Prices in non-market Russia

25.04.2013 — Analysis

Russian economists offered the government to move away from the raw-export dependent economy. The scientists think that the government can do this by regulating prices, by drawing up material balances similar to those used in the USSR’s five-year planning, by eliminating intermediary freeloaders in the public sector of economy and by abolishing trade secret in business. The experts worry that the reformers may throw out the baby with the bath water like they did quite often previously. However, the RusBusinessNews columnist has found it out that the main point is that the vector of the country’s development can be redirected only by a powerful state, which is not the case.

At the end of May 2013, the Russian Union of Industrialists and Entrepreneurs (RSPP) will discuss two concepts addressing changes in the Russian economic growth model; the concepts were developed by scientists of the National Institute of Development at the Russian Academy of Sciences and the Lomonosov Moscow State University. The results of the discussion will be reported to the government and the Parliament of the country.

The team of theoreticians from the National Institute of Development based their concept on the assumption that there is no pricing policy in today’s Russia. Mikhail Gelvanovsky, the director of the institute, states that prices are set by private companies caring about their own interests rather than by the state that would care about interests of all market participants, thus the economy is characterized by disproportions.

The post-Soviet economy of Russia has three main segments: the foreign currency based segment where prices depend on the world market; the monopolistic segment that has no market at all; and the non-monopolized segment where the market does not operate because of price disparity. The reformers from Yeltsin’s team expected that the prices would rise by 150%, and, as a result, they demonstrated a 30-fold increase. The boom in prices was fueled by the monopoly sector ruled by corruptionists and intermediaries.

M. Gelvanovsky believes that the Russian oligarchic and administrative system can be reformed. It can be done only when the export-oriented and monopolistic segments are teamed up with the non-monopolized sector. The country demonstrates excessive dependence on the prices for exported commodities – oil and gas - that are also used by the Russian population. In the world, the ratio between the sales on the external market and the gross domestic product averages 1 to 5; in the 1970s in the USSR, the ration was considerably lower - 1 to 25; in present-day Russia, the ratio is approaching 1 to 2! No wonder that prices are skyrocketing. The scientist thinks that the stated goal can be achieved through the price monitoring system and the price range based on the system and established by the designated pricing authority.

Alexander Chernikov, an associate professor of the Department of Economics of Innovation of the Economic Faculty at the Lomonosov Moscow State University, thinks that the country should switch over to drawing up material balances that are essential for the balanced development of economy in general rather than for development of its individual segments. The USSR had 18, whereas Japan had 200. Today, Russia has none, while their number in the Land of the Rising Sun reached 2,000. The industrialized countries adopted approximately 65% of the Soviet know-how in long-term planning. In the meantime, the Russians hit upon the idea of charging consumers for their connection to electric power networks and estimate energy rates, proceeding from the investment requirements of suppliers, and not the other way around like in the rest of the world. As a result, Inter RAO is now negotiating electricity supply to Russia from Finland, as the domestic electricity has become too expensive for Russian manufacturers. The scientist believes that the investment that must be made in the electric power industry should be looked for in the Reserve Fund of Russia rather than in energy rates.

The ideas of the metropolitan scientists are taken with a grain of salt. The experts who are familiar with the proposals of the Moscow State University and the National Institute of Development argue that they will be difficult to implement in such a large country as Russia.

Yulia Lavrikova, the deputy director of the Institute of Economics of the Ural Department of the Russian Academy of Sciences, supports the authors of the concepts and agrees that the approach to pricing should be changed; however, she is in the dark about monitoring of prices in the market environment and cannot understand who will be responsible for setting price bands: The personnel and institutional resources for computation of prices, which existed in the Soviet Union, have been destroyed and are no longer available. Furthermore, the implementation of the scientists’ proposals will require changes in the national energy policy aimed at a further increase in prices for gas and electricity. The thoroughgoing reforms will challenge the investment strategies of the energy companies. The implementation of the strategic plans implies the necessity to decrease the value-added tax or to impose the sales tax.

Alexey Obukhov, the deputy chairman of the Sverdlovsk Regional Energy Commission, points out that there is a risk that "the baby will be thrown out with the bath water". In his opinion, before plunging into price regulation, special attention must be given to cross-subsidization and the so-called "last mile", which distort considerably the picture of pricing in the country. The government’s discretionary decisions that set rate limits for some consumers and increase rates for other consumers do not go in line with the fair pricing and impede the economic growth.

Pavel Vorotkov, the executive director of the Sverdlovsk Regional Union of Industrialists and Entrepreneurs, is confident that the revolutionary ideas of the scientists can be implemented only by a powerful state. In the meantime, Russia is corrupted and disintegrated. As a result, municipalities give priority to individual princeling entrepreneurs who have cozy relationships with regional administration authorities and not controlled by anyone. The country where the off-the-books economy accounts for 40% cannot count on reliable forecasts and, especially, justified rates. Therefore, all the decisions are "pulled out of a hat": The government increases taxes – business wails; then the President embarks on making amendments to the laws.

The operation of the public sector is another story. The sector is a true nursery for parasitic clingfish intermediaries and a heaven for tax "privatization", giving birth to the economy of absurd: previously, products were transported only by rail if the distance to the destination exceeded 800 kilometers. Today, truck haulage has become more profitable than rail transportation even for a distance of 2,000 kilometers. After its reforms, Russian Railways, OJSC, turned into an unmanageable and non-market company. Such exorbitant administrative costs that are typical not only of Russian Railways, but also Gazprom and energy companies can be neutralized only with the common economic policy.

The famous economist Jeffrey Sachs characterized the existing situation in Russia as a deadlock. The Russian scientists see the way out in the joint decision of business, society and the government regarding price regulation, without which the country will not be able to develop further. However, the experts do not see any influential forces that would be interested in redirecting the vector of the economic policy and putting a stop to destruction of the non-primary business.

Vladimir Terletsky