Sanctions, counter-sanctions and mid-term prospects for the Russian economy November 11, 2014 NRU HSE Development Center 1 Natalia Akindinova

2 GDP growth slowed down in 2013 Real GDP, Labor Productivity and Labor Contribution (y-o-y, %)

3 Stagnation: the main factors Resource constraints as a result of the cessation of growth in hydrocarbon prices and the stabilization in physical volumes of external fuel deliveries Insufficient opportunities and incentives for growth on the basis of productivity (lack of investment, weak institutions) Inconsistency of economic policy  From the one hand, the growth of state intervention in the economy, huge defense budget and new social obligations  From the other hand, the “fiscal rule” and attempts to improve an investment climate (“road maps”)

4 Sanctions made it difficult to refinance foreign debt External Debt: Volume ($ billion) and Structure (%) During the third quarter of 2014 the external debt of banks declined by $ 17 billion to $ 192 billion. The planned payments were $ 19 billion. External debt of enterprises was reduced by $ 27 billion to $ 422 billion. The planned payments were $ 38 billion.

5 Counter-sanctions restrict the supply of goods… Resources for 2013 domestic consumption in provision groups, affected by Russian counter-sanctions (in real terms), %

6 … and lead to higher inflation Prices indices (m-o-m, SA), %

The volume of exports was stable until the third quarter of 2014, then could fall under the influence of lower oil prices. 7 Key economic indicators get worse Exports, $ billion

Devaluation and trade restrictions have led to a decline in imports. 8 Key economic indicators get worse Imports, $ billion

9 Key economic indicators get worse Investment activity (100 = Dec 2010, SA) Investments do not grow for more than two years due to financial constraints, rising costs and deteriorating investment climate. In January-September 2014 investment fell by 2.8%. Construction also fell down.

10 Key economic indicators get worse Real wages Factors reducing real wages: cessation of productivity growth, budget constraints, high inflation

The volume of food consumption is reduced under the influence of trade restrictions and rising inflation. At the same time inflation and devaluation expectations still support the dynamics of the non-food consumption, but this is a temporary effect. 11 Key economic indicators get worse Household consumption (100 = 2012, SA)

12 The mid-term prospects of growth depend on oil prices and sanctions Scenario I (Sanctions / Low oil prices) Источник: Институт «Центр развития» НИУ ВШЭ Real GDP growth, per cent Inflation, per cent (Dec./Dec.) Real household disposable income growth, per cent Retail trade growth, per cent Investments growth, per cent -9.0 Exports, billion dollars Imports, billion dollars 285 Net capital inflow/outflow, billion dollars Ruble/dollar exchange rate (average) Federal budget deficit, % GDP Consolidated regional budget deficit, % GDP -1.3 Price for URALS, annual average, dollars per barrel 85.0 High net capital outflow, decline in exports, the depreciation of ruble The negative dynamics of investment because of capital outflow and increasing risks Increasing inflation and the decline in real income and consumer demand Recession for two years, high fiscal risks

13 The mid-term prospects of growth depend on oil prices and sanctions Scenario II (Sanctions / High oil prices) Источник: Институт «Центр развития» НИУ ВШЭ Real GDP growth, per cent Inflation, per cent (Dec./Dec.) Real household disposable income growth, per cent Retail trade growth, per cent Investments growth, per cent Exports, billion dollars Imports, billion dollars Net capital inflow/outflow, billion dollars Ruble/dollar exchange rate (average) Federal budget deficit, % GDP Consolidated regional budget deficit, % GDP -1.1 Price for URALS, annual average, dollars per barrel Recovery of oil prices improves the situation, but doesn’t solve the problem.

14 The mid-term prospects of growth depend on oil prices and sanctions Scenario III (No sanctions / High oil prices) Real GDP growth, per cent Inflation, per cent (Dec./Dec.) Real household disposable income growth, per cent Retail trade growth, per cent Investments growth, per cent Exports, billion dollars Imports, billion dollars Net capital inflow/outflow, billion dollars Ruble/dollar exchange rate (average) Federal budget deficit, % GDP Consolidated regional budget deficit, % GDP Price for URALS, annual average, dollars per barrel Inflation is reduced by the cancellation of the food embargo and more strong ruble. Net capital outflow decrease but the economic growth is still weak. Inefficiency of the economic model is maintained. To accelerate growth huge reforms are required.

Thanks for your attention! 15