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Growth in Russia has slowed to well below the global average as economists point to low spending by the government and the private sector.
MOSCOW — Last year, Russia set a goal to quicken its economic expansion — to grow faster than the world as a whole — as a way to secure the country’s position as a dominant global power.
So far, the plan is off to a sputtering start.
President Vladimir V. Putin’s proposal, which struck some economists as a throwback to the command economy of the Soviet period, called for state spending of $400 billion over six years in specific areas. Among the items were 900 pianos for music schools and 40 covered ice rinks, along with money for roads and airports.
But this month, the government reported Russia’s gross domestic product grew only 1.3 percent in 2019, down from 2.5 percent the previous year. Bureaucratic delays in spending the money were blamed.
In contrast, the global average for growth last year was 2.9 percent, according to the International Monetary Fund. A goal of lifting growth above the global average by next year now appears untenable.
Six years since Western sanctions restricted access to Western banks and the price of oil, a major Russian export, fell to historic lows, the growth rate shows the economy still crawling along, hampered by critically low private investment and a stumbling state bureaucracy that dominates Russia’s biggest industries.
Still, by many other measures, the economy looks robust. The government boasts bulging foreign currency reserves, success in taming inflation (now at an annual rate of 2.4 percent), and a budget surplus of 500 billion rubles, or $8 billion, last year.
Many economists are now pointing, paradoxically, to the budget surpluses and huge foreign currency and gold reserves, which totaled $562 billion at the end of last month, as a problem. The government’s reluctance to spend money on stimulus has sent a signal to private industry.
“Nobody wants to invest,” said Vladislav Inozemtsev, the founder and director of the Center for Post-Industrial Studies, a Moscow think tank. “Nobody believes the economic situation will be better tomorrow than it is today.” Mr. Inozemtsev calls this period the “lost decade” in Russia.
Despite last year’s pledge of stimulus spending, a commitment that was reaffirmed this year when Mr. Putin outlined plans for new spending on such things as free school lunches, the government has continued socking away savings.
The policy seems to reflect a deep-seated Russian belief: No matter how bad things are today, they can always get worse. Tax payments have piled up as insurance against future shocks — such as harsher sanctions or even lower oil prices.
The government and state companies — the state owns a majority in six of the 10 largest companies on the Russian stock exchange — are not spending in the hopes the economy and tax base will grow on their own.
Economists also point to low private-sector investment as a cause of sluggish growth, over fears the future in the domestic economy or global commodity prices might be worse than the present.
China’s coronavirus outbreak also looms over Russia’s economy, even though the country is largely insulated from manufacturing supply chain problems because its manufacturing sector is miniscule. Russia has reported two cases of infection inside the country.
Instead, the threat for Russia comes as oil prices slump. In recent weeks the exchange rate for the national currency, the ruble, has dipped as China reports more viral infections.
The faltering economy is out of step with Russia’s image politically at home and abroad, as a global power in good health. Geographically, the country grew with the annexation of Crimea in 2014. But even as it meddled in elections and intervened militarily in Syria and Ukraine, the Russian federal budget has remained essentially level in real, or inflation adjusted, terms since 2014.
Oil profits have gone instead into fattening the national piggy bank, a reserve called the National Welfare Fund. The giant account this winter reached its target of accumulating an amount equal to 7 percent of the gross domestic product, or about $125 billion.
To bolster these reserves, the government routinely incorporated into the budget tax revenue based on artificially low assumptions of the global price of oil, with surpluses saved rather than spent. The budget now balances at oil prices below $50 per barrel, while the price of Brent crude, an international benchmark, has hovered around $60.
“They were, and still are, afraid of any disturbance on the external side — be it trade wars, oil prices coming down or sanctions,” Vladimir Tikhomirov, the chief economist at BCS Global Markets said.
With this rule in place, even short periods of rising oil prices in recent years did little to jump-start growth. Every additional dollar per barrel on the oil price adds about $2 billion to Russian tax receipts — but only become extra padding in the Kremlin’s cushion against a possible future downturn.
“Russia is moving from a dynamic, high growth, high inflation sort of place to something looking more like Eastern Europe,” said Vladimir Osakovskiy, chief economist for Russia at Bank of America.
Private investors are reluctant to sink money into the Russian economy, but they are more willing to send the money elsewhere. Most years since the Soviet collapse, more money — usually tens of billions of dollars annually — has left Russia than come in as investment. Russians, like their government, hedge against future downturns by putting cash in dollar-denominated bank accounts, in foreign real estate or foreign investments.
Last year, Russians moved $26 billion out of the country. “The private sector has robust demand for foreign assets,” said Sofya Donets, chief economist for Russia at Renaissance Capital, and a former central bank economist.
There is a silver lining in this economy: For decades, rampant inflation was a scourge of the post-Soviet Russian economy, but low growth and declining real, or inflation adjusted, wages have brought price rises under control. The result is Russia has moved to “modest risks, low inflation but lower growth as well,” said Mr. Osakovskiy. In the boom years of the first two terms of Mr. Putin’s long rule, from 2000 to 2008, the economy expanded at an average pace of 7 percent per year.
The lack of private sector investment has a short-term benefit for investors, too. Rather than recycle profits into their businesses, Russia’s giant metals and petroleum companies have paid down debts and then, more recently, paid out large dividends, elevating stock prices. The Russian stock market became the second-best performing market in the world last year, rising 40 percent in dollar terms.
Investors were also cheered by the prospect of higher corporate profits as borrowing costs come down on the back of declining inflation; the central bank cut interest rates five times last year. The benchmark rate is now 6 percent.
Officials have pointed to new rules to prevent graft in the bureaucracy as having slowed disbursements under the stimulus plan announced last year, and say the money is coming this year. January indeed saw an uptick in spending.
Russia’s $1.7 trillion economy now ranks 11th in the world as measured by its gross domestic product, the broadest gauge of economic activity for a country, between Canada and South Korea.
Ms. Donets said the policy of salting away reserves amid the geopolitical tensions and sanctions had cost growth but left the government in a good position to really shift gears.
“The sustainability of government finances was the focus, and will be for the foreseeable future,” she said. “For six years, the fiscal and monetary policy was very tight.”
But the Kremlin has spent lavishly before, she noted. Ms. Donets pointed to public sector spending on stadiums, roads and railroads before the 2014 Winter Olympics and the 2018 World Cup soccer tournament.
Since Russia embarked on a more assertive foreign policy in 2014, the economy has grown on an average of about 0.7 percent a year, including two recessionary years. Given a well-educated population and abundant resources, it could grow faster, most economists say.
“One thing you can say for sure,” Ms. Donets said. “This is not the potential growth of the Russian economy.”