Oleg Vyugin is chairman of Russia’s MDM Bank and an adviser to Morgan Stanley. Formerly he held various senior positions in Russian financial authorities such as deputy finance minister, first deputy chairman of the central bank, and head of the now-abolished Federal Financial Markets Service. He discusses the state of the Russian economy and effects of oil prices on it in this interview with EmergingMarkets.me.
Q.: Do you think Russia is past the worst in its current economic troubles?
A.: I’m not sure, actually. The problem is that so-called temporary stabilisation which can be projected far in advance via month-to-month calculations and doesn’t take the seasonality of GDP into account actually means nothing because whether we’re talking of any anticipated growth or decline of the economy, we use quarter-by-quarter measurements of GDP based on a very clear methodology, and we still have no evidence of quarter-on-quarter economic growth. This is a general comment.
If we look at specific circumstances, yes, the economy is in the process of adaptation to the substantial decrease of the oil price, to the tightening of the budget policy, and to the sanctions, which have closed access to global markets for Russian companies, and hence have put restrictions on investment.
And as for 2016, we can foresee that, if the sanctions are not lifted and the oil price remains low, then we will actually see further reduction of resources for investment. And, of course, no sources for the increase of the real incomes of the population. So it’s very difficult to imagine than in 2016 there will actually be any positive economic growth. This is the conclusion made by major, including official, institutions, for instance the Ministry of Economics.
So actually it’s too early to say that the Russian economy has stabilised. Yes, probably there is temporary but very fragile stabilisation, due to the stabilisation of oil prices and some temporary reduction of the net outflow of capital due to debt service.
So actually I don’t think 2016 will be a very successful year for the Russian economy.
Q.: Do you agree that oil and gas is the main determinant of success for the Russian economy?
A.: Yes, oil and gas do play a very significant role because they mean wealth. I mean their price especially. If there is stable capacity of production, the price plays a very important role. When the price is higher, a country gets more wealth. It means that it’s possible to have a higher living standard for the population and more resources for investment without any efforts to increase efficiency of the economy as a whole. If the price is lower, there is a decline in consumption and a decline in investment. To overcome this effect, a lot must be done in internal economic policy and governance to stimulate increases in efficiency at company level. Which is not happening now, actually.
Today this is the main negative factor, it has the main negative impact on the economy. Oil price growth will have a positive effect on the economy. Unfortunately, this factor continues to be very significant for Russia.
Q.: Alexei Kudrin, the former Russian finance minister, said a few months ago that the Russian system of economic governance needs to be overhauled urgently, and that each year of delay would need several years to make up for. Do you agree?
A.: It’s exactly what I am talking about. To some extent we have a governance system that’s inherited from the Soviet Union, but applied to a market economy.
Q.: Do you agree with the view that the ruble has bottomed out?
A.: We have to recognise that actually the fall of the ruble has been caused by the fall of the oil price. Sometimes not but in general it has. This means that if the oil price reaches the bottom, so will the ruble. But if not, if the oil price, say, drops to $20 per barrel, the ruble will also fall substantially.