Russia may turn to state investment to battle sluggish growth

* Russia’s GDP growth seen at around 1% in 2019

* Less than expected budget spending strains growth

* Monetary policy helpless in reviving growth -cbank

* Only state spending on big projects can help -cbank, economists

By Andrey Ostroukh, Gabrielle Tétrault-Farber and Anna Rzhevkina

MOSCOW, Sept 19 (Reuters) - Russian officials looking to reinvigorate economic growth are running out of tools to reach President Vladimir Putin’s targets and could have no choice but to increase the state’s already strong presence in the economy, economists say.

Hostage to fluctuating oil prices and Western sanctions, Russia’s economy is on course to grow just over 1% this year, down from 2.3% in 2018, even though the central bank has cut interest rates three times, to 7%, as inflation edges down.

The bank has so far resisted pressure from other economic bodies to cut rates more aggressively, citing its remit of controlling inflation.

Sources of economic growth have been at the heart of recent heated debate between central bank and other policymakers, ranging from the ways in which banks assess risks when issuing loans to consumer lending growth.

Public discussions became so impassioned that central bank chief Elvira Nabiullina was asked at her quarterly briefing this month whether she and Economy Minister Maxim Oreshkin were in open conflict.

But with demand for its exports flagging, the reality is that Russia, whose state coffers hold more than $500 billion, has no other choice but to invest in large infrastructure projects to boost growth, economists and policymakers say.

“There is no potential for a strong acceleration in consumer demand, and it is obvious that there can be hope only for investment, particularly from the state,” said Dmitry Polevoy, chief economist at the Russian Direct Investment Fund. “The state can invest more, and this will help growth.”


A cut in the economy ministry’s 2020 GDP growth forecast, to 1.7% from 2%, prompted Putin to order his government to boost growth and increase real incomes, which have fallen for more than five years, hurting his popularity.

Nabiullina last week said structural factors were impeding growth, and that monetary policy “is almost helpless here”.

“We should avoid repeating the mistakes of countries that neglected the structural factors of an economic slowdown, trying to boost the economy by printing more money, getting a short-lived spike and a fall later with high inflation,” she told a conference.

The central bank has cut its forecast for 2019 GDP growth to 0.8-1.3%, attributing the slower pace in part to weak government investment.

“A higher economic growth rate should primarily be driven by a shift to a more extensive implementation of national projects,” Nabiullina said, referring to a series of big investment and infrastructure projects.

Russia’s finance ministry plans to start spending excess cash from the National Wealth Fund (NWF) in 2020 once the sovereign wealth fund reaches its minimum size of 7% of GDP. The NWF totalled $122.9 billion as of Sept. 1.

Large projects it may support include the Gazprom-led liquefied natural gas facility in the Baltic Sea port of Ust-Luga and Novatek’s second LNG plant, Arctic LNG-2.

But with some national projects behind schedule, only 30% of 1.7 trillion roubles earmarked for them in the 2019 budget had been spent in the first half of the year.

The Russian finance ministry did not reply to a Reuters request for a comment why budget spending this year was slower than expected.


With spending lower than planned, consumer lending has been one of the few factors supporting Russia’s economic activity.

But with the central bank trying to curb its growth, bankers and analysts say consumer credit can do little more.

Sofya Donets, chief economist for Russia and the CIS at Renaissance Capital and a former central bank official, said consumer lending could only have a small effect on growth, not be its main driver.

Consumer demand continued to “make a positive contribution to GDP growth” but will remain slack because of stagnating household incomes, Nabiullina said this month.

In a report this week, the central bank said the economy would be supported by national projects between 2020 and 2022, resulting in an annual GDP growth increase to 2-3% by the end of that three-year period.

Vladimir Tikhomirov, chief economist at BCS Brokerage, said that consumer demand, which the central bank expects to grow by 1% to 1.5% this year, was not strong enough to prompt private companies to invest more into the economy.

Investor sentiment has also soured after the arrest on embezzlement charges earlier this year of several executives from private equity group Baring Vostok, including U.S. investor Michael Calvey.

“The private sector is not ready to invest if it doesn’t see demand,” Tikhomirov said. “In this situation only the state can make the economy grow.” (Reporting by Andrey Ostroukh and Gabrielle Tétrault-Farber; additional reporting by Darya Korsunskaya, Anna Rzhevkina and Tatiana Voronova Editing by Katya Golubkova)