Patriotism. A project by Misha Friedman and IMR

Putin and Populism: A Ticking Time-Bomb
Pavel Ivlev
28 February 2012

On February 13th, Komsomolskaya Pravda published an article by Vladimir Putin called “Developing Fairness: The Social Welfare State.” In this piece, Putin voiced a number of new promises aimed at improving the lives of vulnerable groups such as public sector employees (doctors, teachers), pensioners, students, and military personnel.  According to financial specialists, the proposed plan could cost 5 trillion rubles. The Ministry of Finance gives a smaller estimate, nearly 1 trillion rubles. Whatever the figure, the questions of economic and social reform stand. Without reforms, says IMR Director Pavel Ivlev, the growth of social infrastructure expenses will significantly contribute to macroeconomic instability in Russia.

 


In the weeks leading up to the presidential elections, Russian Prime Minister Vladimir Putin hasn’t announced an integrated platform. Instead, he’s placed a handful of articles detailing his positions on key issues in Russia’s leading newspapers.

Most of the proposals put forth in Putin’s “Developing Fairness: The Social Welfare State” article would require increases in budgetary spending on all levels before these changes could be reflected in the salaries of education personnel. The goal, which has been put forth by the government before, is to raise school teachers’ salaries so that they correspond with average salaries by region. In addtion, they seek to raise the average college educators’ salary so that it’s 200% of the local average salary.

Teaching is one of the lowest-paid positions compared to other economic sectors. At the same time, the government apparatus has always said that raising teachers’ salaries has been one of Putin’s greatest accomplishments, along with raising pensions, stipends, and military compensation. Few speak of the reality, which is that the so-called accomplishments of the populists disguise manipulated statistics. The life quality of teachers remains very low. The numbers actually reflect authorities presenting the average salary of an employee of the educational system (which takes into account school principals and regional administrators) as the average salary of a teacher. It’s a distortion of definitions, or in other words, the numbers lie.

The publication of these “victorious”figures often inspire ire in those they affect. “I can’t handle these lies. It was 6 thousand, now it’s 7. By 2013, it will reach the average in the industry? And again, it’s the average. But what’s my salary? No one at my school earns what the regional administration calls the average teachers’ salary, 15 thousand rubles. How do they come up with their numbers? They should factor in the salaries of administrators separately. The principals’ salaries separately. And the assistant principals’ salaries should be counted separately, too. Then they should say what the real average salary is for the teachers who are actually in the classroom.” This is the opinion of a teacher from the Primorsk Territory, an opinion, which is typical for Russia. In this region, the average salary is said to be 14 thousand rubles, but the real yearly take turns out to be a meager 5400.

 

 

One of the central tenets of Putin’s politics, populism, seeps through his article on social welfare. The Prime Minister promises to eliminate waiting lists for preschools (one of the biggest problems in large cities), and to “completely solve the problem” of accessible housing by 2030, the most controversial of the article’s theses. The government has been talking about accessible housing for 7 years now, but there have been no significant changes in the market. Another prominent promise, aimed at garnering support from young families, is to pay nearly 7 thousand rubles a month to families that have a third child (until the child is three years old) under the condition that the family’s income adds up to less than the average income per capita in their region. The federal budget will allocate extra funding for regions that adopt this plan, providing up to 90% of the necessary funding in 2013 and up to 50% in 2018, as the regional financial support of this measure increases over time.

The administration’s populist  and declamatory measures are veiled (but obvious to specialists) machinations to cover up the inevitability of extreme reforms in the education and healthcare systems. This means a reduction of free health and social services and a transition to per-capita funding for public sector institutions (practically forcing these to become self-sufficient). Such budget cuts pose serious threats to the facilities that run at a loss, previously functioning solely on behalf of government funding. In addition, these will mean fewer tuition-free spots in the universities.

According to the Sberbank Center for Macroeconomic Research, Putin’s promises regarding social welfare will be reflected in multiple budget levels and cost 5 trillion rubles by 2018. On Februay 27, Minister of Finance Anton Siluanov gave a more modest estimate of 1 trillion rubles. Where the money to fund growing public sector expenses will come from is up to the government to decide.

Despite the budgetary shortfalls, Putin continues to insist that the age of retirement will not be raised. Currently, it is 55 for women and 60 or men. Although many economists, including the former Deputy Minister and current Minister of Finance Aleksey Kudrin, say that raising the age is necessary and inevitable, Putin refuses to take this drastic step. This is a political question for an administration that considers political and social stability a higher priority.

The Pension Fund deficit, which  makes up 2% of the GDP and is financed by the federal budget, is one of the most serious problems. Analysts at UBS (the largest investment bank in Switzerland), recently found that without reforms, the deficit will make up 30% of the GDP by 2031, which would be disastrous for the Russian economy.

The problem is exacerbated by the fact that social insurance premiums have been lowered from 34% to 30% for two years, and there is serious discussion of keeping them at these levels after the two years have passed. The Minister of Health and Social Development Tatyana Golikova recently said that the age of retirement would slowly need to be raised starting in 2015.

The Ministry of Finance will need to look for new sources of revenue for the budget. A new luxury tax law has almost been passed. According to Siluanov, this tax could be introduced as early as 2013. The release of financial resources may be made possible by cutting spending on defense and pensions. The Ministry of finance noticed a significant reserve for optimization. By 2020 defense and pension spending could be reduced by 5.5 to 6.9% of the GDP, instead of the previously prognosticated 2%. This can happen if military personnel is reduced by 10% and healthcare personnel by 20%; if the length of time one must be employed before they are eligible for a pension be raised from 20 to 25 years, and other measures could save 0.8% of the GDP. Another 0.3% of the GDP can be saved if the pension insurance fund covers military personnel and other eligible parties with a withholdings rate of 16% (currently, their pension comes out of the state budget). In this way, the pension fun can save 2.26% of the GDP by 2020, making it the most substantial article of optimization.

 

 

No matter how Putin wrings his hands, the Ministry of Finance continues to turn the government’s attention to the topic of raising the age of retirement. This increase, which would make the age 63 for both genders by 2015 (rising at a rate of 6 months every year), will release .9% of the GDP over the course of 5 years.

In addition, the Ministry of Finance has once again broached the topic of the sacred cow, Gazprom. On February 27th, Siluanov proposed to raise the tax on natural resources production to a level where 80% of the increase of domestic gas prices will be deposited into the budget by way of this tax. This can increase the GDP by 1% by 2016. However, in order to achieve this, the Ministry of Finance would need the support of the gas lobby, which they have yet to garner.

Finally, on February 9th, Putin met with representatives from the Russian Union of Industrialists and Entrepreneurs. He spoke to them concerning the introduction of a compensating tax to make up for the abuses that happened with the privatization of the 1990s. Exactly two weeks before this speech (coincidentally?), the issue of introducing such a tax was being discussed by Alexei Navalny at a meeting with investment analysts. At that time, Navalny had proposed to follow the example of Great Britain. The Labour Party had introduced this tactic in 1997. The then Minister of Finance Gordon Brown announced the instatement of a one-time tax on so-called “super profits” earned during the first four years after certain industries were privatized. 3.5 out of the 5.2 billion pounds that were added to the budget via this tax were used to finance employment programs. This measure finally subdued the critics of the privatization that had occurred under Margaret Thatcher.

Unlike in Great Britain, privatization in Russia has always been a kind of sword of Damocles hanging over the heads of all major businessmen.  In 2003, when the Yukos affair was initiated, the Audit Chamber came out with a report on unfair practices during privatization. Business, of course, was interested in legitimizing the ends of privatization. But the recently proposed tax won’t help matters. Public opinion sees not only the low prices of the assets as unfair, but also the existing system of share auctions. It is also unclear how to deal with companies that have already changed hands several times. In his Twitter, Alexei Kudrin wrote, that introducing one-time taxes will negatively impact both the legal and economic situation in Russia. In either case, the discussion of a special tax is still around the corner and looking at it as an effective means for increasing the budget is wrong.

All of these measures for increasing revenue or cutting spending seem inadequate in light of the continued dependence of the Russian economy on the world energy situation, the rampant corruption in Russia, and the overall inefficiency of the Russian bureaucracy. Today, even those working in the government sector recognize the importance of market reforms. On February 13th, Kommersant published an article by Andrey Kostin, head of VTB [Vneshtorgbank], where he calls for the elite to support Putin in exchange for his committing to reforms, stream-lining government personnel, and not participating in the following presidential election. An unprecedented situation has developed: such calls to action are essentially coming from inside the administration, and they are only barely distinguishable from ultimatums. Kostin writes: “The reserves for restoring growth have run out. Life in exchange for oil has no future. The quality of life has risen. Now is the time to bring structural reforms to their conclusion in the fields of pensions, medicine, education, energy, housing, and natural monopolies. The role of the government in the economy must be decreased; government-owned companies and corporations need to be privatized. The government needs to become more effective at regulating the market. Foreign investors must have easier access to the Russian market, whether they are European, Arab, or Chinese. Real efforts need to be made to crack down on corruption. All of this needs to happen while macroeconomic stability is maintained, which is to say, while government spending is somewhat limited.”

Putin’s style of governing has always suffered from decisions being made in “sprints” covering small distances. A political task would be set and then the cabinet would think about how to accomplish it, with what measures and resources. The Russian government, of course, can find the resources to fund the realization of Putin’s campaign promises, especially since the prices for oil continue to rise to record-breaking heights (especially with the situation in Syria.) However, the devil is in the details and a battle will be fought around the sources for funding. The question of “Where will the money come from?” will be the most critical issue for the Russian government in years to come—that is, after it’s formed around a newly-elected head of state.

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