Catch up and overtake Germany: pension reform to help Putin’s May Decree

Economists told how to make Russia the fifth world economy. The most important thing is to distribute resources smartly and reduce the number of pensioners

Catch up and overtake Germany: pension reform to help Putin’s May Decree Photo: Dmitry Reznov

Economists from RANEPA and the Gaidar Institute told how to make Russia the fifth world economy: for this purpose, the country's GDP must grow by 3,3% for six years. This is possible if resources are distributed smartly. In addition, the pension reform will help to accomplish the president's decree. Other experts say it's not so difficult to reach faster growth paces but not through injections to mega-projects. Realnoe Vremya tells the details.

How to join top 5

Specialists from RANEPA and the Gaidar Institute Georgy Idrisov and Pavel Pavlov calculated what Russia needed to do to become one of the five biggest world economies. They claim it's possible, it's just important to distribute resources among different production sectors correctly.

It's Vladimir Putin who hopes to include Russia to the top 5 countries with the biggest GDP by 2024. This task is in his new May Decree, which was signed immediately after inauguration. The IMF assesses today Russia is sixth in terms of the volume of gross domestic product based on purchasing power parity giving the fifth position to Germany. In 2017, the margin between countries totalled over 4% ($4tr in Russia against $4,17tr in Germany).

According to the May Decree, the Russian economy must grow by 30% in six years (to the level in 2016) in real terms and 1,5 times nominally. The research's authors write for this purpose GDP needs to annually increase by 3,3%.

Demography is one of the major challenges for Russia in the middle term. The number of working people will decrease by about 740,000 people, or 1%, in 2016-2024. This will require additional attention to the migration policy, Idrisov and Pavlov indicate. However, the retirement age increase will help the economy. It will slow down the reduction of working people and, consequently, the deficit of labour force won't restrain the economic growth so much.

The Kremlin and the government hope to provide the necessary growth paces with increasing the dynamics of productivity as well as investments. Productivity is supposed to increase by 20% by 2024 compared to the level of 2016, investments are to reach 25% of GDP in six years. The experts' calculations showed that real GDP would rise by the 30% if these two conditions are met and the retirement age increases.

As Idrisov and Pavlov consider, it's possible to reach the necessary growth paces if the investment and productivity plan is pursued and resources are distributed correctly. So an inflow of labour force to the extracting industry, production of coke and oil products will give the biggest return. This labour force can be taken from commerce (-1,7m people) and agriculture (0,4m people). In turn, it's better making big investments in textiles and clothing industry, leather industry, metallurgy and production of ready metallurgic goods, commerce and construction.

Model variant of distribution of labour and investment resources among Russian economic sectors until 2024 to reach the targeted growth paces

sectors of economy

employment growth, thousand people

GVA growth (+NNP) in 2016-2024, %

fixed asset growth in2016-2024, %

economic productivity/economic sectors growth(TFP) in 2016-2024, %

economic productivity/ economic sectors (TFP), year-round growth pace, %

labour productivity, year-round growth pace, %

investments in 2016 prices, bn rubles

GVA in 2024 in 2016 prices, bn rubles

growth in share in GDP in 2016-2024, pp

Agriculture and fishing

-385,9

8,5

8,5

11,4

1,4

1,9

3 099,1

4 431,6

-0,7

Extractive industries

-135,2

25,0

21,3

28,7

3,2

4,4

16 701,6

10 139,0

-0,3

Manufacturing

Food production, including beverages and tobacco

138,8

56,9

64,2

28,7

3,2

4,9

3 013,0

3 162,5

0,5

Textiles and clothing industry

61,9

78,0

100,9

35,9

3,9

6,3

208,7

300,9

0,1

Leather industry, production of leather goods and shoes

-4,7

12,0

20,5

11,4

1,4

2,3

12,6

42,4

0,0

Woodworking and production of wooden goods

-38,0

8,5

8,5

11,4

1,4

1,9

219,4

282,2

0,0

Pulp and paper industry

-28,5

8,5

8,5

11,4

1,4

1,9

340,4

502,9

-0,1

Production of coke, oil products

58,2

107,9

80,1

35,9

3,9

4,8

5 570,6

4 614,4

1,6

Chemical industry

35,7

40,2

46,3

20,7

2,4

3,7

1 956,1

1 236,5

0,1

Production of rubber and plastic goods

17,9

40,2

46,3

20,7

2,4

3,7

453,3

374,6

0,0

Production of other non-metallic mineral products

-42,7

8,5

8,5

11,4

1,4

1,9

714,8

565,7

-0,1

Metallurgy and production of ready metallurgic goods

172,9

125,4

131,7

58,9

6,0

8,8

7 006,1

4 590,6

1,8

Manufacture of machinery and equipment

-264,4

25,3

31,4

42,3

4,5

6,8

602,2

924,4

0,0

Manufacture of electrical, electronic and optical equipment

132,2

125,4

131,7

58,9

6,0

8,8

1 657,3

1 611,9

0,6

Production of transport vehicles and equipment

131,4

86,6

94,6

42,3

4,5

6,7

3 223,0

1 557,3

0,4

Production of other goods

15,7

23,5

32,1

11,4

1,4

2,3

85,9

816,2

0,0

Services

Electric energy gas and water

-140,3

8,5

8,5

11,4

1,4

1,9

6 386,8

2 913,8

-0,5

Commerce

-1 722,0

20,8

37,3

20,7

2,4

4,1

3 701,2

16 628,9

-1,0

Transport and communication

313,3

40,2

46,3

20,7

2,4

3,7

40 428,0

9 456,0

0,7

Construction

450,4

61,5

80,9

28,7

3,2

5,2

3 993,4

8 583,6

1,6

Public sector services

251,6

13,4

16,0

7,2

0,9

1,4

11 518,7

14 203,8

-1,7

Other services

242,5

13,4

16,0

7,2

0,9

1,4

33 877,9

23 933,9

-2,9

Total

-739,2

28,7

31,0

20,0

2,1

3,3

144 770,2

110 873,2

Not a pipe dream

''Over a 3% growth pace a year'' isn't a pipe dream. Moreover, it's quite a modest task. This doesn't need to be achieved like now,'' says Deputy Director of the Development Centre of the Higher School of Economics National Research University Valery Mironov. History knows many cases when not the most developed countries that had production modernisation and change in the economic policy in reserve began to speed up and grew by about 5% for many years.

To speed up, it's necessary to work to enter external markets, Mironov goes on: ''They have growing demand unlike the stagnation inside the country (the import substitution doesn't have a chance of succeeding if demand doesn't grow). In addition, competition is high there. Everyone grows up in a competition, you have to learn. Thirdly, export gives the green currency, which is stable in comparison with the volatile ruble and allows to fund the investment process with smaller risks.''

According to Mironov, it's not the best decision to increase the economy by injecting in huge projects: ''Trying to make investments reach 25% of GDP is a completely false task, it needs to be cancelled. Practice shows that investments are a consequence of the economic growth.

Instead of joining large-scale projects, it's better supporting operating companies that have the groundwork to work in external markets. In addition, it's necessary to invest in human capital and innovative infrastructure – it's win-win investments that will be beneficial in any case. These strategic tasks of the new May Decree are supposed to cost some 8tr rubles; the authorities are looking for the money mainly in taxpayers' pockets. The basic VAT rate will be raised by 20% from 2019.

The Kremlin also offered to collect taxes from metallurgists and enterprises from the chemical, petrochemical and mining sectors. This idea belonged to the president's aide Andrey Belousov who claimed the tax burden in these sectors was lower and profitability was higher.

Industrialists and many economists were indignant about the initiative. In the end, after meeting with companies' representatives in August, functionaries refused to collect the taxes. But enterprises will anyway have to finance the president's decree. At the meeting, the sides agreed enterprise would increase investments in promising projects. The authorities would like to get up to 500bn rubles from enterprise within these agreements. But, according to Belousov, they could do with 200-300bn.

By Artyom Malyutin