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Russia Swears Off Stimulus Amid Stagflation Warning

Bank Rossii
A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, in Moscow. Photographer: Andrey Rudakov/Bloomberg

Jan. 16 (Bloomberg) -- Russia’s government, whose appeals for lower interest rates failed to sway the central bank last year, is now making the case against stimulus that would paper over flaws restraining the economy.

The mix of rising prices and foundering growth, known as stagflation, is depriving the central bank of monetary tools to boost demand, Bank Rossii First Deputy Chairman Ksenia Yudaeva told a Moscow conference yesterday. Fiscal and monetary easing would only offer a temporary fix that risks creating imbalances, Economy Minister Alexei Ulyukayev said at the event.

Russian policy makers are dialing back the rhetoric as the $2 trillion economy remains hamstrung by corruption and inefficiencies. Its public institutions rank 118th and the level of competition 135th of 148 nations in the World Economic Forum’s latest Global Competitiveness Report. Finance Minister Anton Siluanov warned that the country has exhausted its budget resources with the non-oil deficit holding above a “critical” level of more than 10 percent of output.

Spending is “astronomical, but the state of this expenditure is such that people are unhappy with the quality of institutions and service that the government is providing,” First Deputy Prime Minister Igor Shuvalov said yesterday. “We need a pace of growth that allows us to pursue modernization. We can’t ensure fast growth by means of state spending.”

Stock Values

The inefficiencies are reflected in the valuation of Russian equities, the cheapest among 21 developing-nation economies monitored by Bloomberg. Shares on the benchmark Micex Index trade at 4.4 times projected 12-month earnings, compared with a multiple of 10.3 for the MSCI Emerging Markets Index.

Shuvalov said a year ago that the economy needed “easier money” amid a “huge argument” between the government and the central bank over interest rates. He’s refrained from criticizing the central bank’s policy to keep rates on hold.

Elvira Nabiullina, President Vladimir Putin’s former aide, has kept Bank Rossii focused on subduing inflation since she became chairman in June.

Consumer prices rose 6.5 percent from a year earlier in December, more than the central bank’s target for a 16th month. That’s the second-fastest pace in Europe after Belarus, according to data compiled by Bloomberg. The economy probably grew 1.3 percent last year, falling short of the Economy Ministry’s 1.4 forecast, Deputy Economy Minister Andrey Klepach told reporters yesterday in Moscow.

Economy, Inflation

The central bank should only cut interest rates when it “deems the threat to economic growth to be bigger than inflation risks,” Ulyukayev, a former central banker in charge of monetary policy, said yesterday in an interview.

Putin has tried to reignite growth while helping the central bank contain inflation by ordering a freeze on fees charged by state-run monopolies including OAO Gazprom and OAO Russian Railways. Policy should focus on removing limits on supply, such as underdeveloped infrastructure, rather than stimulating demand, Ulyukayev said.

Establishing a transparent, coherent and predictable business climate would help chart a path toward stronger growth, according to the Organization for Economic Cooperation and Development, which Russia plans to join next year.

Net capital outflows from Russia increased to $62.7 billion in 2013 compared with $54.6 billion a year earlier, according to a preliminary estimate published on the central bank’s website today.

Transparency, Accountability

“Russia should continue the current anti-corruption campaign with stronger focus on transparency and accountability mechanisms in the public sector,” the OECD said in a report published yesterday. The government “should continue reducing administrative barriers and widen federal initiatives to regional and local levels.”

Looser monetary policy would only perpetuate the current structure of the economy, failing to improve labor efficiency, according to Yudaeva, who replaced Ulyukayev at the central bank last year.

“What we see in Russia are the same trends as in countries like India -- rather high inflation with a sharp slowdown in economic growth,” Yudaeva said. “It’s one of the challenges presented last year. A strategy of development should emerge on the basis of properly assessing this challenge.”

With policy options squeezed, fiscal limits and a deteriorating economic outlook are compounding the government’s dilemma. Last year’s budget deficit was 0.5 percent of gross domestic product, Siluanov said, warning that the price of crude oil may fall to as low as $80 a barrel in 2014.

‘Absolutely Prepared’

“We need to be absolutely prepared for that, and prepared in advance,” he said. “Yes, we need to set ambitious plans in terms of economic growth, investment, labor productivity and so on; but for the budget, it must rely on absolutely conservative and absolutely achievable forecasts.”

Russia’s oil and natural gas output in 2014 probably won’t fall below last year’s level, Energy Minister Alexander Novak told reporters in Moscow today. Oil and gas account for about two-thirds of exports and about half of budget revenue.

An increase in state investments would help spur economic growth, according to Moscow-based investment bank Renaissance Capital, which sees GDP rising 3.3 percent this year compared with 1.5 percent in 2013.

“A slightly positive, or at least neutral, change in government-related investment will strengthen the total investment story noticeably, even if we cautiously assume the continued gentle slowdown in private-sector investment dynamics,” Renaissance economists Oleg Kouzmin and Charles Robertson said today in a research note.

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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