1. Will Russia be able to implement "financial import substitution": long-term scenario forecast
Renat Akhmetov, Oleg Solntsev,
Vera Pankova, Elizaveta Cepilova
Center for Macroeconomic Analysis and Short-term Forecasting (CMASF)
April 12, 2019

2. Research tasks
Determination of the optimal depth of the financial sector in accordance with the objectives of achieving higher and sustainable economic growth, ensuring price and financial stability
Finding a way to develop the Russian financial sector towards optimal size and structure
Identification of priorities of state policy from the point of view of the transition capabilities of the financial sector to the optimal model

3. Literature review: evaluation of the comparative effectiveness of various state policies stimulating the development of the financial sector
Priority areas of state policy
Attributions
Ensuring reliable disclosure of information
Barth et al. (2001); Djankov et al. (2007); La Porta et al. (2006)
Protection of the rights of financial market participants (investors, creditors)
Djankov et al. (2007); Danilov (2016)
Protection of property rights
La Porta et al. (1998); Esho et al. (2001)
Development of access to financial services (development of financial literacy, creation of infrastructure)
Beck, de la Torre (2006); Beck, Feyen (2013); Danilov (2016)
Regulation of interest rate inflexibility
Lee, Chang (2015); Beck, de la Torre (2006); Beck, Feyen (2013)
Entry of foreign banks into the banking system
Beck, de la Torre (2006); Lensink et al. (2008); Beck, Feyen (2013); Danilov (2016)
Changes in the share of the state in the financial sector
Danilov (2016); De Serres et al. (2007)
Regulation of competition in the financial market
Beck, de la Torre (2006); Beck, Feyen (2013); De Serres et al. (2007)
Regulation of the tax burden on financial markets
Beck, Feyen (2013)
Trade liberalization
Danilov (2016)

4. Methodology for determining the optimal financial sector model for Russia
Two approaches were used to determine the optimal model of the Russian financial sector, taking into account the mutual influence of the development of its various segments
The first approach is to build a composite financial development index using the principal components method:
models assessing the impact of changes in the composite financial development index on the achievement of four macroeconomic policy objectives;
models assessing the dependence of the development of each segment of the financial sector on the composite index of financial development;
scenario models determining the range of values of indicators of development of different segments (under the framework scenarios) corresponding to the optimal values of the composite index of financial development
The second approach is based on the selection of the most influential segments of the financial sector in terms of their impact on other segments (based on the correlation criterion of their dynamics):
models assessing their combined impact on the achievement of key macroeconomic policy goals;
models assessing the dependence of the development of other segments of the financial sector on the development of the most influential pairs
The final assessment of the optimal values of indicators of development of all segments of the financial sector is obtained by averaging the results obtained in the framework of these two approaches, as well as the evaluation results obtained in the evaluation of the optimum for each sector separately 4

5. Data Period: 1980-2014 Sample of countries: 63 (including Russia)
Variables
Data source
World Bank
IMF (IFS, FSI)
Bankscope
Doing Business
Fraiser Institute
Heritage Foundation
DICE
Macroeconomic
Financial
Demographic
Institutional 5

6. Determining the optimal financial sector model for Russia: the first approach

7. Principal component analysis
Segment of the financial sector
Credit to the private sector
Stock market capitalization
Pension Funds
Insurance companies assets 1
0.62
Pension funds assets
0.49
0.58
0.36
0.50
0.37
Segment of the financial sector
First principal component
Second principal component
Third principal component
Fourth principal component
Credit to the private sector
0.506
-0.367
-0.633
0.457
Stock market capitalization
0.555
-0.056
-0.117
-0.822
Pension funds assets
0.496
-0.328
0.765
0.248
Insurance companies assets
0.437
0.869
0.014
0.233

8. The impact of changes in the composite index of financial development for achieving the goals of macroeconomic policy 8

9. The impact of changes in the composite index of financial development for achieving the goals of macroeconomic policy 9

10. The results of the optimization of the utility function of the regulator

11. Determining the optimal financial sector model for Russia: the second approach

12. Results of optimization of the regulator's utility function for three pairs of the most influential markets (in % to GDP)
Segment of the financial sector
First pair
Second pair
Third pair
Stock market capitalization
64.65
Outstanding domestic corporate securities market
10.06
Outstanding external corporate securities market
30.92
33.24
Credit to the private sector
58.62
Insurance companies assets
2.12

13. Transition of the Russian financial sector to the optimal model

14. Macroeconomic conditions
Methodology for determining the direction of movement of the Russian financial sector to the optimal model
The formation of scenario conditions covering the widest range of socio-economic development options, as well as possible options for state policy to stimulate the development of the financial sector and improve the business environment in the financial markets. Building a matrix of framework scenarios based on these options:
Building a system of interrelated models of financial market segments and a composite index of financial development (the first approach) framework forecasts of the dynamics of the financial sector.
Policy
Macroeconomic conditions
Favorable
Adverse
Stimulating 1 2
Inertial 3 4 14

15. Verification of results by different methods*
in % to GDP
* Results of modelling of individual segments are presented in Mamonov, M., Akhmetov, R., Pankova, V., Pestova, A., Solntsev, O. and Deshko, A. (2018). Identification of Financial Sector Optimal Depth and Structure from the Perspective of Economic Growth, Macroeconomic and Financial Stability. Russian Journal of Money and Finance, 77 (3), рр 15

16. Verification of results by different methods *
in % to GDP
* Results of modelling of all segments separately are presented in Mamonov, M., Akhmetov, R., Pankova, V., Pestova, A. , Solntsev, O. and Deshko, A. (2018). Identification of Financial Sector Optimal Depth and Structure from the Perspective of Economic Growth, Macroeconomic and Financial Stability. Russian Journal of Money and Finance, 77 (3), рр 16

17. Policy implications for the development of the financial sector
In terms of impact on the overall level of development of the financial sector the most effective policy direction is to increase the protection of property rights
The next most effective policy direction is to stimulate competition and reduce the level of government intervention in the activities of financial institutions
Further liberalization of foreign economic activity, as well as tax incentives for financial investments will have a much more modest effect
The possibility of exceeding some markets (bank loans, corporate bonds, stock market) across an effective border may require a change in the direction of certain types of policies in the long term (in particular, limiting excessive competition and avoiding tax incentives for financial investments)
The impact of stimulating state policy on the development of the financial sector in adverse macroeconomic conditions is increasing 17