STRATEGY FOR GROWTH -

BUSINESS-PLAN FOR RUSSIA

STOLYPIN “ECONOMY OF GROWTH” INSTITUTE

Our mission is to consolidate efforts of the government and business, scientific communities and society with the purpose of drafting optimal solutions for economic growth and raising of living standards in Russia

Academic Board: Yakov Mirkin - Chairman Chariman of the Board of Evrofinansy Investment Company OJSC, Head of

the Department of International Capital Markets at the Institute of

World Economy and International Relations (IMEMO) at the Russian Academy of Sciences (RAS)

Abel Aganbegyan Head of Department of Economic Theory and Politics at RANEPA

Mikhail Golovin First Deputy Director of the Institute of Economics, RAS

Oksana Dmitrieva Doctor of Economics, Member of Legislative Assembly of Saint Petersburg

Viktor Ivanter Director of the RAS Institute for National Economic Forecasts

Aleksandr Idrisov President of Strategy Partners Group

Andrey Klepach Deputy Chairman of the Board of Vneshekonombank

Viktor Polterovich Head of the Laboratory of Mathematical Economics in Central Economics and Mathematics Institute, RAS; Deputy Director of Moscow School of Economics, Lomonosov Moscow State University

Mikhail Eskindarov Rector of the Finance University under the Government of the Russian Federation

Director: Anastasia Alekhnovich Head of the Expert Center under the President Commissioner for Entrepreneurs' Rights, Vice-President of the All-Russia Public Organization 'Business Russia'

STOLYPIN GROWTH ECONOMY INSTITUTE – THINK TANK FOR 'STRATEGY FOR GROWTH' DEVELOPMENT

2

Supervisory Board: Boris Titov – Chairman Presidential Commissioner for Entrepreneurs' Rights

Maxim Volkov General Director of CJSC 'Pikalevskaya soda'

Sergey Generalov Co-Chairman of All-Russia Public Organization 'Business Russia', President of Industrial Investors Group

Anton Danilov-Danilian Co-Chairman of All-Russia Public Organization 'Business Russia'

Oleg Deripaska President of En+ Group

Vitaliy Machitskiy Founder and President of Vi Holding Group

Alexey Repik President of All-Russia Public Organization 'Business Russia', Chairman of the Board of 'R Pharm'

Zakhar Smushkin Chairman of the Board of Ilim Group

Gleb Fetisov Businessman, Member of the Russian Academy of Sciences

Arsen Canocov Chairman Sindica Group

Igor Hudocormov President “Group Prodimeks”

BRINGING EXPERT VISION AND BUSINESS THINKING TOGETHER

3

What business thinks: Rating of factors inhibiting production growth (on a scale from one to five)

What people think: What main difficulties do you think people starting their own business

face? (any number of responses, % of all respondents)

Source: surveys conducted by the All-Russian Public Opinion Research Center, 2017

FOR BUSINESS MAIN PROBLEMS ARE OF ECONOMICAL NATURE

3,9

3,8

3,8

3,6

3,5

3,5

3,4

3,3

3,1

2,9

3,4

2,5

3,2

5%

17%

5%

7%

9%

1%

3%

12%

14%

15%

20%

Неопределенность экономической ситуации

Снижающийся спрос на внутреннем рынке

Высокий уровень налогообложения

Высокий процент коммерческого кредита

Отсутствие стартового капитала (долгосрочных кредитных ресурсов)

Курс рубля

Высокие финансовые затраты (издержки на тарифы, кредиты, аренду/землю)

Недостаток квалифицированных трудовых ресурсов

Частые проверки

Высокая конкуренция (в т.ч. со стороны импорта, теневого сектора, монополий)

Административные барьеры (качество законодательства, суды)

Коррупция

Сложность бюрократических процедур Red tape

Corruption

Administrative barriers (quality of legislation,

courts) Tough competition (including import, the

informal sector, monopolies)

Frequent checks

Shortage of qualified workforce

High costs (tariffs, credits, rent/land)

The rouble exchange rate

No seed capital (long-term credits)

High commercial credit interest rates

High taxation

Falling demand on the domestic market

Uncertain economic situation

ECONOMICAL CERTAINTY IS :

FOR THE GOVERNMENT AND THE CENTRAL BANK – LOW INFLATION AND STABLE BUDGET, IMPROVED BUSINESS CLIMATE, REFORM OF INSTITUTIONS

FOR BUSINESS – SUSTAINABLE GROWTH AND IF THE GOVERNMENT CAN GIVE A CLEAR ANSWER TO THREE QUESTIONS:

Source: calculations of RAS Institute for National Economic Forecasts

4

ECONOMIC CERTAINTY IS UNDERSTOOD DIFFERENTLY BY THE GOVERNMENT AND BUSINESS

WHAT NON-RESOURCE-BASED SOURCES WILL CONTRIBUTE TO THE RUSSIAN ECONOMY GROWTH?

IS THERE A PLAN TO STIMULATE THEIR DEVELOPMENT?

IS THERE A TEAM THAT WILL BE RESPONSIBLE FOR ITS IMPLEMENTATION?

5

STOLYPIN REFORMS – to trust private sector initiative, to create landownership

KEY AREAS:

Development of private sector initiative, market relations;

Agrarian reform – creating private landownership;

Reform of local government;

Judicial reform.

Source: Edmond Théry, La Transformation économique de la Russie, 2008

P.A. STOLYPIN RUSSIAN PRIME MINISTER from July 1906 to October 1911 (5 years 2 months)

KEY RESULTS:

Production of grain crop increased by 37.5%, №1 position in the world;

Export of alimentary products grew by 93.7%;

Trade surplus rose by 103.4%;

Manufacturing Index went up by 8.8% annually;

Production of iron and steel grew by 53.1% from 1902 to 1912;

Expenditure on public education soared by 256%;

Defense expenditure rose by 50.1%;

Russian population grew by 22.7% from 139.3 to 171.0 million people from 1902 to 1912

6

THE RUSSIAN ECONOMY – NEW GROWTH SOURCES

DEVELOMENT OF INDUSTRIAL SMEs, SHRINKING INFORMAL SECTOR, RECOVERY OF CONSUMER GOODS PRODUCTION

NEW INDUSTRIALIZATION – HIGHER LABOUR FORCE PRODUCTIVITY:

IN EXISTING INDUSTRIES (MIC, aircraft and space, machine-tool and professional equipment, transport and car industries, power industry, medical equipment)

DEVELOPMENT OF NEW SECTORS (deepening of natural resources processing, light and food industry and others)

DEVELOPMENT OF THE FUTURE ECONOMY INDUSTRIES (DIGITAL ECONOMY)

HOUSING DEVELOPMENT, UTILITIES AND INFRASTRUCTURE

AGROINDUSTRIAL COMPLEX DEVELOPMENT

FAR EAST RECLAMATION, DEVELOPMENT OF 'ASIA – EUROPE' TRANSPORT CORRIDOR

Stage № 1: Reset Use growth

(2017–2019 гг.)

Stage № 2: Moving to high speed growth

(2020–2025 гг.)

Stage №3 : Sustainable Growth

(2026–2035 гг.)

Demand on the domestic market. Import substitution. Increased

revenues from traditional export

Investment into increasing productivity of the industrial

production.

A balanced combination of developing internal market by improving the quality of living

standards and the dynamic development of non-commodity

high-technology exports.

A moderately-low exchange rate (relative to the current state)

The strengthening of the ruble exchange rate in accordance with

the parameters of the normal functioning of the economy

Nominal rate and PPP coming

close as the main sign of developed economy

Using existing capacity Increasing investment in fixed

assets and human capital

The presence of Russian companies in global innovation markets and management of

global product chains

7

ON EACH STAGE DIFFERENT DRIVERS OF GROWTH SHOULD BE WORKING

8

THREE KEY REFORM AREAS

MACROECONOMICS – ALL-SYSTEM SOLUTIONS FOR LOWER COSTS OF PRODUCTION

MICROECONOMICS – REGIONAL AND INDUSTRIAL POLICIES

INSTITUTIONAL REFORMS – LOWER RISKS

30.11.2017 9

MACROECONOMICS – to reduce costs, ensure accessible long-term credits at low interest rates

NOT WAITING FOR LONG-LASTING STRUCTURAL REFORMS:

• to reduce interest rates on loans – the effective interest

rate policy

of the central bank (< 1%)

• targeted medium low stable exchange rate of the ruble

• taxes stimulating growth, investment

• to establish a new tariff system in order to increase competitiveness of the whole economy instead of dependence on oil and gas companies as profit centers

• public funding to the amount of 2.2 trillion rubles

1,7% 0,4%

1,4% 1,3%

0,7% 2,8%

7,0%

1,1%

4,0%

8,1%

4,5%

3,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

2013 2014 2015 2016

Структура инфляции в 2013-2016 гг., п.п.

Инфляция (прочие факторы), %

Инфляция (курс), %

Инфляция (тарифы), %

Inflation (other factors), % Inflation (rate), % Inflation (tariffs), %

10

IN OUR IMPORT-DEPENDANT ECONOMY INFLATION IS INFLUENCED BY THE ROUBLE EXCHANGE RATE WHICH IS DRIVEN BY OIL PRICES

Data on the RF confirms inverse relation between consumer price index and oil prices

0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

140

20092010 2011 2012 2013 2014 2015 2016 2017

M2, трлн руб. Brent, $

USD/RUB ИПЦ на конец года, год к году

The study 'On Effective Monetary Policy in Russia…' conducted from January 2009 to March 2016 by the Center for Macroeconomic Analysis and Short-term Forecasting demonstrated that tightened monetary policy in the RF:

- has a statistically significant recessionary effect;

- does not have statistically significant impact on restraining inflation or ensuring stability of the national currency;

- results in higher inflation.

THE MAIN MEANS OF LONG-TERM CONTROL OF INFLATION IS ECONOMIC GROWTH

Inflation structure in 2013-2016, %

Country Credit / GDP, %

Lending rate (credits to

the economy), % Money / GDP, % Investments / GDP, % Inflation, %

before after before after before after before after before after

Japan 1953 1990 1953 1990 1955 1990 1955 1990 1953 1990

n/a n/a 9.08 6.95 45.4 109.1 19.4 32.1 6.6 3.1

South Korea 1970 2010 1980 2010 1970 2010 1970 2010 1970 2010

35.3 103.2 18.0 5.50 28.0 141.6 25.5 28.6 14.8 2.9

Singapore 1970 2010 1980 2010 1970 2010 1970 2010 1970 2010

20.0 83.9 11.7 5.38 66.4 132.7 32.6 25.0 0.4 2.8

China 1978 2010 1980 2010 1978 2010 1980 2010 1990 2010

38.5 172.3 5.04 5.81 24.7 182.4 28.8 46.1 3.1 3.3

Financial Strategies for Modernization of the Economy: World Practices / edited by Y.M. Mirkin – М.: Magistr, 2014. – 496 p.

Countries which made a significant development breakthrough had been consistently implementing the strategy of economic and financial stimulation. Their practices proved that at the early stage of active growth acceptable inflation might comprise a two-digit value and it's the economic growth which became the primary driver for its further decline.

11

11

INTERNATIONAL BEST PRACTICE –

GROWTH STIMULATION LEADS TO LOWER INFLATION

12

THE POLICY OF QUANTITATIVE EASING (QE) FOR RUSSIA:

Investment 2.02 tn. RUB

Capitalization and refinancing of development institutes (Industrial Development Fund (IDF, Bank for Development and Foreign Economic Affairs (VEB) (infrastructure projects including PPP), SME Development Corporation, VEB Foundtion of Mono-Cities, The Russian Agency for Export Credit and Investment Insurance (EXIAR), creation of Agro Industrial Development Foundation and others)

700

Project financing: CB re-financing of commercial banks on security and/or repurchase of project bonds of Special Project Financing Institutes (SPFI)

100

Re-financing securitized portfolios of loans granted to SMEs by commercial banks 100

CB re-financing of the syndicated loans portfolios, trade financing 100

CB re-financing of leasing companies on the security of lease contracts' portfolios 50

Founding a Bank of Bad Debts (restructuring debts of industrial SMEs) 450

Stimulating demand: ⁻ Mortgage 5%, food and medicines for the poor to the amount of 150 billion

⁻ Stimulating demand for domestic machine building

⁻ Foodstuffs and basic medicines for poor population groups

520

1 rouble of public funding will attract 4-5 roubles of private funds

* Experience of Foundation for Industrial Development

To achieve growth rate of 3.5-5$ at the first stage (the end of the third year of the programme implementation) and increase the

share of investment in GDP to 24-26%, the sum of 5.9 trillion roubles per year is required in the first two years of the programme

implementation (measured in prices as of 2015).

MICROECONOMICS – GROWTH PROJECTS THE MAIN PRINCIPLE – COOPERATION

IN ORDER TO LAUNCH INVESTMENT PROCESS THE GOVERNMENT SHOULD SUPPORT IMPLEMENTATION OF THE FIRST 100 ANCHOR PRJECTS WHICH GIVE MAXIMUM MULTIPLYING EFFECT FOR ECONOMIC DEVELOPMENT

Projects of three types are considered: Technological

development of corporate groups and industries;

Infrastructure development;

Higher human potential and capital.

13

Priority spheres for project implementation are new sources of growth.

Modernization projects can be carried out only by private companies with the aid from the state, which should coordinate selection of projects to provide maximum multiplying effect, establish conditions, necessary legislative framework, and provide support at the first stage of recovery growth.

Project management is possible on the basis of territorial clusters.

Public financing might vary from partial loan guarantees to covering up to 75% of expenses.

The most attractive mechanism for large projects' financing is Public-Private Partnership and project financing.

Instrument of special investment contracts should be actively used.

Pprogramme for development and higher performance of industrial parks for production of 'simple things' (consumer goods) near big cities.

Development of agricultural cooperation, building cooperation centers for storage, wholesale and retail sale of agricultural goods in the main city centers, New Markets programme.

Developing plants for processing natural gas into chemicals and mineral fertilizers in ports with the focus on export.

Medical equipment cluster in St. Petersburg, pharmaceutical cluster in Kaluga.

Complexes for gathering and deep processing of associated gas and for production of electric power in Western and Eastern Siberia.

Textile cluster in the Ivanovo region.

EXAMPLES OF 'BUSINESS RUSSIA' PROJECTS Cluster Projects in Russia Areas

pulp and paper plant processing of associated gas timber processing machine-tool building fish and meat industries seed production tourism IT cluster Services to the elderly

30.11.2017 14

INSTITUTES – to reduce risks for property and property owners

• JUDICIAL REFORM

• LOWER ADMINISTRATIVE PRESSURE

• CRIMINAL JUSTICE SYSTEM REFORM

To create the reform headquarters – "DELIVERY UNIT" to organize, conduct and coordinate implementation of ’Strategy for Growth' in cooperation with other authorities, business and the public.

On the basis of new technological opportunities to analyze "big data" of the Russian economy, the basis for further decisions.

To introduce the system of strategic indicative planning which can forecast output and consumption, assess needs in infrastructure and resources, inter alia, on the basis of interregional and input-output tables (dynamic input-output models).

To create an effective system of project management for development: to ensure stable funding of priority public programmes in accordance with their passports, to create a mechanism of flexible links beеween public programmes and the contractual system, to introduce the system of professional assessment of key projects; to introduce KPI for agencies coordinating programmes, development institutes and state-owned enterprises, participants oriented at meeting economically feasible target indicators and project deadlines.

TO CREATE GROWTH ADMINISTRATION TO SEPARATE GROWTH MANAGEMENT FROM OPERATIONAL MANAGEMENT

15

16

FINANCIAL RESOURCES NEEDED FOR GROWTH

NEW SOURCES OF GROWTH FINANCING

Potential, per year TOTAL

Capital increase of the development institutes financed by the CB and new refinancing mechanisms including project and trade financing. Creating a bank of bad debts

1,500 BN RUB

+ 6.2 TN RUB

State banks assets via adjustment of lending mechanisms and specialized mechanisms of refinancing 500 BN RUB

Government guarantees in PPPs 500 BN RUB

Public property privatization 500 BN RUB

Borrowing from the general public and financial investors via attractive instruments, such as indexed bonds

1,000 BN RUB

Treasury support – increased effectiveness of public finance management 700 BN RUB

Admission of 3% GDP deficit in the mid-run, and the ceiling of government debt of up to 30–35% GDP 1,500 BN RUB

EVERY PERCENTAGE POINT OF GROWTH IS AT LEAST 300 BILLION RUB EXTRA PROFIT OF CONSOLIDATED BUDGET

FINANCING MECHANISM Necessary initial

funding TOTAL

ENSURING SHORT-TERM AND LONG-TERM CREDIT AT COMPETITVE RATES 1,500 BN RUB

2.02 TN RUB DEMAND PROMOTION 520 BN RUB

MAINTIANING BUDGET EXPENDITURES AT THE LEVEL OF 2016 139 BN RUB

GDP GROWTH RATE :

STAGE 1 (2017–2019, third year): economic growth

recovery – 3.5-5.0 %

STAGE 2 (2020–2025): reaching high rate and quality of economic development – 5.0-6.0 %

STAGE 3 (2026–2035): sustainable development – 3-3.5%

GDP dynamics scenarios, 1990=100%

1990 2013 2016 2019 2022 2025 0

120.0

100.0

80.0

60.0

40.0

20.0

0.0

1

2

3

4

Russia – Inertia scenario

Russia – Strategy for

Growth

World

Russia - Potential

The USA

Germany

China

India

'No change' scenario

Russia's share in the world economy, % (PPP)

Inflation, %

Number of high performance jobs, mln

2035 Potential

Strategy for Growth

3.65

GDP growth rate, %

7

3,25

1,65

6 4,5

2,9

66,6

48,4

86.2

GDP per capita, thous. UDS (PPP)

5

2,25 2,25

35 40

25

2.86

2.05

1.37

Investment share in GDP, %

19

25

31

Russia – Potential

Russia – Strategy for Growth

GPP (PPP) per capita dynamics, the US=100%

2035 2032 2026 2023 2020 2017 2014 2011 2008 2005 2002 1999 1996 1993 2029 2028 2031 2034

Source: Institute for National Economic Forecasts, RAS

Source: Institute for National Economic Forecasts, RAS

Source: Institute for National Economic Forecasts, RAS

17

STRATEGY FOR GROWTH WILL ALLOW TO DOUBLE GDP BY 2035, or even triple if the full potential of the Russian Economy is reached

18

RUSSIA IS A COUNTRY OF HIGH POTENTIAL

A STRONG COUNTRY NEEDS A STRONG ECONOMY

THE WHOLE COUNTRY AND THE AUTHORITIES THEMSELVES SHOULD BELIEVE IN

OPPORTUNITIES FOR GROWTH; THE AUTHORITIES SHOULD STOP OVERESTIMATING RISKS AND SHOULD LEARN TO TRUST BUSINESS AND CITIZES AND PERSUADE CITIZENS TO TRUST

THE GOVERNMENT

"If trends emerging in the largest European countries between 1900 to 1912 continue until 1950, Russia will dominate Europe from both the economic and the financial points of view"

Edmond Théry,

a French economist delegated by the French Government to study the Russian economy in 1912

SUCCESS OF STOLYPIN REFORMS :

THANK YOU ________________________________

http://stolypin.institute/en/