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Russia-2020: Summing Up the Track-Record

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The year of the pandemic proved to be an unprecedented test for the global economic system, with the decline in global GDP significantly exceeding the declines witnessed during the 2008 financial crisis. Russia’s economy during the past crisis episodes typically exhibited greater declines in economic activity on the back of the added effects of capital outflows as well as lower oil prices. During this crisis year however, Russia’s GDP decline was broadly in line with the global trends, which was due in part to the relatively greater emphasis placed in economic policy on securing macroeconomic stability and building sufficient reserves ahead of the crisis. A relatively low share of services and small businesses in GDP as well as a greater role of the industrial sector also played a role in limiting the scale of the global decline that was largely concentrated in the services/SME segment. 

Indeed, Russia’s anti-crisis effort in 2020 was different from earlier such undertakings in 2008-2009. In particular, while the social sphere received a significant part of the support through subsidized loans and higher social transfers, there was a more concerted effort this time around to elevate potential growth via extending support to sectors that are linked with the development of Russia’s “human capital”, including healthcare, education and IT. There was also significant attention accorded to supporting those sectors of the economy that accounted for an appreciable share of employment. 

Notwithstanding the severity of the economic decline and the relatively moderate scale of the anti-crisis measures, Russia is set to significantly reduce the ratio of state expenditures to GDP – by nearly 3 percentage points of GDP in 2021. This in turn may impart negative effects on Russia’s economic recovery, with the quality of the sovereign balance sheet allowing for a smoother and more extended period of stimulus withdrawal. One of the implications of the economic downturn was the redistribution of funding within the framework of Russia’s National Projects from infrastructure to the social sphere – according to the revisions introduced earlier in 2020 the allocations for infrastructure development are to be reduced compared to earlier projections by more than 20%. 

In the monetary sphere the CBR reacted to the crisis via emphatic interest rate reductions – by 200 basis points so far this year. Inflation in Russia reached 4.4% in November 2020 (0.7% on a month-on-month basis), with most of the acceleration coming on the back of the rouble weakness in the preceding months. The levels of inflation registered in 2020 exceed the 4% target of the CBR as well as the upper bound of its forecast. While the elevated levels of inflation may be seen as temporary and likely to be reversed in Q1 2021, rising inflationary expectations and external vulnerabilities are likely to keep a lid on further activism of the CBR in reducing rates in the near term. A lot will also depend on the further dynamics in the rouble, which exhibited sizeable swings in the course of 2020.  The rouble was under pressure particularly throughout most of the second half of 2020 from worsening geopolitics. During the peak of the pandemic in Q2 2020 the rouble exhibited relative stability, which is likely explained largely by the restrictive/quarantine measures (both in Russia and globally) that resulted in lower capital outflows, lower imports of goods and services as well as lower remittances from Russia to the near abroad. The latter was due to a significant decline in migrant inflows into Russia as the pandemic resulted in severe restrictions on travel within Russia and abroad. Later in the course of the year as these crisis-related restrictions were relaxed, the pressure on the rouble to depreciate mounted, fueled by geopolitical factors.

Looking ahead, the key drivers affecting Russia’s economic performance in the near term will be the pace of global economic recovery and the concomitant growth in oil prices.

Other external factors that may affect Russia’s outlook include the possibility of a moderation in protectionist pressures, including in the trade war between the US and China, as well as new rounds of stimuli, sanctions scenarios, further progression of the pandemic and vaccine development. The technological race between the US and China, most notably in areas such as the 5G development, may also have a significant bearing on challenges and exigencies facing Russia. 

Another important element in the outlook for Russia’s economy in the near term will be the global environmental agenda, including the active steps undertaken by advanced economies in the area of promoting a “green recovery” from the current pandemic. While Europe has championed the cause of advancing the creation of climate-neutral economy by 2050, the US may further reinforce the global momentum towards green development as the new US administration under Biden is likely to prioritize environmental policies. And while this challenge is still largely seen in Russia as a longer-term challenge, its impact on Russia’s economy may prove to be more swift than widely anticipated. 

All in all, while the year 2020 presented a major challenge to the Russian economy, its ex-ante preparedness to external shocks served to attenuate the adverse effects of the global economic slowdown. One of the challenges in the post-pandemic period will be to overcome the “defensive mode” in economic policy and to switch gears into prioritizing faster economic growth. So far, the intensity of external shocks appears to have firmly rendered the maintenance of macroeconomic stability and increasing reserves the overriding economic policy objective.

From our partner RIAC

Head of the analytical Department of Sberbank's corporate and investment business (Sberbank CIB) — Sberbank Investment Research, RIAC Member

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Fed’s Hawkish Shift and the US Economic Outlook

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The US Central Bank recalibrated its outlook on the recovering US economy last week and the appropriation sent the world markets into activity. The Federal Reserve insinuated a possible hike in the interest rates in 2023; a sharp turn from the earlier announcement of keeping the rates stable till at least 2024. While the implementation still falls 2 years ahead, the unexpected insight and such a speedy change of perspective added weight to the voices behind the warnings of an over-heated US economy in a post-pandemic world. The Fed Chair Jay Powell had earlier sated the worrisome elements back in March when the Federal Reserve decided to keep the interest rates low in the short-run whilst conducting heavy Open Market Operations (OMO) to keep the yields low and subsequently, keep the financial markets and investment activity stimulated. However, many economists predicted a sharp recovery in the second quarter of 2021 and warned the investors regarding the inflationary pressures that could follow in a scenario where the US economy outperformed the expectations of the Fed.

The scenario appears to be shaping well as the inflationary figures started hitting highs in April. The US inflation rate stood as high as 5% in May – way above the 2% targeted inflation – yet the Fed continues to stimulate the economy that is already running and bustling. The result could be a devastating spiral of inflationary pressures that the economy has not witnessed shortly. Coupled with a stagnant supply, the forthcoming years could turn the dovish sentiments into an inflationary nightmare that could only be avoided through a relatively tighter monetary policy.

Ridding the wave of the generous stimulus packages, the US economy was touted to pull back the country from the throes of the pandemic. The recent $1.9 trillion package balanced the mayhem that was all but wrecking the financial nucleus of the United States. The businesses were stabilized, the unemployment rates contracted, and the demand rebounded strongly. However, the ambition was to reconstruct the battered economy to the pre-pandemic levels as soon as possible. The vision could only be achieved by financing the investments and continuing to stimulate the demand and collateralize the supply until it was self-sufficient. The latter never happened. While the Fed succeeded in keeping the yields low via Asset Purchases worth $120 billion per month, the US supply faced the brunt of the intermittent lockdowns in major states. A fully equipped population and scarce resources added the pressure that is now renditioned in the form of an inflationary pressure showing signs of deterioration.

Due to hefty healthcare packages and prodigal unemployment benefits, the US industrial output has suffered the brunt of a stagnant labor supply. The basic tents of economics explain the inflationary pressures that have worried the Fed. Yet, a timely policy change is crucial in other aspects as well. As the global economy is improving, so is competitiveness. With an overheated US economy and stunted industrial growth, the US exchequer is facing the might of the post-pandemic market. The US Current Account deficit, which stood at a colossal figure of $647.2 billion in 2020, worsened further as the Fed continued to purchase assets and added more to the fall in the real value of the US dollar. The Current Account deficit broadened by $74.4 billion in just the first quarter of 2021. The deficit currently stands at the worst level since the financial crisis struck in 2007-2008.

With continually expanding imports and over-reliance on international capital, the US dollar has lost its charm since March last year. The US dollar fell by about 12% against a basket of major currencies in the world. Coupled with a negative savings sentiment in the United States and a broadening Budget deficit due to lofty stimulus packages, the US economy runs a major threat of driving down the US dollar further, adding more expense to the imports and thereby expanding the Current Account deficit further despite already being the highest deficit today in the world.

Safe to say, the hint of a tightening monetary policy was served to correct the spiral of another bout of devaluation and put a stop to the overly stimulated economy. The investors expected the Fed to pull the plug on the Asset Purchase Program that has kept the Treasury Yields close to 0. While the Fed is not planning to cut the purchase for another couple of months, the mere insinuation of an earlier than expected termination led to a sell-off in the US Treasury market, pushing the 10-year yield to as high as 1.51% while boasting the 30-year yield to just over 2.0%. The correcting also activated the global oil markets as Brent and WTI converged as close as $75/barrel. Moreover, the US dollar gained value on the back of a strict monetary policy as the Dollar Index spiked 1.03% in just 2 days following the Fed’s insight.

The American economy no longer hangs on the brink of a double-dip recession. And although the economy is no longer inflicted with the curbs of the pandemic, the economy is still demand-active. Thus, the savings-short economy is still heavily reliant on the monetary assistance of the Federal Reserve. With a looming inflationary spiral, an active vaccination drive, and a weakening dollar, now is the chance of ceasing the excess liquidity and shifting to a hawkish policy to gauge the gears of a self-reliant yet a controlled economic progression in the forthcoming years.

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Indonesia’s political will is the key to a successful carbon tax implementation

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Authors: I Dewa Made Raditya Margenta, and Filda C. Yusgiantoro*

A carbon tax should be overviewed as an oasis of post-pandemic recovery. The proper carbon tax scheme will solve two of Indonesia’s extensive homework; reducing greenhouse gas (GHG) emissions and boosting revenue to support economic recovery. In the end, Indonesia’s political will is crucial in completing this mission.

Recently, the carbon tax has become an exciting topic of discussion in Indonesia. This carbon tax is introduced in a revised General Taxation Law bill and becomes this year’s Indonesia National legislation Program. According to the bill, the government plans to collect a carbon tax of IDR 75,000 (US$ 5.25) per tonne of GHG  (tCO2e). The carbon tax could target emissions on the use of fossil fuels such as coal, diesel, and gasoline by factories and vehicles.

The introduction of the Carbon Tax is quite astounding. Previously, the Coordinating Minister for Maritime Affairs and Investment of Indonesia, Luhut Binsar Pandjaitan, said that President Joko Widodo planned to issue a Carbon Trading regulation in December 2020. However, there has been no signal that the regulation will be issued until now.

Implementing a carbon tax is seen as a strategic step for the government to reduce GHG emissions and boost state revenue to increase development funds. As a result, the carbon tax scheme must be well constructed, specific, and well-targeted so that the carbon tax implementation can recover the environment and Indonesia’s economy.

However, the carbon tax implementation will not succeed without strong political will and commitment from the government.

Carbon tax as a climate action plan

As the sixth-largest GHG emitter in the world, Indonesia becomes vulnerable to climate change impact. According to the Ministry of Environment and Forestry of Indonesia, the transportation and manufacturing sectors contributed to around 64% of 2017 national GHG emissions. This number will rise considering the increase in energy demand and manufacturing activities to stimulate the economy. Therefore, a new climate policy, such as a carbon tax, needs to be promoted as a climate action plan.

As an economic-environmental instrument, a carbon tax is more straightforward to address this issue. Also, the revenues gained from this tax can be recycled to support green development. Thus, the target of this tax must be well identified, and the carbon tax scheme must be designed correctly to avoid a deadweight.

Singapore can be the lead example to emulate its carbon tax scheme. Based on Singapore’s climate action plan, the tax is applied to the facilities that emit abundant GHG annually. They also promote clean and simple carbon tax to preserve fairness, uniformity, and transparency. Its carbon tax scheme, which takes place from 2019 to 2023, will be reviewed by an impact assessment in 2022.

From Singapore, Indonesia can learn that the scheme may have the flexibility to respond to the dynamics that will occur, including the opportunity to move towards a carbon trading scheme in the future. Besides, having a solid political like Singapore will give Indonesia’s carbon tax implementation an upper hand.

Building Indonesia’s political will for a climate action plan

Indonesia’s successful climate action plan relies on various variables such as GHG emissions reduction, identifying the most appropriate instruments, and introducing new climate policies. However, all of these variables are highly dependent on political will.

Indonesia’s political will on climate mitigation would be a perfect start and a powerful tool to take immediate action in climate mitigation initiatives. Instead, Indonesia’s political will may face a political challenge during the policymaking process. A lengthy policymaking process of the New and Renewable Energy Bill is one of the examples. Hence, Indonesia’s political will to address climate change at the beginning of the policymaking process is crucial.

Gaining public trust and being severe are essential steps that should be carried out before introducing a carbon tax.

At first, the government must improve its accountability and transparency, reflecting on what Singapore has shown. Indonesia should also consider complementary economic policies that minimize a carbon tax’s negative impacts on business and household sectors.

Then, Indonesia could consider removing fossil fuel subsidies and replacing them with direct subsidies to low-income households.

Finally, Indonesia should guarantee that the obtained revenue from the carbon tax will be recycled for green development and improving community welfare.

Conclusion

In brief, implementing a carbon tax in Indonesia will determine the nation’s and its citizens’ future.

Ensuring the carbon tax implementation will be on point, Indonesia’s political will is the brain, which can be seen from a carbon tax scheme and the supporting policies. The success of this policy will be seen from intensive GHG reduction, positive economic growth, and improve Indonesian people’s welfare simultaneously.

*Filda C. Yusgiantoro, Ph.D., chairperson of Purnomo Yusgiantoro Center and an economic lecturer in Prasetya Mulya University


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Central Bank Digital Currencies: What do they offer?

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The decision of the government of El Salvador to adopt bitcoin as legal tender has invited mixed reactions from around the globe. Notwithstanding the pros and cons of the issue, the message is loud and clear – digital currencies are here to stay.

The total market cap of bitcoin has reached 600 billion US dollars by March 2021. Cryptocurrencies have captured the imagination of rich and poor alike. The percentage of cryptocurrency users has been steadily increasing in countries facing financial instability and grappling with weak currencies. Latin America has seen large scale activity in bitcoins, especially in countries like Venezuela and Columbia. Nigeria likewise has emerged as a hub for bitcoin trade given the challenging economic climate in the country. The Central Bank of Nigeria (CBN), in a February directive, had warned banksand financial institutions of facilitating payments for cryptocurrencyexchanges.Cryptocurrency trade has grown to such volumes that it can’t be overlooked by the state actors.

States and Central Banks unable to buck the trend are contemplating their own version of digital currencies. So, do ordinary citizens gain something from the Central Bank Digital Currencies (CBDC’s)?

Societal and Environmental concerns

Experts have already pointed out serious pitfalls of allowing a free hand to decentralised currencies outside the regulatory framework of the governments. Crime syndicates use cryptocurrencies as safe conduits for money laundering, cross-border terrorist financing, drug peddling and tax evasion. Recently an FBI operation, “Trojan Shield”, which busted a criminal underworld along with the seizure of millions worth of cryptocurrencies, further echoed the proximity of criminals with the crypto-world. Several cryptocurrency frauds have unearthed in recent history. The widespread popularity of cryptocurrencies has diluted the globalstandardson KYC (Know Your Customer) and AML (Anti Money Laundering), providing room for criminals and lawbreakers. 

The energy-intensive nature of cryptocurrency mining has raised concerns about its impact on climate change and pollution. China and Iran have recently put stringent controls on bitcoin mining owing to environmental pollution and power blackouts. It is bizarre that the total electricity used for bitcoin mining surpasses the total energy consumption of all of Switzerland.

Threat to sovereign power 

Decentralised currencies pose a grave threat to the sovereign power of the governments. Several States and Central Banks have thus stepped in to maintain their relevancy, by announcing their version of digital currencies, backed by sovereign guarantee. In the latest Bank of International Settlements (BIS) paper, 86% of 65 respondent central banks have reported doing some research or experimentation on Central Bank Digital Currencies.

China leads the rest

China is quite ahead in the development of its CBDC compared to all other nations. China has already distributed some 200 million yuan (US$30.7 million) in digital currency as part of pilot projects across the country. By early implementing the digital yuan, China expects to challenge the US dollar’s hegemony as the international currency. In future, China hopes to achieve more international trade through a digital yuan, which would further China’s global ambitions and effectively push plans like the Belt and Road Initiative (BRI). Moreover, it provides China with sufficient strength to effectively bypass US sanctions in any part of the world.

The Federal Reserve and the European Central Bank have taken a more cautious stance and indicated that they are not in the race for the first place. In late May, Fed Chair Jerome Powell announced plans for a discussion paper on digital payments, including the pros and cons of the US Central Bank currency. European Central Bank Chief Christine Lagarde said her institution could launch a digital currency only around the middle of this decade.

Why CBDC’s may not offer anything new

Only stringent regulations or an outright ban on decentralised currencies could control money laundering and financing of crimes through digital currencies. It is unlikely that the introduction of CBDC’s would hamper the flow of illicit money through decentralised channels. In all probability, criminal elements would still run their show through decentralised currencies where there is anonymity and the lack of regulations.

CBDC’s may perhaps offer fast and real-time settlement of payments. While this is a plus, the existing bank payment systems already provide for swift and sophisticated transaction processing. So, real-time settlements are nothing new and certainly not a novel innovation. Moreover, cross-border transfers might not see any revolutionary change because these transfers still have to go through the existing regulatory frameworks.

CBDC’s would boost the surveillance mechanisms of the State. It would put every transaction under the government scanner. Individual privacy will be a major causality if proper safeguards are not incorporated. Brighter sides are that the government could effectively target economic crimes like tax evasion with greater ease and a reduced carbon footprint.

Threat to the banking system

Though the actual modalities have not come out, reactions from Central Banks indicate that CBDC’s will co-exist with the existing fiat currencies. The new system can potentially destabilise the present banking system and the financial intermediaries. Proposed digital currencies are backed by the Central Bank, which could never go bankrupt. In the existing system, money is secured by the guarantee offered by private banks. In a period of economic instability, citizens might pull too much money out of banks to purchase CBDC’s, backed with better security and consequently triggering a run on banks.

Back to centralisation

The introduction of digital currencies is out of necessity to preserve Central banks’ legitimacy in the face of the cryptocurrency boom. It possibly will protect the citizens from the extreme volatility of decentralised currencies and may serve as safer mediums of exchange. Since it is backed by sovereign guarantee, it might also act as a better store of value. But, CDBC’s would expand the state power and cause the continuance of the regime based on “trust” in governmental institutions, which was precisely what decentralised currencies like bitcoin had intended to annul. Essentially, CBDC’s would bring in more government to our daily lives, which is rather regressive and goes against the spirit of modern libertarian values.

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