Russia relinquishes the dollars it has earned

11.04.2011 — Analysis

The Russian Ministry of Finance has proposed a ban on investing oil money in the Russian economy. Aleksei Kudrin, the head of the ministry, believes that removing petroleum income from the revenue mix will reduce inflation and create the preconditions for industrial growth. But this idea is not supported even by the other financial experts on the cabinet. A country with sharply reduced consumer demand and where business does not want to invest in production is a country doomed to stagnation. As this columnist for "RusBusinessNews" has determined, the flight of capital from Russia is a direct result of the policies of 1990-2000, when reforms served the interests of the administration in power instead of society as a whole.

Speaking at the 12th International Academic Conference on Economic and Social Development, Aleksei Kudrin proposed legally restrict usage of profits from the export of oil and gas in Russia. Such an unpopular measure would inevitably lead to a reduction in social spending, but Mr. Kudrin still believes that this step is necessary in order to overcome the country's dependence on the price of raw materials. The assumption is that lowered inflation, intelligent planning, and effective administration will help Russia along the path of sustainable development.

Mr. Kudrin later added that the lion's share of additional revenues from rising oil prices would be directed to the federal coffers. The government decided to spend approximately one-third of that income (300 billion out of 1.1 trillion rubles) on promised increases in pensions, stipends, and the salaries of government employees, and to subsidize the agricultural sector and small businesses. The minister of finance emphasized that the government has no money for lobbyists' projects.

Andrei Klepach, the Russian deputy minister of economic development, called short-sighted the government's decision not to make any further investments and to divert additional revenues abroad. His ministry predicts a sharp decline in investment in core industries in 2011. In addition, a great deal of capital is being exported abroad. According to the Russian Central Bank, this outflow amounted to $21.3 billion in the first quarter of 2011 ($14.7 billion was exported between January and March of last year). Experts claim Russia's poor investment climate is to blame for this capital flight, and it seems the government has no current plans to change the situation. According to Andrei Klepach, the leading state-owned companies (Gazprom OJSC and Russian Railways OJSC) have cut their investment programs.

The consequences of such a step will soon be apparent. The one-third reduction in capital investment by Gazprom alone means a 10% decline in investment throughout the entire country. Although these cuts are helping to reduce federal budget deficits, the deputy minister of economic development believes that they will also lead to stagnation and cutbacks in reforms. The ministry predicts that a small, 4.2%, growth in the economy will come from increased exports.

It would seem there are no investors left in Russia today, with the exception of state monopolies and the federal budget. Therefore, experts are unsure what to make of the diversion of a significant portion of Russian companies' additional revenues to foreign holdings. Andrei Korzhubaev, a department head at the Institute of Economics and Industrial Manufacturing of the Siberian branch of the Russian Academy of Sciences, claims that the government does not need to reinvest the wheel - it only needs to take its cue from the experiences of foreign countries as well as our own in their attempts to modernize their economies. In the 1930's, the Soviet government successfully industrialized the country, but so dispossessed the peasants that soon the country was faced with mass starvation. Today, thanks to its natural resources, Russia has a unique opportunity to modernize its aging industrial infrastructure without forcing a drastic decline in the living standards of its citizens. Any additional revenue from the sale of oil needs to be spent on large-scale purchases of equipment and technology and on building bridges, roads, airports, space launch sites, and other critical infrastructure, an area where Russia lags far behind even developing countries. This is what Japan did the 1950's and 1960's, South Korea in the 1970's-1980's, and China in the 1990's. This strategy makes sense because it helps to both modernize the economy and keep inflation from expanding, two areas under the responsibility of Finance Minister Aleksei Kudrin. Andrei Korzhubaev thinks a small portion of the incoming additional revenue needs to be set aside to safeguard against a drop in oil prices.

Evgeny Yasin, the former Russian minister of the economy, took the opposite tack from Aleksei Kudrin at the conference, arguing that a balanced budget and reduced development spending will not lead to institutional changes aimed at improving business activity in the country. Mr. Yasin believes the business community itself must share the blame for Russia's appalling investment climate.

Former Polish deputy prime minister and architect of shock therapy, Leshek Baltserovich, told the conference there are a great many ways to sabotage reform. If you want to increase corruption, give more power to bureaucrats. If you want to increase inflation, give preferences to individual companies or industries or support monopolies, which will destroy competition itself. Modernization is impossible without competition, just as obtaining important outcomes is impossible without the protection of private property.

However, the author of Polish reforms also noted that discussions of the almighty power of the market and private property are nothing but propaganda from those who want to rid themselves of government oversight. And those people can have a lot of influence on economic development. The path the government ultimately chooses will depend on for whom it is working. As Mr. Baltserovich says, not all of the current reforms are for society's benefit. Sometimes they are only advantageous to the ruling class and to a government that is acting in that class's interests.

Experts believe that the Polish economist has provided a definitive answer as to why Russian officials are loath to take foreign or domestic experience into consideration when modernizing the economy.

Vladimir Terletsky