Page 10 - bne IntelliNews Russia Country report May 2017

Kudrin has also suggested that Russia increases its deficit from 1% to 1.5% of GDP by borrowing more, but this is where the argument gets stuck.
Kudrin has been offered the job of prime minister to put his plan into action, according to a reliable bne IntelliNews source, but only if he can get a consensus amongst the various Kremlin fractions.
Opposing him is the so-called Stolypin Club, headed by presidential ombudsman for business Boris Titov, which wants a more traditional Keynesian solution by massively increasing borrowing and using the cash to stimulate growth immediately through state-lead investment programmes. Kudrin’s version is slower and more difficult to implement, but it should lead to a higher quality of growth. And it has the big advantage that it won’t be as vulnerable to Russia’s endemic corruption and stealing by the very oligarchs that are close to Putin.
Currently the two camps appear to be at loggerheads with no compromise in sight. That makes Kudrin’s meeting with Putin in May all the more important as the president may attempt to break the stalemate. If Kudrin can be overwhelmingly convincing he may well make the jump to prime minister in short time, incumbent Prime minister Dmitry Medvedev seems to be on his way out, according to bne columnist Mark Galeotti.
Whatever is decided this month, the government have an uphill battle ahead of it. All three of Russia’s biggest economic drivers – consumption, construction and investment – are in retreat. At least one, preferably two, need to be turned around if the economy’s health is to recover.
A government mortgage subsidy programme (that was just ended thanks to falling interest rates) means mortgage lending is outperforming non-mortgage loans, but that has failed to turn the construction sector around, which is actually declining faster now than it was last year. The value of construction works completed contracted -5.0% in March alone, according to Rosstat.
Consumption dynamics are also mixed, according to Alfa Bank’s chief economist Natalia Orlova: social indexation is less efficient at stimulating consumption growth than public salary indexation and, “unless retail loan growth accelerates to 18% y/y in 2017, consumers will have to pay interest payments on debt, thus reducing their spending power even more”, says Orlova. Real wages are growing again, but the all-important real disposable wages that drive consumption continue to shrink, albeit at a slower pace than last year.
On top of this, when Russians do go shopping they are buying more imported products. The first quarter saw strong import growth that only undermines the health of public finances and is probably a reflection of companies building inventories because of the strong ruble-dollar exchange rate. The government’s talk of possibile tax increases in its 20/20 tax manoeuvre has spooked consumers, causing them to put off buying and preferring to save instead.
Finally, fixed investment is woefully inadequate. Corporate loans declined 0.9% m/m in March (or 0.1%, excluding FX effects) due to a decrease in FX loans, while corporate deposits were down slightly too. The retail loan book
10 RUSSIA Country Report May 2017 www.intellinews.com