Putin’s 2021 address as classic example of Keynesian economics
How the president’s address will influence the economy, stock and currency markets
Head of the Ministry of Finance Anton Siluanov evaluated costs on the Russian president’s message at 400 billion rubles for two years. How will Vladimir Putin’s address influence the economy and stock markets? The president’s speech was mainly about domestic politics and the post-COVID-19 economy, measures taken to stimulate it. Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin thinks that the president demonstrated an approach that can be added to books on Keynesian economics, which is a macroeconomic theory of state regulation of the economy created by John Maynard Keynes in the 20-30s of the past century, as a classic example. Read in our report more about why we talk about precisely this scheme, what reaction Putin’s words will cause in the stock and currency markets.
What Keynes said
The bedrock of Keynes’s theory is that the economy develops through cycles, a crisis in the economy can take place naturally as proof of the market economy’s inability to regulate itself. In conclusion, the state should actively interfere in the economy for the highest possible employment (in the labour market) and the biggest growth of the economy. The economy is stabilised by the state by increasing or decreasing demand (consumer and investment demand). For this purpose, both instruments of monetary policy are (fall/rise in the key interest rate, a decrease in money supply and so on) and instruments of the tax and budget policy (particularly funding for companies from the budget, a change of tax rates and so on) are used. The state is seen as a very active economic power, a crucial member and regulator of society’s economic life. Budget funding is seen as the main catalyst for demand in the economy. Isn’t this Russia in 2021?
What Putin said
As it has already been noted, we talked about big budget spending, and additional money issue by the Russian Central Bank will likely become the source of the money (the so-called “money printing press”), since the budget and different funds don’t have such money. Let’s see where this money will go and understand the key points of the speech.
- A 50% compensation for a trip to a children’s summer camp;
The continuation of the programme of the so-called tourist cashback — a 20% refund of the price of a tour for adults;
- A compensation for a trip for students, the possibility of accommodation in university campuses;
- Direct support for families with children — there must be developed a new integrated programme of support for families with children, especially one-parent families by 1 July 2021. Children from 8 to 16 from one-parent families are entitled to payouts of 5,650 rubles a month, needy pregnant women will monthly receive 6,350 rubles, families of schoolchildren will receive 10,000 rubles of one-time aid to prepare for school;
- An under-7 child care sick leave will be paid, which is equal to a hundred per cent wage;
- Free meals for children in schools.
- The launch of an expanded screening and occupational check-up programmes from 1 July 2021;
- 5,000 ambulance cars will be allocated in the countryside and towns;
- To make sure most state services are online 24/7 by 2022, introduce social treasury principles — all payouts, services, money must be paid in the single window system;
- Work with alimonies must be done automatically, without the necessity of pestering authorities;
- Price regulation and market saturation — a rise in prices eats citizens’ incomes, the task is to create long-term conditions to guarantee the stability of prices for foods and their availability;
- To fix 5,000 rubles of monthly additional payment for supervisors of college classes;
- To allocate 24 billion rubles to refurbish culture centres, libraries in the countryside and towns;
- To create 45,000 new state-funded places in universities. 75% of this money will go to the regions. All state universities can get 100 million rubles of grants to create laboratories and technoparks;
- To allocate 3,5 billion rubles in 2021 to create and support the Presidential Fund for Cultural Initiatives.
- The accumulated amount of greenhouse gases in the next 30 years must be lower than before;
- To introduce a law on financial responsibility for polluting the environment;
- To introduce a quote system for harmful emissions for all cities of the country;
- To support companies with production modernisation. Aluminium plants are the first in line;
- Development of hydrogen and accumulative energy.
Finance and economy:
- To create additional support measures for small and medium-sized businesses during a month such as tax incentives, accessible loans, expansion of product sales, including by purchases made by large state companies;
- To envisage laying a gas pipeline to citizens’ parcels free. Regional leaders must prepare plans to switch to more eco-friendly fuel types;
- Budget loans granted to regions to fight consequences of the pandemic will be restructured until 2029, while commercial loans will be replaced with budget loans;
- Regions will receive infrastructural loans at 3% for 15 years. Road construction, circumvention of cities, modernisation of housing utilities, development of tourism clusters are a priority. The total funding in this programme is 500 billion rubles;
- Accelerated construction of Moscow — Nizhny Novgorod — Kazan highway and its prolongation to Yekaterinburg for three years with the development of adjacent territories;
- Reduction of administrative barriers and development of digitalisation;
- Applying for visas for foreigners within four days online to stimulate the tourism sector;
Foreign politics and defence:
- The launch of a hotel construction programme at 3% for 15 years;
- Russia itself fixes its “red lines” one shouldn’t cross;
- Replies to challenges will be asymmetric and harsh;
- Further reinforcement of armed forces by 2024, the share of modern weaponry and machinery in the army will total 76%. While the share in the nuclear triad (ICBM, submarines, strategic aviation) will already top 88% in 2021.
Summaries and influence on markets
Given that the Russian economy is very centralised and nationalised, we shouldn’t have expected anything different. The focus is made on state regulation and stimulation of the economy, through details such as laying a gas pipeline. Time will show if it is good or bad. The reality shows that such measures will turn out timely and logical. The rise in budget spending by injecting printed money will spur inflation, which we already see in all commodities. We should wait for the Central Bank’s credit policy to tighten amid the fight against inflation. An aspiration to balance the financial policy, feed it where it is necessary and cut it where it isn’t is plain to see.
As for the market’s reaction to the speech, the ruble and state bonds went up in price after the speech, there had been a negative tendency previously.
The attention to the domestic agenda, not the foreign one, without too strict rhetoric backed markets. By 14.30, the dollar and ruble rate reached 76,52. Geopolitical risk is already factored in the current ruble rate, but a fall in the tension of the opposition will allow returning the ruble rate to 73-75 in the next six months.
The profitability of state bonds fell on the whole curve, that of 10-year-old bonds have it at 7,12% a year, which is a positive result. The lower the risk, the lower the profitability of bonds.
The reaction of the currency market turned out to be moderately positive, since the message didn’t contain anything new on the foreign political agenda to worsen expectations in this area. Geopolitics keeps strongly influencing the ruble rate. Risks of new sanctions stay. The irritation of the West that’s frightening its neighbours with accumulating troops on the border with Ukraine and expelling diplomats are the factors that are pressing the ruble and state bonds.
Now a meeting of the Central Bank’s board of directors on Friday is the accent. The Russian Central Bank’s policy is expected to get stricter, the probability was assessed by the futures market at 83%. The key rate is forecasted to rise by 25-30 basis points. Such an increase can support the ruble. A peak of tax payments — income tax — in April will be another factor in strengthening the ruble.
External factors — a fall in oil prices, daily growth of the dollar — will be the factors weakening the ruble.
The author’s opinion may not coincide with the position Realnoe Vremya’s editorial.