 You're all very welcome. My name is Paulic Murphy. I have a duty to tell you at the beginning to please turn off your mobile phones, as I should do with my own. We are fortunate to have with us today a man who has left Moscow this week. I once said that he is the man that has brought the biting cold wind from Siberia with him. Yes, definitely. Because he is a Frenchman and French people don't bring biting cold winds with them. Our speaker is Jacques Sapir, who is a French economist, and who has been the director of studies at the École des Hautes Etudes en Science Sociales in Paris since 2006. But he also teaches at the Moscow School of Economics. The subject of the talk is the economic and development challenges facing Russia, a matter of persistent interest among all of us. We have been observing the Russian economy with a bated breath for some 27 years now. There is the question of the Russian approach to economic development, which varies and has varied under the presidency of Vladimir Putin from, let's say, a more liberal direction to a more state-directed direction. There is the question of the Western sanctions on Russia, which have some impact on the Russian economy. But nevertheless, it seems that after a recession between 2014 and 2016, the Russian economy is in better shape than many of us had anticipated. So, Jacques, as an expert, we look forward greatly to hearing your views on the situation. Thank you. Thank you very much. First, I want to thank the institute for inviting me, and I shall present you first an assessment and then some problems which are to face the Russian economy in the next two or three years. The first thing is to understand where Russia stands now. And as you can see, the drop in production, which was mostly, not all, but mostly linked to the huge fall of oil price since the end of 2014 and in 2015, has, of course, induced a huge drop, but this trend has been first stabilized by 2016 and by the beginning or more precisely by mid-2017 against Russia began to grow. This is the first start, I think. The second very important thing is to look what has happened to different sectors of the Russian economy. The red line is the industry, the blue line is the construction, and you can see that industry has been regularly over 100 persons. It's important to understand it's year-to-year growth. It's not months-to-months, it's year-to-year, what we call in French the sliding growth. So it's a proof that it is the industry which first reacted very positively to this situation. The situation in construction is much more thrilled with some very big drops, some very big, of course, moves up, and this is partly, I shall go back to this point later, this is partly linked to the situation of household credits, which is mostly housing credits. Now you have the inflation, and this is very interesting. The first thing is the big high, which was induced by the huge depreciation of the ruble by the end of 2014 and the early 2015. This big height was very, very quickly digested. But then you have another quite interesting problem. Look, this is the moving average on six months, which is of course much more reliable than months-to-months rate. Okay, you are seeing the high. You are seeing a kind of shadow of this high, which is more or less one year later. This was absolutely normal. But after that, what happened? The rate of inflation began to go down. So to the point that is going down right now at the level unearthed since the beginning of Russia. The current rate, the current yearly rate or on two consecutive months rate of inflation is 2.5%. Never before the inflation in Russia went under 5%. This is quite interesting because this is showing that a big part of inflation, which was linked, to the inflation of imported goods is not be stopped as at least reduced. Then we have the process of investment in fixed capital. Investment in fixed capital, of course, raised very, very much from 2002 to 2008. Then you end the financial crisis. After a resumption of this high, of course, this rate dropped down. But you can see, and that's quite interesting, that the drop began in 2013, not 2014, which could lead us to suppose that part of this high was actually linked to infrastructure project linked to the Olympic Games in Sochi. And then the actual level was fall over. But then it is again resuming its growth. Labor productivity, that's quite important because in economic terms, it's the productivity of labor which is driving the economic growth. And this is on this particular aspect that we are to make some international comparison. And now you can see that the labor productivity had a significantly higher rate of growth than the labor productivity in the USA. This is quite interesting. Actually, a lot of people are saying, well, the Russian economy is stagnating. It's not true when it comes to labor productivity. And what is more interesting is the fact that this growth in labor productivity was not followed by an increase in unemployment. The unemployment level was still between 5.2, 5.5% of the productive population. This is, of course, quite an interesting result. Now, this is a result also hiding huge difference between different activities. The manufacturing industry had a very much higher rate of growth than all other sectors of the economy. The construction which moved up very, very quickly in the early 2000s after that more or less stabilized. After that, you have also sectors like utilities, like fisheries, which have practically no rate of growth or very limited rate of growth since 2002. So it's extremely important to understand that the divergence in the rate of growth of labor productivity has been absolutely tremendous. Again, you can see that activities like transportation and communication, also wholesale and retail trade, have a rate of growth higher than the economy at the wall, but have dropped, actually, for wholesale and retail trade quite a lot in 2015. This is probably the result of the fact that a lot of companies, of Russian companies, are not firing their employees when the production or the level of activity is decreasing, just because they are thinking or forecasting the fact that this drop in economic activities is not to stay for very long after the rate of growth of the economy will move up again and they will have direct need of employees. You have to know that there is a real shortage in Russia of people who had a medium to high level education right now. It's not a shortage in general, it's a shortage by comparison with the need of the economy. And this is certainly affecting the trajectory of labor productivity. Now, problem number one, population income. Population income is coming first from the real wage and we can see that since September, October 2016, the six months average mean or three months average mean of real wage has ever been very much over zero. Now, quite an interesting thing. The blue line is retail trade. Retail trade has grown much faster than real wage from 2000 to 2008. Now with the reverse, which means that the money get by people, get by households, is not going or is not going completely into the retail trade and you have to know that this curve is not just looking at the traditional retail trade but it's introducing the e-trade in computations which means that you have all the sources of impact of the income of household income which have to be taken into account. And you can see here through the revenue side of the budget. The first thing absolutely obvious is the decrease in oil and gas revenues. 6.4 trillion of rules in 2012, 4.8 trillion in 2016. But in the same time, non-oil and gas revenues grow and they grow mostly because all the revenue have grown will be the excise tax, will it be the corporate income tax, will it be the personal income tax and of course social contribution. 4.1 trillion in 2012, 6.3 trillion in 2016. So the oil and gas revenues went down to 27.5% in 2012 to 17% in 2016 and the other non-oil and gas revenues moved down which implies that a part of household incomes has been suckered by the fiscal system. This is pretty important and this is explaining why there is so strong a problem not with real wage but with household incomes. Now we have to look on to household debt and non-personal household debt which is mostly the debt on to construction or the mortgage debt. This is, the blue line is the nominal wage of debt and here is the real deflated amount of debt. This is quite interesting, till August of last year the level of debt was under the level of January 2016 so actually households have decreased the amount of debt which is perfectly understandable if you look to the level of actual rates on debt but it's also linked to the fact that household income has decreased in 2015 and 2016 and since August November 2017 as it's very probable that household income again began to grow we can see the level of debt growing up quite quickly. Problem number two, the divergence of investment growth. This is quite interesting if you are looking again to different sector of the Russian economy. The extractive industry and the oil and gas industry have known a constant grow up of investment. There is absolutely no break in the curve and this is quite interesting because it proved that financial sanctions had absolutely no effect on the Russian industry at least in these sectors. I'm not to be so affirmative in other sectors but for these sectors that's absolutely obvious. The extraction, the mineral extraction also moved out in 2015, which is pretty normal considering the specificities of this sector. So when it comes to natural, to raw material extraction, the investment still was growing up. Now if you look to manufacturing industries, first look at what happened for the production of vehicle and transportation. A very huge coming up, very huge hike in 2014, coming from 2010 to 2014. After that a drop which is absolutely understandable if you look to the demand for vehicle on the Russian market. You know that the demand for vehicle was more or less held in 2015 and 2016. Now unfortunately I don't have the data for 2017. Now it seems by some discussion I had with people from Hono and from different companies that again this is moving up. We are seeing also the same trend less accentuated but still the same trend for the metallurgical industry and of course for the production of machine and equipment. But there is one sector of the manufacturing industry which is absolutely similar with the one of the extracting industry or the oil and gas industry, chemicals. And this is linked to a major break onto the world market by huge chemical cooperation, huge Russian chemical cooperation. Of course it is not what could be called the very precise chemicals. It's mostly a huge production of azote and things like that. But this production is now making a growing and growing part of Russian exports. And this is extremely important because this is a proof that to some point Russia has been really or has been capable to move for only raw material exports to semi-processed material exports. I'm not to clarify the chemical industry other than semi-processed. But nonetheless this is a move which is relatively new in the Russian economy. Same thing now for high-tech production. You can see here the production of office equipment which has went up very quickly and then is going down as quickly. But there is here something which is quite interesting. The production of medical equipment. The production of medical equipment has been growing very regularly since 2002 and was not affected by this big downturn for 2015 or 2016. The main reason, in my opinion, is the fact that most of the demand for medical equipment is coming from the state or from institutions which are related to the state. Now, from where this investment comes? The first point is the share between internal funding and external funding of investment. Internal funding, it's external funding here. External funding crossed the border of 50% in 2000. And since then it came at nearly 63%. Now, and this is 2009, it began to go down. First pretty slowly, then very much quickly. This implies that foreign investment in Russia or more precisely foreign funds funding the investment in Russia has decreased even before 2014. It has began to decrease in 2010. And this is very probably linked to the big financial crisis, the Lehman Brothers crisis that we have known in the world. After that, this new drop can be mostly attributed to economic sanctions. This is pretty obvious. But what is quite interesting is the fact that Russia has found a way to overcome this sanction and to replace some foreign funding by some Russian funding for the external growth of investment. It is not the state or more precisely the size of state investment decreased very quickly since 1998 to 2004. After that, it was more or less constant. Of course, you have a small height in 2015. But it's not very significant. Another much more interesting point is enterprise modes. And there is here a problem of data. We don't have the data for 2015 and 2016. I believe that probably the curve is here but I absolutely no mean to have the official data on that. Okay. Funding coming from only in person of external funding and enterprise modes have grown to the fact that they are both representing between 40% of external funding. What does it mean? It means that it's mostly very big enterprise. Some of them state owned like Gazprom, Rosneft, which are funding the investment of other enterprise. And this is creating a network of dependency of these enterprise toward the state enterprise, which is pretty important. After that, you have also the fact that bank credit has increased a bit in 2016. Remember, we are talking only of external investment, external funding of investment. So it means that bank loans are making at best 10% of the total investment funding as external and internal are more or less equal. But what we are seeing here is the fact that the Russian state is helping banks to loan to enterprise. This is different kind of subsidization of loans, which has been particularly important for the agriculture. Now, the problem is that this is raising two different issues. The first issue is the fact that still now, raw material and semi-processed material are still driving up investment in Russia. This is a problem. But another problem and to my opinion, much more important is the fact that the probable size of state or state related enterprise into the funding of new investment has grown quite a bit in the last five years. It's a process which began actually before the political conflict in which Russia has been involved. But it is growing and it is now probably reaching between 60% and 70% of all funding both internal and external. To some extent, this is making the Russian economy now much more similar to the pre-revolution, the 1913 Russian economy than to the Soviet economy, because it was already the situation in 1930. It was the point that I have studied a bit some years ago and I had a PhD student, a young Russian lady. She became French after, named Tatiana Esperanskaya. She is now working in Geneva in Rossnev Trading. But she wrote a Bryant PhD and she was already showing in 2011 that the Russian banking system was becoming more and more like what was the Russian banking system in 1913. So we can speak to a kind of return to the model of pre-revolutionary Russia. Last point, credit debt and investment. The non-financial debt in national currency is going up, but this is to some point because the debt into foreign currency, mostly the US dollar, has go down very, very quickly because of the huge depreciation of the rule, and because of economic sanctions. So we had a kind of transfer between national currency and foreign currency, which is explaining why we have, and this is a green curve, we have the global debt, which has been going down in 2016, which is only quite slowly moving up right now. And the explanation is here. Here you have the blue line, the weighted average interest rates on which loans are extended. This is going down with the model of inflation, but not so much. We are moving from 14% to more or less 10.5%. In the same time, inflation went down much more rapidly, which implied that real interest rates had moved down to a very considerable level. Actually, real interest rates were around 5% in mid-2016, and right now, in early 2018, they are at least at 7%. And you understand perfectly that 7% for real interest rate, this is driving out of the banking system, driving out of the landing system, most enterprise and part of the population. Now, a last point to have a complete view of the situation. The evolution of the national wealth fund. The national wealth fund was an $88 billion in early 2014. It went down from August 2014 to January 2015, and very probably to help Russian enterprise to digest the first row of economic sanctions. After that, enterprise adapted themselves, and the national wealth fund was still going from 75 to 72 billion US dollars. This is not very significant. But then, we are seeing from September 2017 up to January 2018, another drop of nearly 10 million. This is very probably pre-election spending. Problem number three, an economic policy and consistency. And this is a very serious problem. Look at the budget expenditure. This is in share. You can see, of course, the huge increase in defence, which is, of course, much less obvious if you are looking onto a constant price real level. But as a percent of the expenditure side of the Russian budget, they have increased much. In the same time, lower order decreased. So we can think that there is a kind of balance between expenditure for lower order and expenditure for defence. What is quite interesting is the fact that in person, the social policy went down in 2014, but then quickly went up. So the social policy has been left more or less unchanged. Education went down quite significantly. And this is also quite interesting, housing and utilities and frustration. When I asked some questions to people in the Ministry of Finance, they told me that the state has moved out from the housing sector and concentrated all its money on the financing of utilities and frustration. Nonetheless, this is explaining also the drop in construction that we have seen at the very beginning. Now, the Russian budget had constant price. And you can see here that there is quite a movement down in 2015 and 2016 for the revenue side, which is much less pronounced for the expenditure side. So to my opinion, if the monetary policy is actually a quite restrictive one, and this is obvious by the level of real interest rates, the budget policy has been something between austerity and level or normal budget policy. It's a policy that I would qualify as austerity, but certainly not as an austerity regime, because you can see the budget deficit went up quite significantly. And because we have seen also the social policy budget was more or less equal in proportion, even went a bit up in 2015 and 2016 after the big drop of 2014. You can see the same data but then computed in person. And you can see that the decrease in revenue has been quite obvious, but the decrease of expenditure much less. So this is again a confirmation that the budget policy in Russia has been austerity but not an austerity regime. So let me to conclude with some view on the challenge facing the new Russian government, or the government which will come to power after the election, after the election of Vladimir Putin, of course. First, Russia is to face the consequences of a very restrictive monetary policy. And this policy cannot stay with us, but if the state is to increase its involvement both in the funding of investment and in the support of household incomes, there is a trade-off. If Russia want to maintain a very restrictive monetary policy, or more precisely, if the leading body in the Russia Central Bank want to stay with a very restrictive monetary policy, the state will have no other option than to increase its involvement. It will increase its involvement very probably in following the line of a relatively auster budget policy, that is not by spending in all different directions, but it's spending in very precise areas, which are the social policy budget, which is to increase, and which seems to have increased in 2017. You know that the ultimate data for 2017, we don't have so far. But here again, by discussing with colleagues, by discussing with people from the Ministry of Finance, I am pretty sure that the social policy budget is probably around 36 or even 36.5% of the total expenditure side, which means that there is a very significant budget in social policy. Now, the other priority for the budget policy is of course defence, and defence is to be a very important item in public expenditures. Now, we have to understand that this combination of very restrictive monetary policy and an auster budget policy is raising a problem of reaching the very ambitious targets set up by the government. The Russian government is making a 4% a year growth a target. Actually, there is a lot of economists, mostly in the Academy of Science, and people who I respect a lot who are saying that the actual target will have to be 6%. And with this combination of monetary policy and budget policy, it is not possible to have a growth of over 2% a year. Of course, 2% a year is, by European standards, quite a significant growth. But we have to understand that the economic situation in Russia is not the economic situation in Europe. So, I perfectly understand why the Russian officials, why the people in the Russian government are wanting to have a much higher growth. Nevertheless, it is not possible to have this growth with the kind of policy mix they have right now, which is also raising another issue, is an official economic policy which is contradicted by an implicit economic policy. What I call an implicit economic policy is a policy generated by decision made by the government, even without intent to reach these decisions. This is the fact that by adopting the kind of monetary policy they have adopted, they have driven the financial system inside the government and not outside. The same situation with investment. The official economic policy is to say we want to develop private investment. But the actual fact is a growing share of state in national investment. So, there is actually an official economic policy and a policy which is, with good faith, followed by government official. And there is also an economic policy generated by the end result of decision made last year or even the year before, and which is driving the Russian economy more and more toward the state. This is major a problem. So, the necessity to act consistently will be a challenge for the next government. The reaction of the next government to this challenge will depend of three things. First, the way it will perceive this conflict between an official and an implicit economic policy. Will it acknowledge this fact or will it deny this fact is still to be seen? But this will be the first reason explaining what will be the new economic policy. The second problem is, of course, the general context. And my feeling, but I'm too precise, it's my feeling, is the fact that still Russia will be in a situation of political confrontation with the United States and with the European Union. There will be no other way for them than to be driven toward a state system. And this is a very important problem. And the third point is, of course, the quality of women and men who will be the government. Of course, the new prime minister is not to be someone who could challenge the rule of Vladimir Putin. But it is not the prime minister who will make the difference. So, it will be the minister of finance, the minister of economic development and things like that. And even under them, people like vice-minister, head of central administration. And it is extremely important to understand that with the election there will be a process of change over in the central administration. This process will be marked by quite an important entry into this level of administration of young people. This is already forecast, actually young people are already online waiting to know what opposition which are to be liberated in the new government. But there is also a social dimension there with infusion of new people. People who are between 30 and 40 years old. We will have an infusion of people which are pretty well trained. Be they in western university or in Russian universities which are right now at the same level of the best western universities. And these people are free from the inheritance of the Soviet system. So how these new people will react to the challenge facing the Russian economy is something to be seen with some trepidation. Thank you.