Russia is Giving Priority to Stability over Economic Growth

Russia is Giving Priority to Stability over Economic Growth

Russia is Giving Priority to Stability over Economic Growth

It has been noted by observers that Russia is consistently diverting a good percentage of its export earnings into National Wealth Fund (NWF), which is part of the nation’s gold and foreign exchange reserves. It is also doing other things to bolster up reserves, like hiking oil industry taxes and value-added tax, and raising pension age sharply. The objective is to increase the NWF into 14.2 trillion rubles by 2021. This is all well and good, as a huge reserve of gold and foreign exchange will ensure stability to the economy, even if something unexpected happens, (like US sanctions or a world economic crisis) the economy will remain unaffected to a great extent.

However, the policy will affect growth and upset Putin’s plans to make Russia one of the world’s five most powerful economies by 2024. Vladimir Tikhomirov of the BCS brokerage observes that attaining stability has its advantages, but the policy will reduce the money flow needed economic renewal. His is not an isolated view. The policy will affect microeconomic growth, though from a broader, macroeconomic point of view, the picture looks bright. However, the policy is an inflexible one, and the idea is to find money for development through borrowing.  Andrei Makarov, who heads the budget committee of the Russian parliament stated that the 2019 budget envisages the surplus of about 2 trillion rubles. He added that the reserve will protect Russia from fluctuations resulting from the oil situation economic sanctions that might be imposed on it.

The oil situation is unpredictable indeed, as any minor upheaval can cause an escalation in oil prices. But Russia is more anxious about a new wave of sanctions from the US. And it is not difficult to see the factors behind this anxiety. The 2014 sanctions, prompted by Russia’s annexation of Crimea ate into about one-third of reserves and the country returned to growth only last year. At present there are two issues looming large that may provoke the US to impose sanctions again. One is Russia’s alleged involvement in the murder of a former Russian spy Sergei Skripal and his daughter which happened in England. The other is the charge about Russia’s interference in US elections. Russian policies in Ukraine and Syria could become another contributing factor.

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