Economist Andrey Klepach: "The yuan will not become a lifesaver for the Russian economy"

Andrey Klepach, Chief Economist of Vnesheconombank (VEB), assessed the prospects for the Russian economy in his article in the National Banking Journal.

Yuan will not strengthen the economic sovereignty of Russia

In particular, the expert explained why one should not look for salvation in the Chinese currency - the yuan:

“The monetary and credit system that we developed in 1990-2000, no matter what the exchange rate is now, has died. The Central Bank cannot carry out foreign exchange interventions in dollars and euros, and the increase in gold reserves and the NWF in yuan makes little sense due to the limited convertibility of the yuan. Changing dependence on the dollar for dependence on the yuan is not the way to strengthen economic sovereignty. In fact, now the Central Bank is betting on pushing the currency out of the country to the maximum. The rate of mandatory sale is now zero, the rate of mandatory repatriation of currency is zero. Gazprom, on the one hand, must sell the proceeds to Gazprombank, then all this either goes abroad, or accumulates in the foreign currency accounts of Gazprombank and our private companies, where it can be arrested at any time in the same way as the gold reserves of the Bank of Russia. (…)

I think that the first problem is that it makes no sense to accumulate excess gold and foreign exchange reserves. This is not even a question of the actions of the Central Bank, but a question of excess national savings through the state, which are not invested in the Russian economy, but are placed abroad. The 300 billion dollars seized abroad could work for Russia and give a significant effect over the years in the form of an increase in the real wealth of the country. The remaining $300 billion in gold reserves also cannot work normally under sanctions. The issue of gold reserves is not a matter of prestige, “break or not break”, but a matter of huge national savings that did not work for the country under the flag of ensuring our financial stability and the stability of the ruble exchange rate. Yes, the accumulation of gold reserves increased the security of the currency system, and the budget rule underestimated the ruble exchange rate. But now this mechanism cannot work..."

Imports will be reduced by about half

Klepach also explained the degree of influence of Western sanctions on the Russian economy:

“If we take clearly unfriendly countries: these are the European Union, Britain, the States, Canada, Australia, New Zealand, then they produce almost 60% of world GDP at par and 44% at purchasing power parity. It is important that unfriendly countries account for 75% of the world's R&D spending and about the same share of scientific publications. Therefore, the balance of power in technology and research is more unfavorable for us than in the economy as a whole.

At the same time, it should be noted that if the Western world is sufficiently consolidated, it controls key international organizations and institutions, then the world “friendly” to us is practically not organized in any way, each one or for himself, and is not capable of any collective action. (…)

The government understands that about 50% of our exports, more than 200 billion dollars, which go to unfriendly countries, are under the threat of sanctions. This does not mean that our exports will fall by half, our estimate is somewhere around 10-11% in real terms of the fall this year, about 2% next year, and we can continue exporting oil and coal with a discount of up to 30-40 %. On the other hand, almost 56% of imports come from unfriendly countries, and they are also at risk. According to our estimates, in 2022-2023, the drop in imports in real terms may be about 30-31%. Now the export and import data have become closed, but in the first quarter, the reduction in imports can be estimated at about 49-50% in real terms.

Wage indexation does not compensate for high inflation

It is clear that the main concern of Russians today is how much their income will decrease. Here Klepach makes a disappointing forecast:

“Talks about low wages, or rather, on the contrary, the conflict of high wages with our competitiveness, do not correspond to the current state of affairs. Our wages, even before the last dip in dollar terms, were on average lower than in Shanghai and a number of other Chinese provinces. And without a high salary, we will not create either competitive human capital or domestic demand.

The main problem is still the situation with the incomes of the population. The main drama is ahead, since no systemic measures to support the income of the population have been taken, despite the numerous proposals of experts. On July 1, indexation of pensions was carried out, but it does not cover all inflation and does not apply to working pensioners. So far, no indexation of state employees and salaries of military personnel, corresponding to increased inflation, has been carried out, although, apparently, limited indexation will still take place in the fourth quarter. It will affect the incomes of the population in 2023, and is unlikely to compensate for high inflation. Therefore, the problems of incomes of the population are still ahead.

Our estimate of the reduction in retail this year is 7-7.2%, while it will most likely decrease next year, because there are no prerequisites for an increase in demand, both due to a lack of income and due to a contraction in consumer credit . Moreover, many Western and Russian companies have taken a nominal cut in wages, and in the fall there may be a jump in unemployment, which is still at a low level”.

The main problems for Russia itself are yet to come

As a result, Klepach gives a disappointing forecast:

“Our estimate now for this year is a 4.6% decline, although initially we expected -7.5-8%. We expect that the bottom point of the crisis will be passed in Q3-Q4 of this year, but the decline in GDP will continue in 2023 as well. At the same time, the Ministry of Economic Development expects an even greater reduction than we do - 2.7%, against 0.3-1%. The main economic and social problems are ahead of us, and we should not indulge in euphoria..."