20 years under Putin: a timeline

Oil prices remain high, but Russia’s budget deficit is growing. In July, the Finance Ministry increased its budget deficit projections for 2014 from 0.4 percent to 0.5 percent. According to representatives from the Economic Development Ministry, GDP growth “looks like zero.” Under these circumstances, two developments in particular stand out: the possible abandoning of a program for boosting the country’s birth rate; and increasing allocations of sovereign funds toward the implementation of megaprojects. Political analyst Tatiana Stanovaya discusses how Putin’s regime can survive the deficit.

 

 

The Russian economy inspires less and less optimism as time goes on. Deputy Economic Development Minister Andrei Klepach recently declared that the country’s overall economic situation was better in July than in June: “This is not a recession, not a decline, but a stagnation, because it is but one step removed from zero. The pause in growth remains for now, despite the fact that GDP increased in July and domestic demand showed more positive dynamics compared to June.” According to the Russian Federal State Statistics Service, as of the first half of 2013, the rate of Russia’s annual economic growth had slowed to 1.4 percent, which is more than three times less than the 4.5 percent growth rate it exhibited from January to July of 2012.

As usual, the government needs someone to blame. According to Klepach, the main “culprits” of the recession can be found in the production sector. Despite earlier positive dynamics, mineral production decreased in July by 0.6 percent, he says. A decline in processing industries as well as in the production and distribution of gas and electric energy amounted to a 1.1 percent decrease. “If we are talking about those who have dragged the industry down, it was above all the producers of transport vehicles; taking into account the seasonal factors, the drop was 11.6 percent,” said the deputy minister. In July, negative dynamics were also apparent in the production of electrical equipment and rubber goods, as well as in the chemical industry and wood processing.

So what is the problem? Officially, Russian authorities are inclined to blame the global economic crisis, as well as the Eurozone’s unfavorable economic situation. Prominent economist Sergei Aleksashenko, however, believes that “[officials] are probably pulling the wool over [Putin’s] eyes again, citing unfavorable external conditions and a deep crisis that has shaken the entire capitalist economy to its core: ‘Look at Germany or France, not to mention Spain or Greece, where there is zero economic growth.’ I don’t know if there is someone in Putin’s circle who can tell him this is all untrue—that the emperor has no clothes (by which I’m referring to the growth rates of the Russian economy).”

Economists have been repeating recommendations: taking measures to improve the investment climate; increasing the independence of the judicial system; and decreasing corruption. Doing these things would, however, create additional political risks for the regime.

For a long time, economists have been repeating like a mantra recommendations that sound like common sense: taking measures to improve the investment climate; creating favorable conditions for small and medium-sized businesses, which are now suffering from administrative and fiscal terrorism; simplifying rules of business operations; increasing the independence of the judicial system; and decreasing corruption. Doing these things would, however, create additional political risks for the regime and would make it more difficult for the government to exercise control in a country where corruption is a way of guaranteeing the bureaucracy’s loyalty and the servile judicial system is an instrument of restricting the opposition’s political activity (as evidenced by the criminal cases against Yukos and Navalny, the “Bolotnaya case,” and so on).

As a result, the state relies on two de facto strategies for solving macroeconomic issues, which consist in conducting a tough budget policy and investing money from the National Wealth Fund (NWF) in megaprojects. In other words, holes are to be patched, and the economy is to be boosted at the population’s expense and in the interests of “state oligarchs.”

Under these circumstances, the Finance Ministry’s suggestion to abandon Russia’s “maternity capital” program after 2016 has created a stir. Vladimir Putin announced the idea of allocating a “maternity capital” to families for the birth of a second child in his 2006 address to the Federal Assembly. This was a distinctive speech in which the Russian president talked about a turning point in the state social and economic policy. His previous 2005 address was written by Dmitri Medvedev and was marked by an emphasis on democracy and liberalism uncharacteristic of Putin. The 2006 presidential speech was supervised by current Moscow Mayor Sergei Sobyanin, who was the Kremlin chief-of-staff at the time. This was the beginning of the golden age of ideas of “social conservatism,” which were reflected in projects to direct large financial flows into the production sector and social sphere. This is when state corporations began to emerge. Also, a critical change became noticeable in the president’s rhetoric: he was clearly gravitating toward “dirigisme” in the economy. Thus he focused heavily on industry sectors connected to heavy engineering and the military, two areas that symbolically represent the USSR’s former strength.

 

The Russian authorities, it seems, are seriously considering the abolition of "maternity capital."

 

“Maternity capital” was one of Putin’s biggest ideas. Every woman who gave birth to her second child after January 1, 2007, was to receive relatively large allowances, which she could use toward education, mortgage payments, or pension savings after the child reached the age of three. The head of the Russian Pension Fund, Anton Drozdov, is calling for allowing mothers to use their capital without restrictions. According to him, rules of allocating “maternity capital” are too strict, resulting in corruption and fraud growth in this sphere. Out of almost 4.5 million families who have received certificates since 2007, only 24 percent fully used their “maternity capital.” The majority of these families, 1.9 million, used this money to improve their living conditions. According to Kommersant-Dengi magazine, more than 1.27 million families used their “maternity capital” to partially or completely pay off home loans, and only 592,000 families improved their living conditions without resorting to loans. Thus, the majority of funds allocated to the “maternity capital” program were used in an area where, according to the head of the Pension Fund, corruption is thriving.

Within the government, there is little consensus on this subject. The systemic opposition suggests extending the duration of the program after 2016. Prime Minister Dmitri Medvedev declared that the decision had not yet been made, but his tone suggested that the option of abandoning “maternity capital” is being seriously discussed. The Finance Ministry, for example, has already estimated that it would be possible to save 194.5 billion rubles ($5.9 billion) in 2014, 377.1 billion rubles ($11.4 billion) in 2015, and 581.9 billion rubles ($17.5 billion) in 2016 if the program is abolished now.

The government needs this money, especially considering that under the current conditions of economic stagnation, state companies’ demand for megaprojects is growing. Thus, all eyes are fixed on the NWF and the Reserve Fund, both of which emerged in 2008 as a result of the division of the Stabilization Fund. The Reserve Fund exists as a “rainy day” fund, and its aggregate amount as of August 1, 2013, had reached $85 billion. During the global economic crisis, the Reserve Fund was almost depleted (in 2011, its aggregate amount was $25–26 billion, whereas in 2008, it amounted to $125 billion). Now, however, despite the fact that oil and gas revenues were higher this year than expected, the Finance Ministry will not rule out the possibility of having to “unseal” reserve funds in order to cover the budget deficit. At worst, 9 percent of its aggregate amount will be withdrawn. The main reasons for such measures consist in oil and gas revenues being insufficient to reimburse state companies for value-added tax, as well as the failure of the privatization program. Due to these two factors, the budget is 600 billion to 800 billion rubles ($18 billion to $24 billion) short. Former Finance Minister Alexei Kudrin declared that the decision to  “unseal” reserve funds means that the government “is not future-proof.” “Even those few elements of integrity in the financial system are being currently destroyed, used, and as a result we are decreasing the stability of our institutional system, which helped us fight the crisis,” Kudrin has stated. As a result, according to him, the population’s real revenues will decrease.

The NWF was created for future generations, as well as to help the deficit of the Pension Fund. As of July 1, 2013, the Finance Ministry estimated the aggregate amount of the NWF at more than 2.82 trillion rubles ($85 billion). The fund is essentially composed of oil and gas revenues. In his speech at the St. Petersburg International Economic Forum in June, Putin declared that 450 billion rubles ($14 billion) from the NWF would be used for infrastructure projects; however, in August, the government accepted a proposition of the Economic Development Ministry to use up to 50 percent of the fund’s total amount for infrastructure projects. As the saying goes, one leg of mutton helps down another.

Putin will have to choose between his “friends” with their excessive ambitions, and the electoral groups that have grown dependent on state support.

Current large infrastructure projects include the construction of the Central Ring Road in the Moscow region and a high-speed railroad to link Moscow and Kazan, as well as the reconstruction of the Trans-Siberian Railway and the Baikal-Amur Mainline. Yet the estimated 450 billion rubles ($14 billion) will certainly not be enough for all this. The Open Joint Stock Company Russian Railways has requested 290 billion rubles ($9 billion) for the reconstruction of the Trans-Siberian and Baikal-Amur mainlines (the company plans to invest a total of 562 billion rubles ($17 billion) in this project, 150 billion ($5 billion) of which will come from the NWF). Putin ordered an allocation of 150 billion rubles ($5 billion) toward the Central Ring Road project alone and demanded that construction be sped up. A week earlier, the president discussed the building of a high-speed Moscow-Kazan railroad. Construction is supposed to begin in 2015, with the cost of the project amounting to almost one trillion rubles ($30 billion). Transport Minister Maxim Sokolov has acknowledged that “the source of financing of capital expenditures of 279–280 billion rubles ($8.40 billion to $8.43 billion) has not yet been defined.” These expenditures may ultimately be covered by money from the NWF or the federal budget.

This would all sound very impressive if not for the corruption problem. The cost of any large construction project in Russia is three to four times higher than it would be in another country. Attracting private investors is extremely difficult due to low returns on (or the sheer unprofitability of) projects, as well as social and political risks. Also, the investment of large state funds does not guarantee that a project will be carried out well. The fate of the Russian regional jet SSJ-100 proves this point. Nobody knows exactly what the cost of this project was, since funds were allocated under different expenditure items. Experts, however, estimate its cost at $7 billion, $4–5 billion of which were state funds. The aircraft failed to attract foreign customers, and those who had signed the contracts later refused the SSJ-100 due to poor construction. Russia’s largest airline company, Aeroflot, declared that 40 percent of all plane breakages were connected with SSJ-100 jetliners. As a result, financing of the project has been put on hold until 2016, by which date all the mistakes are supposed to be corrected.

There is only one possible conclusion: that the government will soon have to look for ways to save budget funds in order to satisfy the growing appetites of the “state oligarchs.” Putin will have to make political decisions about who is more important to him: his “friends” with their excessive ambitions, or the socially vulnerable electoral groups that have grown dependent on state support. The problem is that any choice he makes will bring with it political risks for the regime—either from inside or “from below.” And high oil prices will make no difference.

Russia under Putin

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