed to the end of the year so there is a chance you will see more of it then,” says VTB Capital chief economist Alexander Isakov.

There are job-creating infrastructure projects in the works in Western Russia. The bigger problem is the center and far east. Governments there are slow to lay out terms for infrastructure projects. Some may not even be viable. It’s not like Russia’s Siberia is teeming with people. But until governments commit, private money goes elsewhere. Everyone in Russia’s investment circles sees the opportunity, but the mindsets of those in Moscow and those in Siberia are quite different.

There is no unified national vision. There is no Made in Russia project like there is in India. There is no Russia 2025 target for advanced technology sectors like there is in China.

Make Russia Great Again?

Russia’s ‘Boring’ Economy Could Grow More, But Government Too Conservative

A construction worker builds out the Nizhnyaya Maslovka metro station in Moscow. Russia spends 27% … [+] of its total development budget on infrastructure, most of it in Western Russia.

Andrey Rudakov © 2018 Bloomberg Finance LP

See: 13 Mind Blowing Facts About Russia’s Economy — Business Insider

There are 78 national projects currently, according to the government’s latest project portfolio. Total investment is around 25.8 trillion rubles ($407 billion).

The likelihood of project success depends on where the money is going. For example, in the first 9 months of 2019, the probability of money being allocated and the project being finished by 2024 are highest for education (89% probability, according to VTB Capital’s assessment) and lowest for roads, export and digitalization (20% probability).

Russian investments are being made. Their success rate is improving, going from 86% last year, to an estimate closer to 90% in 2019, according to Isakov’s calculations.

Russia’s budget has a 2 trillion ruble surplus. Investors would like to see them splurge a little.

Russia allocated 3.063 trillion rubles to the national economy in 2014. By 2018 it was 2.4 trillion rubles. In 2014, Russia spent 936 billion rubles on state administration. Four years later it was 1.3 trillion rubles. Housing and utility infrastructure spending was 120 billion rubles in 2014 and rose to just 149 billion in 2018.

Russia has its reasons for playing conservative.

From 1989 to 1998, Russian output dropped 45%. By 2000, the nation’s GDP was between 30% and 50% of its pre-Soviet collapse output. Millions of Russians left the country, taking their money—and high-tech talents—with them.

Last year, Vladimir Putin said in his state-of-the-nation speech that he would cut Russian poverty rates in two. Some 13% of the population, or 19.3 million Russians, live below the poverty line, according to the Irish Times.

The bottlenecks and the headwinds in Russia are as well-known as they are constant.

“We lack institutional reforms. The government is not tackling that,” Kudrin said. “The workforce is shrinking, so in order to grow you need to increase productivity. The productive rate here is half that of Europe’s. To match them, we need to increase the share of the private sector in the economy, and at the moment the share of the state in the last ten years grew to 48%,” he said.

Russia’s ‘Boring’ Economy Could Grow More, But Government Too Conservative

Anton Siluanov, Russia’s finance minister: We want to be a top 20 destination for global business.

Andrey Rudakov © 2019 Bloomberg Finance LP

Kudrin said Russia’s economy was not competitive enough, so there was little incentive for companies to invest in innovation, too.

“I’m a little pessimistic, not because I think that Russia cannot meet the goals set by the government, but I’m not sure if meeting them is even enough,” Kudrin said.


Russia’s interest rates are falling, but not enough to improve its growth rate, says Finance Minister Anton Siluanov.

“We want to make the environment more predictable for investors. We don’t want investors to have to think too hard about whether it’s worth investing here,” Siluanov said, adding that he wants to see Russia in the top 20 on the World Bank’s Doing Business report. They were number 35 in 2018, behind Japan. “Doing business in Russia is a good idea,” he said. “Investing here will bring you good returns.”

For good returns to mean more than bond and dividend yield, the Russians have their work cut out for them.

“It’s kind of a boring country. No one ever asks to talk about it,” says Craig Botham, an emerging markets economist for Schroders in London. “You’re growing at 1.2%. You’re fortunes are tied to energy and minerals. That’s not enough,” Botham says. “It’s a good bond story, though.”

Show More

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button