RUSSIA REWIRING ECONOMY

Putin counting on old-style state-led investment to drive growth rather than consumers

AS the United States tightens the noose of sanctions, Russia’s new plan to rewire its economy is counting on old-style state-led investment to drive growth rather than consumers.

President Vladimir Putin’s government wants to double the its total capital spending in rouble terms by 2024, under a blueprint published by the Economy Ministry. That would bring its share to a quarter of gross domestic output from 21 per cent now, a pace of growth that’s more than twice the increase it envisions for retail sales.

With the economy starved of foreign capital after years of Western sanctions and likely facing more, the pivot to state-led spending is putting the consumer in the cross-hairs. Taking a page from China’s playbook a decade ago, when it turned to investment to power economic growth, Putin is preparing for a dramatic shift after delivering the biggest consumer bonanza in his country’s modern history during the oil boom years.

Wielding such measures as a higher value-added tax (VAT), Russia’s new vision for the economy focuses resources in the hands of the state — channelling them towards costly projects such as railroads and bridges — and all but gives up on privatisation in the coming years. Investment as measured by gross fixed capital formation hadn’t reached 25 per cent of gross domestic product since the collapse of the Soviet Union in 1991, according to data.

“If we boost investment, then it will discourage growth in wages,” said Valery Mironov, deputy director of the Development Centre at Moscow’s Higher School of Economics. “There’s no need to put the horse before the cart — investment ahead of growth — because it’s exports first of all that drive economic growth, and not investment.”

Once the lifeblood of Russia’s economy, domestic demand has limped along as incomes failed to recover after a recession that followed the crash in oil prices. But with the central bank already looking to cool off credit to households with higher risk weights for loans, Russia is counting on the VAT rise from next year to add 630 billion roubles (RM38.04 billion) annually to its coffers.