Why Nabiullina does not link economic growth with oil prices

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

The usual model of the economy, based only on consumer demand, has finally exhausted itself. The world has run out of new markets, which means opportunities for extensive growth and business scaling.

The Wall Street Journal quoted the Head of the Central Bank of the Russian Federation Elvira Nabiullina as saying, which caused a storm of indignation both among liberals and on the part of violent "socialists":

The previous model of [consumer demand-driven] economic growth has exhausted itself. Even if the price of oil rises to $ 100, it is still very unlikely that our economy can grow by more than 1.5-2% per year

Critics unanimously saw in her words an attempt to justify the unwillingness of the "wrong government" to stimulate the Russian economy, primarily financially. Particularly violently outraged were the supporters of the theory popular in our country, according to which, in order to accelerate economic growth, Russia should immediately be flooded with the largest possible amount of cheap money.

What's what here - let's try to figure it out together.

Growth as the main purpose of existence

The conviction of the intrinsic value of economic growth as its main defining criterion was taken from Western textbooks on the structure of the market mechanism. If you do not go into subtleties, the general logic there looks quite coherent.

The market is a permanent and limitless concept. Everything that you have produced, he is in one way or another capable of consuming: the only question is the size of costs, the scale of prices and conditions of sale. At the same time, even in the century before last, Marx noted the dependence of the value of the cost price on the scale of production. Relatively speaking, an enterprise that produces, say, one hundred million pairs of shoes a year will have significantly more favorable conditions with suppliers of raw materials and components than a similar manufacturer of only one hundred thousand pairs. In addition, due to the scale, large-scale production gets more opportunities to optimize internal technological processes, thereby further reducing the level of costs.

Consequently, the faster you scale up, the more profitable you get, the wider the range of price competition, which means the higher the chances of bypassing the competitors themselves. Including due to the emergence of resources to accelerate expansion into territories that have not yet been occupied by anyone, as well as the expulsion of those who do not fit in with existing markets.

The scaling of this mechanism to the level of the economy of the state as a whole led the authors to the conclusion about the unconditional usefulness and even impermanence of constant and endless growth as the main goal of the functioning of the economy itself as a generalized concept. The main thing is that it has enough money in circulation for this growth. Thus, the key task of the state and the Central Bank was deduced - to monitor the level of finances and ensure their replenishment in time by attracting external investments or through emission.

The difference between theory and practice

It must be admitted that when these books were written, this was approximately the case. Except for one small but important nuance. Even from the general description of the process, it can be seen that the key condition for its functioning is the presence of that very endless market, capable of absorbing any amount of produced goods. Only in this form it existed until about the end of the fifties of the last century and already in the next decade began to disappear.

Even if we consider only the capitalist part of the world of that period, the revival of production in Europe, Japan and South Korea began to hinder the endless growth "according to the textbook". By the mid-1980s, free markets on the planet were virtually over. The collapse of the Soviet economic cluster and the collapse of the USSR itself in the early 1990s, as well as the partial opening of the Chinese market, actually saved the market economy from the collapse, which was many times more destructive than the famous American Great Depression.

The classical theory again had a sufficiently large empty space, due to the absorption of which it became possible to continue growth - however, not so much by capturing the initial emptiness, but due to the above-mentioned superiority of large, well-functioning production facilities over small ones in optimizing costs. Thanks to them, Western companies were able to lower prices to a level guaranteed to be ruinous for competitors in the face of local industries.

How it looked is clearly seen in the example of the "colonization" of Eastern Europe and the Baltic states. For example, the Riga RAF outright lost in terms of costs to Ford, Volkswagen and Renault - "it did not fit into the market." The fate of 95% of enterprises of the Soviet period in the west of the former USSR turned out to be similar. The history of most of the factories in Russia was similar.

But textbook readers saw only momentary results of "competition", losing sight of the fact that the model of growth as an economic end in itself began to clearly approach the natural boundaries of the world itself, within which the entire market exists.

Is it possible to grow without money?

In the classical description of the market model, little attention is paid to the direction in which the profit goes - it is considered not very important. If the market and the world are one and the same, then there is no difference who specifically earns or goes bankrupt, because the money itself still remains within the system, simply being redistributed between holders.

However, in practice, it turned out that the profits derived, say, by an American (or German, or any other foreign) investor in the Russian market, was spent on improving the welfare of the United States, practically without improving life in the place where this profit was made.

Hence, the conviction was formed that the growth of the domestic economy is hindered only by the lack of investment, or, more simply, money. To build a plant, you need to take out a loan. This can only be done in the West. Consequently, the profit from the project will also go there. So far, throughout the 1990s and 2000s, the market seemed general and global, it was annoying, but on the whole it looked logical.

An attempt to return independence to the country forced the state to start somehow protecting its market and its interests, which led to an exacerbation of the geopolitical conflict, which resulted in a gradual restriction of access to "cheap Western loans", which was interpreted as the main reason for the slowdown in the growth rate of the domestic economy. From this the obvious conclusion was drawn: the problem is solely in money. If the state gives them, everything will immediately bloom and sprinkle. Especially in the case of rising prices for raw materials, primarily energy resources, of which we have a lot.

And then suddenly the head of the country's main bank suddenly declares that 1.5-2% growth per year is the absolute limit for any price of a barrel of oil and any amount of financial injections! Didn't she read the textbooks? Is she a foreign saboteur, an enemy of the people? Everything is clear as day!

But what if you approach the question without emotion, but with a calculator?

Not everyone can invest

Let's suppose that oil suddenly jumped “for 200”, we generally sell gas “for 700”, the Central Bank and the Ministry of Finance put the “financial rule” into a shredder and the resulting burst of money, every penny, was sent “to the economy”. What will happen in the end? Universal happiness? Unfortunately no.

In 2017, Russian GDP grew by only 1.5%. The current year, according to various forecasts, promises an increase in growth to 1, 9-2, 2%, with an average most likely value in the region of two. Whereas the US is already showing 4.1%, and the European Union - 2.4%. It is logical to assume that if we double the volume of domestic production, we will easily not only bypass Europe, but America will remain behind us to swallow dust. They took the boundless money that arose by a miracle and distributed it to factories with a simple task - to double the output! We'll come in the evening and check it out.

At the end of 2017, 80 million square meters were commissioned in Russia. m. of new housing. Only the country's official need for it is estimated at 280 million square meters. m., and if we take into account the replacement of the worn-out fund, then the figure is close to 800 million. Here it is, a market that can easily swallow the doubling of the pace of construction, give only money for expansion?

Unfortunately no. According to statistics, already today 52% of transactions in the primary and 42% in the secondary market are secured by mortgages, that is, loans. Of course, the balance outside the largest metropolitan areas is somewhat different in terms of the ratio of numbers, but even in the outback 34% of new housing is purchased with mortgages anyway. Can you build more? Definitely yes! The problem rests on sales, which have reached their limit in the housing market. 80 million sq. It is possible to sell relatively stably per year, however, it is no longer possible to raise sales by at least only a quarter. There is no one. There are no paying buyers.

And this is how it is practically everywhere. 48.9% of new cars, 28% of household appliances, 27% of mobile phones are sold on credit. Things have come to the point that in a number of banks 8% of all new consumer loans are issued for weddings and 7% for home renovation. This means that consumers are running out of money now.

Is it possible to stimulate their demand by distributing additional cheap loans? Judge for yourself. In the first half of last year, new loans accounted for 21% of the total expenses of Russian households, and in just a year they were issued in the amount of 1.55 trillion rubles. The level of consumer debt over the year increased by 13.2%, while nominal wages increased by only 7.2%, and their real purchasing power generally increased by only 1.1%.

Therefore, we can, of course, distribute money in order to produce twice as much “everything”, but to whom are we going to sell all the “extra”? And without sales - what is the general use of such "paper" economic growth? And how long can we “grow” like that before the explosion of hyperinflation? For those who do not understand how it happens, you can read our material about Venezuela.

Who said - “there will be work, there will be a salary, people will have additional money”? Even if we count only according to the classical textbook, then the cost price is the sum of the costs of raw materials, materials, production and wages. Consequently, the personnel of the enterprise are not able to buy even a tenth of their own production. Today the share of the wage fund in production costs is on average 3.5-5%. So the pouring of loans into production does not provide any large-scale growth in the solvency of consumers.

What are the rights of Nabiullin

This is how it turns out: who likes it or not, but the harsh reality confirms the correctness of Elvira Nabiullina. By now, alas, all the possibilities for the functioning of the classical model of eternal growth based on endless consumer demand have been exhausted.

Does this mean that "we are all going to die"? Of course not. This means that within the framework of a simple extensive model, the Russian (like any other) economy can grow only within the limits of available markets. If the forecast of an increase in sales of our gas to Europe for the next five years promises an increase from the current 198.9 to about 230 billion cubic meters, and gas there costs $ 200 per thousand cubic meters, then $ 6 billion is all we can for the indicated term to grow. If the percentage in relation to the current volume of GDP is 0.5%, then this is the limit for gas growth in five years. If we calculate in the same way all the directions in which at least some prospect of increasing volumes is objectively seen, and add them together, in the end we end up with the same “maximum of 1.5-2% per year”. With absolutely any scale of instant financial investments and an arbitrarily high price "per barrel".

Can I get more? It is possible, but not in an extensive way, but only through a gradual increase in the Russian level of industrial redistribution of products. Selling slabs is more profitable than the corresponding amount of the original ore. Selling rolled steel is more profitable than the corresponding volume of slabs. Selling structural elements is more profitable than just steel. And, of course, selling an assembled aircraft is much more profitable than supplying even very expensive titanium parts for its assembly. Only by going up the level of technical conversions, it is possible to come to the conclusion that the average ton of products sold will cost closer to three million dollars and bring a million dollars in profit, as in the field of aircraft construction, and not $ 223 and $ 33.45, as in the field of wheat supply. …

But this process requires not a simple primitive one-time injection of a breakthrough of money into the economy, but a scrupulous, methodical and complex work to modernize the production facilities themselves, coupled with a gradual transition to more high-tech products, as well as to establish their marketing. Japan, South Korea, China, yes, in general, all current leaders, it took about 10-12 years of persistent and concentrated efforts to pass this path. It is naive to think that it is possible to overtake them simply due to the “thickness of the money cutlet”.

Is Russia following this path? Not without flaws, not without problems, but in general, yes. This is evidenced by the fact that the volume of industrial exports in our country has already surpassed the raw materials - and this is even under the conditions of sanctions. Rosatom's growing portfolio of orders for new foreign power units is a good confirmation. Calculations show that in about a decade, revenues from sales of electricity generated by them will be comparable to the volume of current gas exports.

And this is not the last item on the list of changes. They are coming. But the changes primarily require financial stability - including curbing exchange rate fluctuations and minimizing inflation. This is what the head of the Central Bank of the Russian Federation ultimately spoke about in an interview.