Guaranteed Poverty: Central Bank of Russia published monetary policy scenarios

Novye Izvestia studied the scenarios together with the experts.

Yelena Ivanova, Natalia Seibil

2020 has become a turning point and shock, the Central Bank of Russia states. No one could have predicted what the new virus from China would result in. No one was prepared for the April oil shock, when the entire world oil market would collapse due to Russia's withdrawal from the deal with OPEC. Moreover, it was impossible to foresee that these two events would overlap. The relatively obese 2019 helped. Thanks to him, the situation in the country is difficult, but comparable to the world one. The central bank cut its key rate to 4.5%. Unlike previous crises, now the threat of deflation is much higher than inflation, which was reflected in one of the forecast scenarios.

All four scenarios developed by the bank assume low oil prices compared to the previous three years. In 2020, the price per barrel will be $ 38. Further, the picture changes, depending on the scenario. In the best case, in 4 years it will rise to $ 50, in the worst case it will drop to $ 35. Therefore, forecasts show that Russian exports will decline and in four years will not reach the 2019 figures.

Current payments account - an indicator that determines the ruble exchange rate against other currencies - will remain positive only in the baseline scenario. In all other cases, its values will be negative. The central bank's foreign exchange reserves will decline this year and next anyway. In pessimistic scenarios, they fall in all four design years.

Basic scenario

According to experts, the baseline scenario is quite close to reality.

One of the main indicators of the government's monetary policy - the current account - remains in positive territory, although compared to 2019, when it was $ 65 billion, this year it is a modest $ 2 billion.

- For the Central Bank, the import and export indicators are not decisive, they are derivatives. What indicator is really important is the state of the current account, the balance of payments. It is decisive for the ruble exchange rate in the medium term. The baseline scenario includes a balance of payments surplus. This year the surplus will be somewhere around two billion dollars, next year - three, in 22, 10 billion, and in 23 - 21 billion. The current account of the balance of payments current account - it is very positive, and in all other scenarios we observe a deficit in the current account and a significant reduction in the foreign trade balance, says Nikita Maslennikov, head of finance and economics at the Institute of Contemporary Development.

The Central Bank in all variants predicts a threefold reduction in the trade balance in 2020. This is also explained by a sharp decline in production in all economies of the world, except for China, although there are also developing state-funded infrastructure projects. The bulk of the country's exports is still oil and gas. Therefore, exports from Russia will decrease by 30%. The country will receive less than $ 134 billion this year and $ 207 billion over the next three years.

In general, the currency will become significantly smaller. The level of foreign exchange earnings will not recover to the parameters of 2019 and in 2023.

Oil prices and the Russian budget

The Central Bank proceeds from the assumption that the main article of Russian export - oil and gas - will bring the budget currency at the level of 2004-2006. According to bankers, the average annual oil price will not rise above $ 38 per barrel. This is $ 5 below the so-called budget rule - the budget cut-off price.

- The Central Bank in its baseline scenario proceeds from the situation it is observing. International organizations provide benchmarks for oil prices. Accordingly, the oil price in the baseline scenario is in no way tied to the budget rule. The budget rule is legalized, and the oil price is fixed in it. It will be implemented, there will simply be no interventions, and their volumes will be determined”, - says Maria Ivanova, head of the Monetary Policy Department of the Economic Expert Group.

Nevertheless, the Central Bank proceeds from the fact that this year the state will be forced to open a piggy bank - if in June of this year economists said that the National Welfare Fund would most likely not be touched, since the annual oil price will not fall below 40-42 dollars per barrel, then after three months the situation changed.

“The fact that the baseline scenario includes an oil price of $ 38 per barrel indicates that funds from the National Wealth Fund will be spent to cover investments in the federal budget”, - says Alexandra Suslina, head of the Fiscal Policy direction of the Economic Expert Group.

Capital outflow

The baseline forecast of the Central Bank assumes that $ 25 billion of private capital will "flow away" from the country this year and next. This is 6 billion more than in 2019. However, this figure is inconclusive.

As of September 1, capital outflow amounted to $ 37 billion. In 2022 and 2023, “only” 30 billion will leave the country in two years. It is unlikely that this forecast can be adjusted downward, most likely, the Central Bank will have to compensate significantly more than the $ 18 billion in this scenario this year from its reserves and $ 13 billion for next year, as well as sell government bonds in 2020 for $ 6 billion dollars, and in 2021 - by $ 9 billion.

- This year is special. There were many risks, and no one could predict in advance either the epidemic, or the closure of borders and the shutdown of production. Without these factors, the situation with capital outflow would be more predictable and understandable. Therefore, when forecasts are made, they do not take into account shocks that severely affect capital outflows. Both economic and political factors influence capital outflows. The shocks that happen. For example, the imposed sanctions or new restrictions adopted within the country, - explains the uncertainty Maria Ivanova.

Political risks

Unlike previous forecasts, the Central Bank relies in its forecasts not only on oil prices, but also on other indicators. This is noted by all the experts we interviewed.

- This time the central bank took a serious step in terms of increasing the reliability and adequacy of forecasts, because before the main key parameter on the basis of which the forecast was formed was the oil price, this time a number of other parameters were added on equal terms, which form macroeconomic picture. But this, naturally, is the trajectory of the budgetary policy, when there will be consolidation and to what extent. Naturally, the dynamics of coronavirus risks is taken into account, as well as how and at what speed the recovery of consumer demand and investment demand is sustained. And these are the main parameters, and oil is one of them only. The political situation also affects, - explains Nikita Maslennikov.

Political risks today include support for Lukashenko, in particular, and the actions of the Belarusian people against the Lukashenka regime in the context of relations between Russia and Belarus, in general. Another political risk is the poisoning of opposition politician Alexey Navalny.

Earlier, when the country had no political problems, there was no Crimea, no war in Donbass, Georgia, the ruble exchange rate was 90% determined by the oil price, says Alexandra Suslina:

- In addition to this, a sanctions and credit history began a few years later. That is, there are other factors, besides oil prices, which have an impact on the ruble exchange rate. For example, the poisoning of Navalny.

Now the moment has come when the political situation has a much stronger effect on the ruble exchange rate than oil prices. Maria Ivanova agrees with this:

- At the moment, yes. We can say that there are times when the expectation of the threat of sanctions affects and situationally creates an excessive capital outflow, that is, something that is caused not by economic, but by political factors. I can’t say how much cheaper the dollar would be if these factors weren’t at work, but they certainly do.

The Central Bank calls the political pressure on Russia from Europe and America not to interfere in the situation in Belarus and possible sanctions after the poisoning of Alexei Navalny as "geopolitical risks." The bank considers them less likely, therefore they are reflected only in the crisis, risk scenario. The basic version practically does not take them into account, says Nikita Maslennikov:

- In the risk scenario, the political situation is one of the factors. This is not the case in the baseline scenario, because our colleagues proceed from the assumption that both the Belarusian situation and the Navalny factor will be exhausted by the end of the year. And in the risk scenario, these two factors are directly incorporated - a significant increase in geopolitical tension in the world. For us, this means the likelihood of tough sanctions.

Ruble to dollar rate

In times of crisis, there is an iron rule - the lower the growth, the weaker the currency, experts say. In addition, since 2014, the Central Bank has refused to interfere with exchange rate formation. Some targeted interventions can be carried out even with such a policy, but this applies to individual cases when something collapses on a large scale and at once.

- The Central Bank has the necessary tools. In his own interests, that is, in the interests of maintaining the course, he does not make any interventions. But this does not fundamentally change anything - neither the trajectory, nor the mood of market participants. In this sense, he is honest, does not produce anything that could be perceived by market participants as interference in the exchange rate setting, says Maria Ivanova.

Nikita Maslennikov believes that the current course is close to stable: - There is no need to keep the course, it should be kept from fluctuations. This is not a swing for 10 rubles a week - 10 rubles up and then 10 rubles down. This is an absolutely nervous stress for people and businesses. The Central Bank's task is not to keep the course, but to smooth out the volatility.

A weak ruble is beneficial to exporters, then their ruble revenue grows. With an oil price of about $ 40 per barrel, the rate of 74.5 - 75 rubles per dollar is considered stable. It is determined in the current situation by three main factors: the price of oil and its dynamics, the arrival of non-residents and residents on the Russian debt market and geopolitical risks, says Nikita Maslennikov. In other words, if the baseline scenario is realized, the ruble / dollar rate will remain at its current values. If one of the factors falls out - as it was in June-August, when foreign investors stopped buying government bonds - the rate fell by 8 rubles, as indicated by Dmitry Dolgin, ING's chief economist for Russia and the CIS.

In addition to these three factors, the ruble exchange rate will be influenced by economic growth or lack thereof after 2020. If the growth is three percent a year or more, then the rate will be 65 rubles per dollar. If the growth is only half a percent, then the exchange rate will remain at the level of 70-80 rubles per dollar, experts say.

Can the baseline scenario work and what are the alternatives

The baseline scenario for the development of monetary policy is quite optimistic. But it shows how much Russia depends on the global world.

The main condition under which the plan will come true is if there is no second wave and a global lockdown, as it was this spring. The Central Bank does not rule out that restrictive measures will be in many, if not all economies, but they will not have the character of stopping the entire economy, as it was in the second quarter.

The Russian factor lies in the fact that geopolitical risks will be foreseeable. The Central Bank's plan assumes that the situation with Belarus will be resolved by the end of the year. The poisoning of Alexei Navalny will also be played out, and there will be no sanctions either from the European Union or the United States.

The third success factor is that economic policies will be oriented towards growth and overcoming structural constraints. And although the government, not the central bank, is responsible for economic growth, cabinet decisions will directly affect the country's monetary policy. The content of foreign economic policy is still extremely uncertain, says Nikita Maslennikov:

- It will become clear in the first half of October, when the parameters of the budget for the next two years will be clear. Something will be known on September 16 at a government meeting. We will see the parameters, and then it will be clear what kind of consolidation will be. Most likely, it leaves for the 22nd year, and next year it will be a soft cut in costs. In 2022, the distribution of expenditures by budget line will be higher than this year. After all, about 800 billion will have to be spent on restoration. Since fiscal policy will be soft, the central bank will not push too hard on key rates, since the limit of possibilities is also very limited. Next year it will be reduced by half a percentage point, and in the optimistic scenario - by 0.75.

Until now, economists have assumed that economic recovery should take place in the third quarter of 2021. However, even the baseline scenario of the Central Bank shifts it to 2022. The winter will be long.