A very difficult choice will have to be made between macroeconomic stability and high growth rates. A clear illustration of the dilemma is Russia's oil income, which on the one hand is dependent on high oil prices, and on the other is increasingly regarded as an incentive for promoting investment.
The Ministry of Economy is in favor of directing part of these funds, including the National Wealth Fund, toward the development of infrastructure projects. In my opinion, priority should be given to infrastructure development and more active modernization. Budget investment must in the end stimulate private investment, which will gradually be channeled more and more toward infrastructure aims. The most realistic way in which Russia’s economy should develop is through increased investment, modernization and infrastructure development.
Is it possible to achieve growth rates of 5% or higher? In Russia, this is possible provided investment, which so far contributes very little to GDP growth, resumes contributing what it did before the crisis.
The macroeconomic situation is rather difficult now, global risks are high, capital outflow is high; in order to see an increase in investment we need to improve the investment climate and reduce capital flight from Russia, which is hampering our economic growth.
We have inner reserves which, apart from budget funds, include an enormous amount of people’s savings. If our banking system starts working more efficiently in engaging these savings into investment, it will probably be the most important contribution to investment growth. Moreover, billions of dollars are held in offshore accounts outside Russia, and millions of our compatriots live abroad. If we can attract them to our economic development – as South Korea, Taiwan and Ireland have successfully done in their time – it will be very helpful for our economic growth.
The investment problem and the infrastructure issue now form a vicious circle: the inferior level of infrastructure provokes capital outflow which, in turn, hampers infrastructure development. It is vitally important to break this vicious circle by way of institutional reform, a paradigm change in respect of capital outflow and an influx of investment. It is worth pointing out that the second half of last year showed an increase of direct investment into the Russian economy, although capital outflow still remains quite high. Foreign companies, such as Coca-Cola and IKEA, are investing heavily in Russia and seeing big profits.
There are a number of methods of attracting people to take a more responsible approach to public-private partnerships. One is financial literacy. The state must take significant measures to educate the entire population – not just the younger part studying in schools and universities – in matters of finance. When less than 1% of the population invests in financial markets, it means there is a big divide between people’s savings and the investment sphere. Besides, it is vital to develop the social financial infrastructure, such as pension funds. The state must be more active in developing the pension system, in clarifying its aims to the population and in helping people to manage their pension funds more efficiently.
For ordinary Russians state guarantees are of vital importance, especially in view of the world record number of cases where people lost large sums of money in all sorts of financial pyramids and banking crises of the early 1990s.
To get the investment process off the ground, the lack of confidence must be overcome. This cannot be done by one-off targeted measures; a comprehensive campaign over a long period of time is necessary. As a positive example, the Central Bank’s monetary policy can be cited. Five or six years ago, the slightest shift in the exchange rate between the rouble and the dollar caused public anxiety; people started queuing up at the banks, which only made the volatility of the financial markets and the exchange rate worse. Now, thanks to its consistent policy, the Central Bank has created public awareness that no risk of massive losses for the population can result from fluctuations of the exchange rates, however big. In the middle of last year, when European currency markets were highly volatile, and the rouble lost much of its value for some time, people were not rushing to get rid of their roubles. The strategy paid off, since by the end of last year the rouble went up to nearly 30 roubles to the dollar, and now stands at 34.
The fragile confidence is just being established; it is vital to maintain it, carefully avoiding the defaults and devaluations of the 1990s, or things like the recent freezing of deposits in Cyprus. Confidence must become the long-term guiding principle of the Russian economy.