The low monetisation of the economy essentially “kills” deferred demand within the country, and subsidising interest rates will require significantly larger cash injections than the announced 1 trillion rubles, which will actually settle in the banking system instead of being effectively used for project financing and accelerated import substitution in critical important sectors of the economy, Valdai Club expert Ekaterina Arapova writes.
With the start of its special operation in Ukraine, Russia has faced sanctions pressure from the Western coalition of countries unprecedented in its scale, depth and intensity. Although the sanctions hurt not only sectors of the Russian economy, but also the companies and banks of the initiating countries, it is becoming more and more obvious that the price that the West (including Europe) is willing to pay in order to achieve the stated political goals is very high. As a result of the trade, financial and technological blockade, Russian enterprises are losing a significant part of their opportunities for lending to current activities, they are experiencing a shortage of stocks of a wide range of working capital (components, raw materials), they are faced with a violation of supply chains, and an increase in the cost of transportation and insurance of goods.
Under these conditions, the Government has announced the introduction of a stimulus package of reforms totalling more than 1 trillion rubles, the supporting structures of which are (1) support for small and medium-sized businesses, (2) backbone industries and enterprises (primarily information technology, agriculture, manufacturing, the food industry, trade, construction, tourism, medicine, etc.), as well as (3) strengthening social guarantees and tax breaks for ordinary people. The main instruments of state support are concessional business lending programs, subsidising interest rates, providing credit and tax holidays, simplifying administrative procedures, and so on. At the same time, the authorities are tightening the rules for foreign exchange transactions for companies and citizens, as well as imposing restrictions on investments from foreigners.
At the same time, it is important to understand that these measures largely reflect the usual inertial trend of urgent response to the Western sanctions package against the backdrop of insufficient decisions and financial support aimed at the strategic long-term restructuring of the Russian economy.
First of all, given the current conditions, it is necessary to unify the system of tax incentives for small, medium and large enterprises. Until recently, the privileged position of small and medium-sized businesses was logical and justified both in terms of focusing on the de-monopolisation of the economy, and taking into account the previous nature of sanctions policy against Russia. Earlier, small and medium-sized enterprises for the most part evaded the scrutiny of the initiators of the anti-Russian sanctions. However, in the context of the current large-scale sectoral sanctions, the collapse of cargo transportation and disruptions in the supply of working capital, the need for a complete re-equipment of the economy and reorganisation of internal value chains is needed as well as achieving maximum synergies in the interaction of small and medium-sized businesses with large industrial production, on the one hand, and on the other ensure the ease of a tax transition to the status of “large enterprise” for the most successful and rapidly growing small and medium-sized companies. The existing jump in taxation when a medium-sized business becomes a large one yields an actual gap in the economy, that persists between VAT and VAT-free sectors. This hinders the development of successful companies, and their ability to increase their efficiency due to economies of scale, and, accordingly, their potential for import substitution.
The second priority is to achieve maximum synergy in the dialogue between machine builders and metallurgists. Of course, the EU ban on the purchase of ferrous metallurgy products from Russia, the expansion of corporate sanctions, and the suspension of contracts for the purchase of non-ferrous metals (for example, the Boeing contract with VSMPO-Avisma for the supply of titanium) and the risks of further restrictions on export supplies both from Western countries and within the framework of Russian sanctions (which, by the way, are already included in the cost of aluminium, nickel, palladium, copper, etc.) are detrimental to the Russian metallurgical industry. However, due to the current geopolitical situation, the forced reorientation of metallurgists to the domestic market is, in fact, what Russian machine builders have advocated for many years, calling on the Government to introduce export quotas to overcome narrow industry interests and the excessive export-orientation of large metallurgical companies, and expand the range and improve the quality of products in the interest of Russian industry. The main danger today is that metallurgists “shift” the losses from the restriction of export earnings to the domestic consumer and overestimate domestic prices for Russian machine builders (which, given the rather high monopolisation of the metallurgical industry, the latter have already begun to feel by themselves). Under these conditions, the main object of attention of the Government, particularly the Federal Antimonopoly Service, should be a detailed study of the principles of pricing for domestic metals and the justification for raising prices, especially given the rather low import dependence of the metallurgical industry (according to various estimates, from 10% to 20% of the cost).
The emergency response to mitigate the acute phase of the crisis should be to reduce and defer tax payments and the payment of insurance premiums for pensions, social and medical insurance. As part of the course taken by the Government to subsidise the interest rate on loans, at the moment it is necessary to prioritise the provision of preferential and interest-free loans for the replenishment of working capital, the creation of seasonal stocks of raw materials for the next two years and the development of mechanisms for the full or partial compensation of transport costs, ensuring the greatest acceleration of inflation costs.
Interruptions in the supply of working capital and an increase in the cost of transportation and cargo insurance against the backdrop of a sharp devaluation of the Russian ruble and a record collapse of the background market threaten a wave of bankruptcies in the corporate sector, which could be followed by the bankruptcies of banks and other financial institutions in a spiral.
The introduction of a moratorium on bankruptcies among enterprises (for at least up to six months, and preferably until the end of 2022 with the possibility of its extension), which is now being discussed in the Government, is of vital importance in the current conditions. The actions already taken by the Central Bank to support commercial banks — expanding limits on providing liquidity, eliminating penalties for violations of foreign exchange positions, support in terms of assessing the creditworthiness of troubled banks and accounting for foreign exchange assets — can partially support banks, while the moratorium on bankruptcies has wider scope and supports the real sector.
Possible mass bankruptcies of companies and financial structures underlie the most pessimistic scenarios for the development of the Russian economy in 2022, the “digitised” and quantified effects of anti-Russian sanctions circulating in the media and academic studies (both Russian and foreign experts).
All this, we recall, is in the context of the current ban on the sale of Russian assets by non-residents and the restriction of “short sales” that prevent speculative transactions. Under the conditions of a delayed, but still inevitable unfreezing of non-residents’ funds in the Russian stock market, the additional issuance and direct redemption of government bonds and the purchase of bad assets may be required.
In turn, the implementation of a large-scale project financing programme in the most critical, import-dependent industries should serve as the basis for the long-term strategic reorientation of the Russian economy, the development of import substitution, new industrialisation and the increase in the nation’s adaptive resources, given the sanctions pressure. Support for IT, agriculture, food production, construction, trade, and medicine already constitutes the main structure of the simulation package of reforms implemented by the Government.
First of all, we are talking about the study of infrastructural and technological possibilities for creating factories for the production of Baikal and Elbrus processors developed in Russia. These were attacked under the sanctions, as they lost the support of the Taiwanese semiconductor manufacturer Taiwan Semiconductor Manufacturing Company (TSMC), which had been tasked with organising their production. We are talking about the accelerated increase in the production of Tu-204 (214), Il-96, and Il-114 aircraft, with their automatic purchase by state banks, as well as financial support from large lessors, such as the State Transport Leasing Company (STLC), and cargo insurance companies.
The scale of targeted support must be increased, with special attention paid not only to the expansion of existing production lines, but also to the introduction of new domestic developments into industrial production, which until recently could not compete with the imported counterparts. This also applies to medicine (medical equipment, high-tech prosthetics), railway technology and agricultural machinery, as well as modern achievements in the field of machine tools and industrial equipment. Particular attention should be paid to the protection of intellectual property rights and prompt patenting of domestic developments (new technologies and industrial designs).
All this should be accompanied by an easing of monetary policy and a sharp reduction in the key rate by at least half over the next month. In 2015, it took 9 months to reduce the rate from the then-record 17% to 11%. Under the current conditions, the Russian economy does not have this time. If this requires a revision of the law “On the Central Bank of the Russian Federation...” and vesting the monetary regulator not only with the function of inflation targeting, managing the exchange rate and ensuring financial market stability, but also with responsibility of conducting economic policy and stimulating economic growth, then it is necessary to resolve this issue, including with respect to the legal code.
The expansion of fiscal stimulus is meaningless without the simultaneous implementation of a policy of monetary easing. Keeping the key rate at 20%, coupled with tighter foreign exchange controls and the existing requirement to sell 80% of foreign exchange earnings, prevent financial panic, limit the scale of foreign exchange speculation, and allow the population to keep funds within the banking system. However, in the medium and long term, maintaining such a high rate is detrimental to the economy. The market has already received a signal that the internal financial messaging system is able to operate smoothly, and the national payment system processes all domestic card traffic. Despite the panic surges that have taken place, funds have largely been localised in bank accounts, through the provision of high interest rates on short-term deposits. Now is the time to think about reviving domestic investment in manufacturing.
The low monetisation of the economy essentially “kills” deferred demand within the country, and subsidising interest rates will require significantly larger cash injections than the announced 1 trillion rubles, which will actually settle in the banking system instead of being effectively used for project financing and accelerated import substitution in critical important sectors of the economy. In the current conditions of supply disruptions, rising costs associated with devaluation of the exchange rate, risks of the non-return of previously paid advances to foreign suppliers and difficulties in collecting receivables, the “affordable” rate on loans that Russian businesses are able to pay is estimated by different industries at being from 1% to 5% maximum. Accordingly, the larger the gap between the rates on commercial bank loans and the interest that allows businesses to stay afloat, the greater the burden will fall on the Russian budget, reducing the potential volume of social programmes and project financing.
