Putin urges shift toward investment-led growth model
President Vladimir Putin yesterday held a meeting on economic growth. His opening remarks were mostly devoted to a review of 2012 and the key challenges ahead. He rated last year’s economic performance as fair; however, he also pointed out that the good FY numbers for key indicators were explained by the strong start to 2012, and that the most recent statistics are concerning (particularly the 1.2% YoY GDP growth in November). The President asked how the country was to achieve sustainable growth. Meanwhile, Putin said that the economy was operating at potential, citing experts who believe that in such an environment demand-led growth does not work properly and that it would therefore be better for the government to concentrate on investment.
These comments are in line with Putin’s goals stated on 7 May, as well as with our view that the demand-led growth model has run its course and now Russia cannot expect growth higher than 2.5-3.0% (which we believe is the potential growth level) without rigorous institutional reform aimed at higher investments (local and foreign). We believe that political support for such a course is needed: we see some risk in this regard (as easy-wins are unlikely and the government will have to work extremely hard to obtain sustainable 4-5% YoY GDP growth in the coming decade, which Putin mentioned in December’s State of the Nation address). Given that the budget rule will prevent any substantial loosening on the fiscal side (although excessive use of NWF money is a risk), our main concern is monetary policy. We suggest that the political weight of the new CBR chairman (this June, current CBR Head Sergey Ignatiev’s third term will finish) will be of paramount importance if inflation-targeted monetary policy, the primary goal of which is to be low and stable inflation, not economic growth, is to be secured.
Maxim Oreshkin, Daria Isakova
VTB Capital analyst
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