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Why Investments are not Growing in Russia: Chinese Recipe for Acceleration
August 27, 2020 00:27


Now the main source of financing for investments in fixed assets in Russia is companies' own funds. This limits investment opportunities. To solve the ambitious task of accelerating investment growth, it is necessary, first of all, to increase the availability of borrowed funds for business. The Chinese experience clearly confirms this, Dmitry Plekhanov, an expert at the Institute for Integrated Strategic Studies says.

The value of the Russian indicator of gross capital formation to GDP, which is used to compare investment activity between countries, has remained steadily below the world average over the past 30 years. At the end of 2019, this indicator in Russia amounted to 23% of GDP against 26% on average in the world. The gap with the leading developing countries is even higher. In China, the share of gross capital formation in GDP reaches 43%, in Indonesia - 35%.

In general, over the past 5 years, investments in fixed assets in Russia have grown by only 0.7%. At the same time, according to the new presidential decree on target indicators for the development of the Russian economy for the next 10 years, the real growth of investments in fixed assets should be at least 70% compared to the 2020 indicator. This puts on the agenda a serious question of how it is possible to achieve such a significant acceleration in investment growth.

It is characteristic that the stagnation in the dynamics of investments in Russia in recent years has been taking place against the background of an increase in the share of companies' own funds among sources of financing. Since 2015, this share has exceeded 50%. In fact, this is a return to the situation that was observed in the 90s, when investment costs were also declining, and their financing was mainly due to its own funds.

Moreover, in 2020, against the background of the economic crisis, the situation only worsened. According to the data for the first quarter of 2020, the share of investments financed from own funds increased to 65%. This would be a completely normal indicator if investments in our country grew at a high rate, and the level of competitiveness and technical equipment of enterprises was, for example, at the level of Germany, where the share of own funds in investments in recent years has been approaching 80%. However, for Russia, such a high share of its own funds is, first of all, a signal of an acute shortage of alternative sources of financing, and primarily borrowed funds.

The fact that an increase in investment should be accompanied by an increase in the availability of borrowed funds is evidenced by the experience of China, which has created new infrastructure for enterprises and the population and supported the creation of new jobs in the economy. In 2009, the volume of new loans issued doubled in comparison with the previous year, and the growth rate of investments in fixed assets accelerated sharply and exceeded 30% at the end of the year. In general, the outstripping growth in lending and investment in relation to GDP was observed in China until 2016. To date, the total volume of credit indebtedness has grown 4.3 times compared to 2008 against 3.2 times GDP growth, and the share of gross capital formation in GDP increased in 2009 to 47% and until recently remained at a level above 40 %.

Over the past 10 years, about 650,000 km of roads have been built in the country, new port transshipment capacities of 2.7 billion tons / year have been introduced, the length of high-speed rail lines has grown from 8,400 km in 2011 to 36,000 km in 2020.

The volume of debt in the economy has grown significantly, but without credit growth, none of this would have happened, and the onset of the economic crisis in China would create risks not only for China itself, but for the entire world economy (due to a sharp decline in demand). Moreover, we see that time is passing, and the bad debt crisis expected by many has not come.

The indicator of overdue debt on bank loans remains below 2%, which, on the one hand, can be partly attributed to the underestimation of indicators in official statistics, but, on the other hand, the financial system as a whole remains stable, as indicated by the low level of interest rates on the interbank market. To a large extent, this is facilitated by support from the financial authorities of the PRC, which immediately respond to any critical situation by expanding liquidity. Yes, at present, the PRC authorities have moved to a more cautious position regarding the further growth of leverage in the economy (debt to GDP ratio), but this happened after the main results of economic policy were achieved. In addition, in the context of the crisis, restrictions on credit growth, as has happened more than once before, were significantly weakened.

The experience of China also demonstrates that the active expansion of lending to the economy can be sustainable and not lead to the onset of crisis phenomena if it is primarily aimed at financing not consumer spending, but investment spending, including those necessary for the implementation of projects at the regional level that create new points of growth and increasing the efficiency of transport, logistics, etc. A typical example is the creation of a network of high-speed highways (HSR). For example, the construction of the Beijing-Shanghai highway is estimated to have increased the value of land in areas near the highway by an average of 87%. This increase in cost suggests that the construction of the highway, in addition to increasing transport accessibility and mobility of the population, has become a powerful factor in the growth of economic activity in the surrounding areas, which has resulted in the expansion of housing construction, commercial real estate and industrial facilities. Investments in the development of high-speed railways have brought significant benefits to the regions, which received an additional source of income from the sale of land plots that have risen in price.

The Chinese example also shows that it is impossible to achieve rapid development without some increase in risks in the economy. In this regard, the statement of a high-ranking Chinese official, which is mentioned in the recently published book on the phenomenon of the expansion of debt in the Chinese economy, China: The Bubble That Never Pops, is characteristic: “A little more imbalance is better than a collapse". The example of Russia in recent years, on the contrary, shows that you can try to maintain stability in the economy, but without significant hopes for accelerated development. Russian economic policy, primarily in the monetary sphere, over the past few years has sent business signals that additional risks should not be taken and support should not be expected in case of problems.

Author: Anna Dorozhkina

Tags: Russian economy Russian government Russian business   

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