20 years under Putin: a timeline

Russia’s new prime minister, Mikhail Mishustin, was tasked with pushing forward the stalling national projects amidst the political transition initiated by Vladimir Putin earlier this year. Today, as the COVID-19 pandemic and Moscow’s oil price war with OPEC hits the Russian economy hard, the chances for the projects to be successfully carried out this year are getting slim. Moreover, a closer look at the government efforts shows that even before these crises, implementation of the national projects was already problematic.

 

Mikhail Mishustin was appointed Prime Minister to push forward the stalling national projects. Photo: kremlin.ru  

 

Great expectations 

One of the main goals of Russia’s newly appointed government led by Mikhail Mishustin was to smooth the implementation of the national projects—a series of spending priorities in 13 policy areas, including healthcare, education, demography, housing, small entrepreneurship, digital economy, et al. The projects, worth 25 trillion rubles ($318.3 billion), were announced by Vladimir Putin in 2018 and are regarded as key stimuli to Russia’s lackluster economic growth and as stability guarantees in what could be a transition between the Putin and the post-Putin eras. 

In his previous post as head of Rosfinmonitoring, Russia’s financial police, Mishustin gained a solid reputation as an efficient administrator. One of the initial expectations of his government was that it would fix a long-standing fiscal problem—the sluggish execution of the federal budget—which has been plaguing the national projects as well. The speed of the national projects’ implementation was important for at least two reasons. First, Putin seemingly envisaged that they would put the country, and especially long-neglected regions, on a growth path in what might be his last term in office. Second, as an Oxford Economics study showed last year, slow implementation could put a drag on the already sluggish economic growth.

Mishustin’s government has indeed accelerated budgetary spending. In the first two months of 2020, 3.1 trillion rubles were spent, putting budget execution at 16 percent of the yearly plan—an improvement from 2019’s 14 percent for the same period. The government also planned to boost spending on the national projects by 7.7 percent. However, by the end of March, it was already clear that it would likely spend less. 

 

Funding complications

The national projects are primarily funded from the federal budget, which provides 13.2 trillion (51.3 percent) out of the 25.7 trillion rubles initially earmarked for this purpose. Regional budgets contribute another 4.9 trillion (19 percent), while 7.5 trillion (29.2 percent) come from extra-budgetary sources, that is, the private sector. Private investment is expected to spur local growth, but the 2019 Oxford study cautions against this optimistic view: Russia’s low investment rate—only 20.6 percent of its GDP last year—is well behind other emerging markets. The problem is certainly not a lack of money, as in 2019 about 30 trillion rubles were sitting in business accounts, but rather a growing concern among investors about political instability, score-settling, and the lack of rule of law. As a result, businesses struggle to make investment decisions, especially when it comes to the long-term planning for implementation of the national projects.

Regional budgets are not in good shape either. In 2019, the number of regions with a budgetary deficit went up from 15 to 35. Regions are wary of increasing their debt burden, since by accumulating large debts they risk being put under the direct supervision of the Ministry of Finance. Meanwhile, their reserves are running dry. The National Credit Rating Agency estimated that if oil prices remain low in 2020, the cost of debt financing for the regions could result in 62 out of 83 regions depleting their reserves by the end of the year. This prediction came before COVID-19 hit Russia, which will further hurt regional revenues. The extent of the problem might be clearer in the fall of 2020 when regions apply for budgetary transfers.

To shore up the national projects, the government under then Prime Minister Dmitri Medvedev initially planned to use some of the money saved in the National Welfare Fund (NWF), a rainy-day piggy bank that accumulates excess budget revenues when oil prices are above $40 (the fiscal rule)—primarily to maintain stable pension coverage, but also to plug holes in the federal budget or invest in strategic projects in case the liquid part of the NWF reaches 7 percent of GDP. In November 2019, the government predicted that in 2020 it would be able to spend a maximum of 1.5-1.7 trillion rubles, in 2021 3.7 trillion, and in 2022 5.8 trillion. However, in reality the government meant to spend only 15-20 percent of this amount this year, or 300-400 billion rubles on the national projects, while attracting the rest from other sources.

 

Reality checks 

The government plan was called into question as early as mid-January when Vladimir Putin announced the constitutional reform, dismissed Medvedev, and appointed a new government. In his address to the Federal Assembly, the Russian president put forward an array of new social priorities that required additional spending of about 2 trillion rubles in the next three years. Since the rules for tapping the NWF are strict, a scheme was developed that envisioned the fund buying the Central Bank’s controlling stake in Sberbank (the largest state-owned Russian bank) for 2.3 trillion rubles (with part of the sale proceedings to be returned to the state budget), which raised doubt over the government’s ability and willingness to make another big investment from the fund this year.

The situation deteriorated further in March when the COVID-19 pandemic and Russia’s walking out from the OPEC deal resulted in oil prices crashing to around $20 per barrel. At this point the NWF money will likely be redirected to cover the federal budget deficit—up to 0.6 percent of Russia’s GDP, as suggested by First Deputy Prime Minister Andrei Belousov.

Russia’s GDP will undoubtedly fall this year, but no one even remotely knows by how much. A weakened ruble theoretically helps the NWF, but the ruble-dollar exchange rate is not tied to oil prices as strongly today as it was a decade ago. If, however, the Russian currency were to weaken significantly, this may cause an inflationary shock and hurt the population—something that the Kremlin simply cannot afford.

These issues were looming large even before the Kremlin acknowledged that COVID-19 had become a serious problem in Russia. On March 27, the country’s leading economists suggested in an open letter that the government should introduce a pandemic relief package of 5–10 trillion rubles—ten times the estimated cumulative effect of tax cuts, social measures, credit deferments, cheap loans, etc. announced in recent weeks, which would also have to be covered from the reserves. A week later, the head of the Audit Chamber, Aleksei Kudrin, came to a similar conclusion.

Theoretically, the government could loosen the rules and tap the reserves for a significantly bigger relief package, while maintaining planned spending on the national projects. Having little room to significantly increase the tax burden on the economy, the government could still borrow or trust the central bank—which has also lost a significant share (5 percent) of its reserves over little more than a week of market turmoil—to ease the situation. But with so many moving parts and so much uncertainty about the future, Russia’s fiscally conservative government was more likely to put the brakes on the national projects. Which is what happened on March 23, when the government essentially deprioritized their funding.

 

Poor track record

This is not the first time that an ambitious socio-economic development program has been undermined by a larger crisis in Russia. In 2008, the government planned to spend about $1 trillion under the Concept of Socio-economic Development of Russia until 2020, which had to be significantly reworked in 2012 as Russia was struggling to recover from the global financial crisis. The new program still failed to deliver its targets. Putin’s “May Decrees,” a series of spending priorities announced after his reelection in 2012, faltered amidst the post-2014 economic slowdown and further centralization of political power and budgetary income at the expense of regional governments. The present crisis, which seems to have derailed the national projects for the time being, will likely also expose the very deficiencies—e.g. derelict health care facilities in the regions—that they were designed to remedy.

Despite the ambitious claims by Putin and the bold initial efforts of Mishustin, it is increasingly clear that the implementation of the latest national projects will be stalled this year, as Russia will be putting out fires, some of which could have easily been avoided.

Last year, Kudrin suggested changing the fiscal rules to set the cut-off point for the NWF at $45/barrel, with the differential invested in healthcare and education. Once the present crisis is over and Russia inevitably reviews its national projects, the government will have to consider investing more in these priorities and improve the investment climate to make the regions more resilient before the next unexpected crisis.

 

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