KEF-2016: Reforms for Inclusive Growth November 3 4, 2016

KEF-2016: Reforms for Inclusive Growth November 3 4, 2016 On the verge of the new economic cycle how to set up for the failure, and how not to Andrey Movchan, Senior Associate and Director of the Economic Policy Program, Carnegie Moscow Center 2016 KEF http://kef.by/

On the verge of the new economic cycle how to set up for failure and how not to Andrey Movchan. 3/11/16.

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Where is the cycle? - In commodities 8 7 Inflation adjusted, normalized to 1 as of Y1968, prices of crude oil, gold and platinum in 1968 dollars 6 5 Back again 4 3 2 1 0 Gold real prices Oil real prices platinum real prices

1984-01-01 1985-01-01 1986-01-01 1987-01-01 1988-01-01 1989-01-01 1990-01-01 1991-01-01 1992-01-01 1993-01-01 1994-01-01 1995-01-01 1996-01-01 1997-01-01 1998-01-01 1999-01-01 2000-01-01 2001-01-01 2002-01-01 2003-01-01 2004-01-01 2005-01-01 2006-01-01 2007-01-01 2008-01-01 2009-01-01 2010-01-01 2011-01-01 2012-01-01 2013-01-01 2014-01-01 2015-01-01 Another cycle indicator 60000 real median household income, USD '000 58000 56000 54000 52000 50000 48000 46000 44000

1985-11-01 1987-04-01 1988-09-01 1990-02-01 1991-07-01 1992-12-01 1994-05-01 1995-10-01 1997-03-01 1998-08-01 2000-01-01 2001-06-01 2002-11-01 2004-04-01 2005-09-01 2007-02-01 2008-07-01 2009-12-01 2011-05-01 2012-10-01 2014-03-01 2015-08-01 1985-07-01 1986-11-01 1988-03-01 1989-07-01 1990-11-01 1992-03-01 1993-07-01 1994-11-01 1996-03-01 1997-07-01 1998-11-01 2000-03-01 2001-07-01 2002-11-01 2004-03-01 2005-07-01 2006-11-01 2008-03-01 2009-07-01 2010-11-01 2012-03-01 2013-07-01 2014-11-01 2016-03-01 1986-01-01 1987-05-01 1988-09-01 1990-01-01 1991-05-01 1992-09-01 1994-01-01 1995-05-01 1996-09-01 1998-01-01 1999-05-01 2000-09-01 2002-01-01 2003-05-01 2004-09-01 2006-01-01 2007-05-01 2008-09-01 2010-01-01 2011-05-01 2012-09-01 2014-01-01 2015-05-01 1985-08-01 1986-12-01 1988-04-01 1989-08-01 1990-12-01 1992-04-01 1993-08-01 1994-12-01 1996-04-01 1997-08-01 1998-12-01 2000-04-01 2001-08-01 2002-12-01 2004-04-01 2005-08-01 2006-12-01 2008-04-01 2009-08-01 2010-12-01 2012-04-01 2013-08-01 2014-12-01 2016-04-01 Production stagnates since 1998-2000 140 120 100 80 60 40 20 0 Production of computer equipment, 2012 =100, the US 120 100 80 60 40 20 0 Production of food and bev, 2012 = 100, the US 140.0000 120.0000 100.0000 80.0000 60.0000 40.0000 20.0000 0.0000 Production of medical and pharm, 2012 = 100, the US 120 100 80 60 40 20 0 Production total, 2012 = 100, the US

10.1.87 2.1.89 6.1.90 10.1.91 2.1.93 6.1.94 10.1.95 2.1.97 6.1.98 10.1.99 2.1.01 6.1.02 10.1.03 2.1.05 6.1.06 10.1.07 2.1.09 6.1.10 10.1.11 2.1.13 6.1.14 10.1.15 10.1.87 2.1.89 6.1.90 10.1.91 2.1.93 6.1.94 10.1.95 2.1.97 6.1.98 10.1.99 2.1.01 6.1.02 10.1.03 2.1.05 6.1.06 10.1.07 2.1.09 6.1.10 10.1.11 2.1.13 6.1.14 10.1.15 1985-10-01 1987-03-01 1988-08-01 1990-01-01 1991-06-01 1992-11-01 1994-04-01 1995-09-01 1997-02-01 1998-07-01 1999-12-01 2001-05-01 2002-10-01 2004-03-01 2005-08-01 2007-01-01 2008-06-01 2009-11-01 2011-04-01 2012-09-01 2014-02-01 2015-07-01 10.1.87 2.1.89 6.1.90 10.1.91 2.1.93 6.1.94 10.1.95 2.1.97 6.1.98 10.1.99 2.1.01 6.1.02 10.1.03 2.1.05 6.1.06 10.1.07 2.1.09 6.1.10 10.1.11 2.1.13 6.1.14 10.1.15 Monetary policy is inefficient since 1997 2.400 2.200 2.000 1.800 M2 velocity, the US 20.00% 15.00% 10.00% real deposits growth rate 1.600 1.400 1.200 1.000 5.00% 0.00% -5.00% -10.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% 3 month real interest rates -15.00% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% M2 growth rate and CPI, the US CPI consumer M2 growth rate

1984-12-01 1986-04-01 1987-08-01 1988-12-01 1990-04-01 1991-08-01 1992-12-01 1994-04-01 1995-08-01 1996-12-01 1998-04-01 1999-08-01 2000-12-01 2002-04-01 2003-08-01 2004-12-01 2006-04-01 2007-08-01 2008-12-01 2010-04-01 2011-08-01 2012-12-01 2014-04-01 2015-08-01 Labor intensity was the driver, 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 Labor factor share in manufacturnig cost, the USA but not any more 90 85 80 75 70 65 60 The US industrial capacity utilization, % 140 120 100 80 60 40 20 0 Real output per hour, the US, manufacturing 105 100 95 90 85 80 75 Real unit labor cost index, the US

Fixed capital points at the end of cycle

Infrastructure investments do not help any more апаппа

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 However the global GDP growth is rather stable $400 $300 $200 $100 Annual growth of world GDP in 2010 dollars $0 -$100 -$200 -$300 5.00 4.00 3.00 2.00 1.00 A growth rate of the world GDP in %% y = -0.0043x + 1.668 0.00-1.00-2.00-3.00-4.00

10.1.86 8.1.87 6.1.88 4.1.89 2.1.90 12.1.90 10.1.91 8.1.92 6.1.93 4.1.94 2.1.95 12.1.95 10.1.96 8.1.97 6.1.98 4.1.99 2.1.00 12.1.00 10.1.01 8.1.02 6.1.03 4.1.04 2.1.05 12.1.05 10.1.06 8.1.07 6.1.08 4.1.09 2.1.10 12.1.10 10.1.11 8.1.12 6.1.13 4.1.14 2.1.15 12.1.15 CPI growth looks quite linear also 300 Consumer CPI, the US 250 200 150 100 50 0

1985-01-01 1986-05-01 1987-09-01 1989-01-01 1990-05-01 1991-09-01 1993-01-01 1994-05-01 1995-09-01 1997-01-01 1998-05-01 1999-09-01 2001-01-01 2002-05-01 2003-09-01 2005-01-01 2006-05-01 2007-09-01 2009-01-01 2010-05-01 2011-09-01 2013-01-01 2014-05-01 2015-09-01 1985-07-01 1986-11-01 1988-03-01 1989-07-01 1990-11-01 1992-03-01 1993-07-01 1994-11-01 1996-03-01 1997-07-01 1998-11-01 2000-03-01 2001-07-01 2002-11-01 2004-03-01 2005-07-01 2006-11-01 2008-03-01 2009-07-01 2010-11-01 2012-03-01 2013-07-01 2014-11-01 2016-03-01 1988-12-01 1990-02-01 1991-04-01 1992-06-01 1993-08-01 1994-10-01 1995-12-01 1997-02-01 1998-04-01 1999-06-01 2000-08-01 2001-10-01 2002-12-01 2004-02-01 2005-04-01 2006-06-01 2007-08-01 2008-10-01 2009-12-01 2011-02-01 2012-04-01 2013-06-01 2014-08-01 2015-10-01 1985-08-01 1986-12-01 1988-04-01 1989-08-01 1990-12-01 1992-04-01 1993-08-01 1994-12-01 1996-04-01 1997-08-01 1998-12-01 2000-04-01 2001-08-01 2002-12-01 2004-04-01 2005-08-01 2006-12-01 2008-04-01 2009-08-01 2010-12-01 2012-04-01 2013-08-01 2014-12-01 2016-04-01 Although CPI per industry is not 120 100 80 60 40 20 0 CPI high tech equipment, the US 500 450 400 350 300 250 200 150 100 50 0 CPI medical services, the US 800 700 600 500 400 300 200 100 0 CPI education, the US 300 250 200 150 100 50 0 CPI food and bev, the US

1985-01-01 1986-05-01 1987-09-01 1989-01-01 1990-05-01 1991-09-01 1993-01-01 1994-05-01 1995-09-01 1997-01-01 1998-05-01 1999-09-01 2001-01-01 2002-05-01 2003-09-01 2005-01-01 2006-05-01 2007-09-01 2009-01-01 2010-05-01 2011-09-01 2013-01-01 2014-05-01 2015-09-01 1985-07-01 1986-11-01 1988-03-01 1989-07-01 1990-11-01 1992-03-01 1993-07-01 1994-11-01 1996-03-01 1997-07-01 1998-11-01 2000-03-01 2001-07-01 2002-11-01 2004-03-01 2005-07-01 2006-11-01 2008-03-01 2009-07-01 2010-11-01 2012-03-01 2013-07-01 2014-11-01 2016-03-01 1984-04-01 1985-09-01 1987-02-01 1988-07-01 1989-12-01 1991-05-01 1992-10-01 1994-03-01 1995-08-01 1997-01-01 1998-06-01 1999-11-01 2001-04-01 2002-09-01 2004-02-01 2005-07-01 2006-12-01 2008-05-01 2009-10-01 2011-03-01 2012-08-01 2014-01-01 2015-06-01 1988-12-01 1990-02-01 1991-04-01 1992-06-01 1993-08-01 1994-10-01 1995-12-01 1997-02-01 1998-04-01 1999-06-01 2000-08-01 2001-10-01 2002-12-01 2004-02-01 2005-04-01 2006-06-01 2007-08-01 2008-10-01 2009-12-01 2011-02-01 2012-04-01 2013-06-01 2014-08-01 2015-10-01 1985-08-01 1986-12-01 1988-04-01 1989-08-01 1990-12-01 1992-04-01 1993-08-01 1994-12-01 1996-04-01 1997-08-01 1998-12-01 2000-04-01 2001-08-01 2002-12-01 2004-04-01 2005-08-01 2006-12-01 2008-04-01 2009-08-01 2010-12-01 2012-04-01 2013-08-01 2014-12-01 2016-04-01 And even sometimes flat 120 100 80 60 40 20 0 800 700 600 500 400 300 200 100 0 CPI high tech equipment, the US 160.000 140.000 120.000 100.000 80.000 60.000 40.000 CPI education, the US 20.000 0.000 500 450 400 350 300 250 200 150 100 50 0 CPI apparel, the US 300 250 200 150 100 50 0 CPI medical services, the US CPI food and bev, the US

Oil consumption is driven by population size 100000 90000 80000 WORLD OIL CONSUMPTION IN 000 BBL A DAY y = 1156.8x + 66272 R² = 0.978 70000 60000 50000 World oil consumption per capita bbl a day 40000 30000 12.25 12.56 12.99 12.68 12.29 20000 10000 1995 2000 2005 2010 2013 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

And the price driven by rather small changes in consumption WORLD OIL CONSUMPTION IN 000 BBL A DAY 90000 Over the trend price grows 85000 80000 Below trend price falls Follows the trend price stable Below trend price falls 75000 70000 65000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1960-01-01 1964-01-01 1968-01-01 1972-01-01 1976-01-01 1980-01-01 1984-01-01 1988-01-01 1992-01-01 1996-01-01 2000-01-01 2004-01-01 2008-01-01 2012-01-01 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Four major trends that persist through cycle 35.00 SHARE OF IMPORTS IN GDP, WORLD, % 45 POVERTY RATE IN %%, WORLD 30.00 25.00 20.00 40 35 30 25 15.00 10.00 5.00 20 15 10 5-0 40.0000000000000 35.0000000000000 30.0000000000000 25.0000000000000 20.0000000000000 CRUDE BIRTH RATE, WORLD, PER '000 $11 000 $10 000 $9 000 $8 000 $7 000 $6 000 REAL GDP PER CAPITA IN 2010 USD, WORLD 15.0000000000000 $5 000 $4 000

The composition of value chain has changed dramatically parameter 1990 2015 change trade as %% of GDP 38 59 55% imports as %% of GDP 19,3 28,1 46% gross savings as %% of GDP 22,3 19,9-11% government consumption as %% of GDP 16,8 18,6 11% household consumption as %% of GDP 60 61,6 3% fixed capital formation as %% of GDP 22,6 19,4-14% agriculture AV %% of GDP 5,4 2,8-48% manufacturing AV %% of GDP 18,8 16,7-11% non manufacturing industry AV %% of GDP 14,4 9,6-33% services AV %% of GDP 61,4 70,9 15%

Few nations will grow the stock of consumers Migration does not affect the picture any more Migration per year The EU ~ 2 mln MENA ~ 0 SSA ~ - 1 mln The US ~ 0,5 mln LatAm ~ - 0,5 mln EMEA ~ 0 Russia ~ 0

1960-01-01 1963-01-01 1966-01-01 1969-01-01 1972-01-01 1975-01-01 1978-01-01 1981-01-01 1984-01-01 1987-01-01 1990-01-01 1993-01-01 1996-01-01 1999-01-01 2002-01-01 2005-01-01 2008-01-01 2011-01-01 2014-01-01 Great internal consumers/producers loss is ahead 30.000 25.000 20.000 15.000 10.000 5.000 CRUDE BIRTH RATE, BELARUS, PER '000 0.000

1960-01-01 1963-01-01 1966-01-01 1969-01-01 1972-01-01 1975-01-01 1978-01-01 1981-01-01 1984-01-01 1987-01-01 1990-01-01 1993-01-01 1996-01-01 1999-01-01 2002-01-01 2005-01-01 2008-01-01 2011-01-01 2014-01-01 1960-01-01 1963-01-01 1966-01-01 1969-01-01 1972-01-01 1975-01-01 1978-01-01 1981-01-01 1984-01-01 1987-01-01 1990-01-01 1993-01-01 1996-01-01 1999-01-01 2002-01-01 2005-01-01 2008-01-01 2011-01-01 2014-01-01 1960-01-01 1963-01-01 1966-01-01 1969-01-01 1972-01-01 1975-01-01 1978-01-01 1981-01-01 1984-01-01 1987-01-01 1990-01-01 1993-01-01 1996-01-01 1999-01-01 2002-01-01 2005-01-01 2008-01-01 2011-01-01 2014-01-01 And in almost all countries Crude birth rate, Turkey, per '000 Crude birth rate, MENA, per '000 50 45 40 35 30 25 20 15 10 5 0 60 50 40 30 20 10 0 50 45 40 35 30 25 20 15 10 5 0 Crude birth rate, China, per '000 45.0000000000000 40.0000000000000 35.0000000000000 30.0000000000000 25.0000000000000 20.0000000000000 15.0000000000000 10.0000000000000 5.0000000000000 0.0000000000000 Crude birth rate, LatAm, per '000

End of cycle ideas Three major facts determine the mid term future of the global economy: The number of active consumers will decrease; There will be no brand new growth trigger; The number of passive consumers will increase. Oil price, migration, current account disbalances are false agenda Through next years the oversupply of money will persist; Do not confuse it with budget revenues! We are in the best times for borrowing ever Added value migrates into marketing and R&D, but more into marketing Trade share of GDP grows barriers become problems for the builders For all countries domestic markets become insufficient

Russia bad start, gloomy perspective

Pumping at full speed

Non-oil exports in decline

Imports in decline as well, however the delayed demand is about to come

Physical volumes go down about 2% per year

Although mineral resources extraction grows

Latest news parameter 2015 (or in %% to 2014) 2016 (or in %% to 2015) Household income 94,9% 91,7% Share of taxes and duties in incomes 9,6% 12,4% RE purchases ~ - 20% ~ - 25% GDP based on fixed prices calc - 3,8% (Y2011 level) - 1,2 - -2% (Y2010 level) Non oil exports 83% 85% Imports 63% 96% Banks balances in central bank 117% 199% М2 108% 111% Budget revenues in constant prices 91,1% 80%

Mid income trap страна данные за средняя зарплата номинал, долл PPP средняя зарплата, ППС, долл Norway декабрь 2015 5 251 0,971 5 099 United States август 2016 4 382 1,000 4 382 Japan июль 2016 4 274 1,111 4 747 Germany декабрь 2015 4 064 1,135 4 611 SouthKorea июнь 2016 3 021 1,399 4 227 Estonia июнь 2016 1 309 1,575 2 061 Greece ноябрь 2015 1 256 1,470 1 845 Chile июнь 2016 1 150 1,794 2 063 Argentina март 2016 1 141 2,220 2 533 SlovakRepublic июнь 2016 1 126 1,793 2 019 Poland июнь 2016 1 045 2,123 2 219 China декабрь 2016 770 1,832 1 411 Romania июль 2016 727 2,275 1 654 Brazil июль 2016 601 2,021 1 215 Russia июль 2016 548 3,253 1 782 Turkey декабрь 2010 507 2,217 1 123 Kazakhstan июль 2016 431 3,695 1 592 Georgia март 2016 395 2,554 1 010 Belarus июль 2016 373 3,654 1 363 Azerbaijan июнь 2016 308 4,822 1 483 SouthAfrica март 2016 301 2,718 817 Vietnam июнь 2016 218 2,743 597 Ukraine июль 2016 204 4,063 830 KyrgyzRepublic июнь 2016 203 3,333 677 Tajikistan июнь 2016 131 3,732 487 Indonesia ноябрь 2015 121 3,213 389

М2 exceeds inflation does not help as in the US

Banks mount extra cash balances

Inflation goes down because of the decrease of demand

Russian elites bet on old horses, while next cycle winners will ride new ones Russian seem-to-be strategy Reindustrialization Agriculture and food security Increase of the role of the state Market protectionism and selfsufficiency Resource driven economy Infrastructure enhancement NEW ARGENTINA, 100 YEARS AFTER Winning ideas Servicization International labor division Decrease of the role of the state Participation in global economic blocks Marketing driven economy Education and medicine enhancement

Belarus in the global context

Economic radar screen biggest ones The USA EU countries Canada Japan South Korea Russia Brazil China Belarus Mexico India

Belarus at a glance Parameter Belarus World rank Poland Russia GDP per capita, USD 5800 86 12500 9000 Industrial production 2013 2016 growth rate Share of industry/agriculture in GDP 1% 148 4% -3% 46% / 9% n/a 33,3% / 4% 37,5% / 4,2% Budget revenue/gdp 38,5% 50 18% 20,7% Public debt to GDP 31,5% 115 48,2% 8% GNS as %% of GDP 25% 49 16,8% 28,3% Market value of public equity per capita, $ 000 0-4,5 2,5 Exports per capita, $ 000 4,4-5,2 2

Europe is the only accessible market of sufficient size for distance sensitive goods EU Population over 500 mln GDP $19 trln Long term growth 2,5$ Total imports 1,8 trln Russia 146 1,2 2% 0,16 trln

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 One-sided structure of the economy exports from Bearus, main partners, % imports to Belarus, main partners, % Latvia Ukraine Ukraine China EU (Netherlands) Germany Russia Russia 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 9000.00000000000 8000.00000000000 7000.00000000000 6000.00000000000 5000.00000000000 4000.00000000000 3000.00000000000 2000.00000000000 1000.00000000000 0.00000000000 No oil does not mean no dependence 80% 60% 40% 20% 0% -20% Russian dependency -40% GDP per capita WTI adjusted to GDP per capita 1991-60% GDP growth rate WTI growth rate

Hyperdependency kills Januaryapr 15 januaryapr 16 5 months 16/15 parameter 2011 2012 2013 2014 2015 Trade turnover 87 178 92 464 80 226 77 180 56 997 18 005 15 115 0,84 Export 41 419 46 060 37 203 36 392 26 686 8 492 6 927 0,82 Import 45 759 46 404 43 023 40 788 30 312 9 513 8 188 0,86 Balance -4 340-344 -5 820-4 396-3 626-1 020-1 262 0.0-500.0-1 000.0-1 500.0-2 000.0-2 500.0-3 000.0-3 500.0-4 000.0-4 500.0-5 000.0 Net lending (+) / net borrowing (-) (balance from current and capital account) from 2005 to 2016, USD bln, Belarus - Russia Share of oil refining in industrial production exceeds 16% RUR is 50% of the CBB currency basket

The story of 2 countries Parameter 1 country 2 country Population mln 9,4 8 Budget revenue/gdp 38,5% 40,2% Problems with the UN and others Yes? Yes GNS as %% of GDP 25% 22%

The story of 2 countries Parameter 1 country 2 country Population mln 9,4 8 Budget revenue/gdp 38,5% 40,2% Problems with the UN and others Yes? Yes GNS as %% of GDP 25% 22% Share of industry/agriculture in GDP 46% / 9% 31,2% / 2,4% GDP per capita, USD 5800 36000 Public debt to GDP 31,5% 67% Industrial production 2013 2016 growth rate 1% 5% Market value of public equity per capita, $ 000 0 18,5 Exports per capita, $ 000 4,4 7,5

Few ideas for Belarus Small is good The natural niche intermediary and transit position between the EU and Russia shall be exploited in full. DAFTA is not suitable, though there are ways around. Still the EU and openness of the market are more important long term Diversification of foreign trade is vital and inevitable Competition with EU can start with tax regime Competition with Russia starts with attractive domiciliation and labor conditions Debt is good, but using it for fixed capital accumulation is inefficient Services shall grow Nothing is bad in securities markets