Yaroslav Lissovolik, Chief Economist at EDB: Average annual inflation will most probably go down to approximately 7%

Many experts believe that on Friday, 11 December, the Bank of Russia will most probably keep its key rate unchanged at 11%. What will be the Central Bank's interest rate policy in the next year? When should inflation be expected to go down? Is it possible that GDP will resume growth? These questions are answered by Yaroslav LISSOVOLIK, Chief Economic at Eurasian Development Bank (EDB).

Q.: What will be the exchange rate and inflation in 2016?

A.: One of the positive trends in the next year will most probably be a significant slowdown in inflation because of the base effect and the attenuation of the devaluation effect. The average annual inflation will most probably go down to approximately 7% and this will be sufficient to reduce the rate of the Central Bank. Its decrease, coupled with low oil prices, will continue to exert pressure on the rouble; however this will be partially compensated by reductions in capital outflows and positive balance in the current account. Overall, as for the rouble average yearly exchange rate, the risk that it will weaken further is more probable, given low oil prices.

Q.: How will restrictions on Turkish imports impact inflation and the interest rate policy of the Central Bank?

A.: Restrictions on Turkish imports will hardly affect inflation significantly. An additional inflation impulse of several tenths of a percentage point is obviously possible, but this effect will most probably be temporary and won't influence the Central Bank's decisions on the interest rate. The "first order" factors for the Central Bank will remain the same: inflation dynamics, inflation expectations of the population, economic growth rates, and the situation with the rouble.

Q.: Are there any reasons for revising Russia's sovereign ratings?

A.: In my opinion, there are a number of positive factors, which can help to improve Russia's ratings by international agencies. This is, first of all, stabilisation of economic growth and its possible recovery in the next year. I believe that this indicator is key for all the three rating agencies at the moment. In addition, we observe signs of certain changes in Russia's fiscal policy, which is orientated largely to maintaining a low budget deficit. This may help to reduce pressure on the Reserve Fund and the National Wealth Fund. Finally, it is also possible that relationships with the West will ease and European sanctions will be softened, although this scenario seems to be more probable in the second six months of the next year.

Q.: What will be the Russian monetary and fiscal policies in the next year?

A.: In the beginning of the year, at the Gaidar Forum, Minister of Economic Development Alexey Ulyukayev said that a combination of a relatively softer fiscal policy and a relatively tougher monetary policy would be desirable. Indeed, such a combination seems more preferable, at least, from the point of view of economic recovery. However, the current trends are different: the fiscal policy is aimed at limiting expenditure to restraint deficit, while the monetary policy in the next year will be to reduce the interest rate significantly. The restraint of public expenditure is even more probable, if to take into account the obvious restrictions associated with increased taxes. Because of the need to stabilise the public sector and stimulate economic growth, the key task will be to improve the efficiency of public expenditure.

Q.: Do you believe that economic growth will begin to resume in 2016 and that there will be no external shocks, which, according to economists, is the main condition for such growth?

A.: GDP dynamics in several recent months suggests, to a certain extent, recovery in 2016. We observe signs of stabilisation in the investment sphere and the expected decrease in inflation in the next year, coupled with the stabilisation of the exchange rate, can help to restore consumption by households. However, the risk of external shocks, associated in the first place with volatile oil prices, remains high. On the other hand, it is probable that the external environment will improve to a certain extent in 2016, with the lowering of the sanction pressure by European countries. Overall, despite the preconditions for the Russian economic growth to become positive, we still lack sufficient stimuli for a drastic acceleration of economic growth in the next year.

Q.: This is your first interview as a chief economic of EDB. Why did you agree to join EDB?

A.: For me, to work at EDB is to work, in the first place, in the area of Eurasian integration, which is not only advisable, but of vital importance to the EEU countries. Eurasian integration was one of the main topics of my scientific research. A significant portion of my book Competitive Russia in the World of Competitive Liberalisation is about it. I'm also interested in the theory of Eurasianism developed by Gumilev, Savitsky and Trubetskoy. My doctoral thesis was about economic aspects of the theory of Eurasianism and the possibility of implementing this development strategy in current conditions.

Now I plan to apply some of my research findings in a more practical field. I'm also extremely interested in working for an international institution such as EDB in the area of interstate cooperation in trade and investment, which could really promote growth in the EEU countries.

Q.: Does the Eurasian Economic Union have potential in the current situation?

A.: In the current situation the EEU has enormous potential. With Russia enhancing its efforts to set up economic alliances in Asia, and China's active steps to strengthen economic cooperation between Europe and Asia, opportunities and benefits associated with integration in Eurasia expand. The EEU countries can contribute to a significant extent to the growth of economic cooperation in Eurasia and will be more active in making foreign trade alliances with foreign, non-CIS countries. The creation of a free trade zone with Vietnam, as well as the announced plans to set up a free trade zone between the EEU and Singapore suggest that everything is going right.

Q.: What is your stance on the idea of a single currency in the EEU?

A.: The single currency should not be an issue to rush. Conditions need to be created in the first place, primarily by means of decreasing inflation, improving companies and people's trust to the economic policy, and increasing the coordination of economic policies of the EEU member countries. The EU experience in several recent years suggests that even after a lengthy period of intense economic integration crises may occur, which threaten the integrity of the currency union. However, the very posing of the issue of currency integration will help to improve the quality and coordination of economic policies, and the creation of a currency union will bring significant dividends to the EEU member countries in the form of reduced borrowing costs and transaction charges.

Interview by Natalya ROMANOVA, Banki.ru

Source: Banki.ru