The pre-crisis growth model cannot be repeated. Of the 8% annual growth, 6% was due to consumption. This was driven by the growth in real wages, which was double/triple the growth in labour productivity. The gap was increasingly covered by debt. Now, companies have changed their behaviour and wage growth is more modest. The contribution of consumption to growth will be no more than 3%.
Physical hydrocarbon production in Russia is to be flat for the foreseeable future, and possibly in the long run too. With growing domestic consumption, this means that oil exports will decline slowly. At best, the impact of this factor on growth is zero, at worst it is negative.
The recession in Europe is a clear example of fiscal tightening’s impact on growth. Until 2006, 80% of federal budget spending was covered by non-oil revenues. Today, it is only 50%. MinFin is right to call for a lower non-oil deficit. As for the 2013-15 budget, spending is to be trimmed by 2% of GDP over 3 years, subtracting 1pp from economic growth. The economy was leveraging itself very rapidly. On the eve of the crisis, the debt/profit ratio stood at 1.7x, while now it is 2.5x (although we note that profits are lower; and thus it is unclear which profits are meant). So, the debt burden might become a constraint. Belousov noted the reduction in tariff protection by a third as part of WTO accession.
Bottom line. The new ‘inert’ growth rate is 2% p.a. This is unacceptable, as Russia would be unable to fund social liabilities and military expenditure. Russia needs 4-4.5% growth to match resources to spending needs. Sources of extra growth in Russia are improvements in the investment climate, export support, and productivity catch-up.