Clannish society has a stranglehold on the Russian economy

03.09.2010 — Analysis

The Ministry of Economic Development predicts that capital inflow to Russia will fall to zero by 2013. Experts are calling this situation the beginning of the end for an "underinvested" country. Government officials are trying to reassure everyone that speculative capital outflow will be replaced by direct investments and foreign loans. However, as a columnist for RusBusinessNews has explained, business activity is declining, as is any basis for optimism, and the government's decisions are not taking economic realities into consideration.

Andrei Klepach, the Russian deputy minister for economic development, predicts that capital inflow to Russia will fall from $10 billion to zero in the next three years. This pessimistic estimate is clearly at odds with the minister for economic development's statement in July - Elvira Nabiullina claimed that the economy in the first half of the year was climbing out of the crisis at a fairly good pace. On the basis of this, the ministry even raised the index of growth for the internal gross domestic product by a few points in 2010.

After the first seven months of the year, the Ministry of Economic Development claimed that investment would grow by 10% in 2011 (despite the fact that it only grew by 1.3% between January and July of 2010). The government's hopes were pinned on the vitality of Gazprom, which promised to spend as much as 1.7 trillion rubles. However, experts strongly doubted that such an optimistic scenario of economic development would play out, and the representatives of the Russian Audit Chamber even reminded Elvira Nabiullina's office that last year's prognoses turned out to be very far from reality. In his response, Andrei Klepach delivered a eulogy for further capitalist investment activity and, as is shown by what is happening in the Russian regions, there are reasons to believe that his predictions will be more accurate.

In the Chelyabinsk region, in the first half of 2010, investments in fixed assets amounted to only 86% of the level of investment from January-June of 2009. Thus, the index of industrial production is not growing and remains at the same level as July of last year. Construction is in a serious decline - the volume of completed work has fallen by dozens of percentage points. In the Sverdlovsk region, the index of industrial production rose 10% in six months, an increase associated with the rise in metals prices. However, the emerging growth of exports to China is significantly less than the increasing number of imports coming from that country. Machinery manufacturing, which declined by dozens of percentage points during the economic crisis, is today barely at 75% of its 2008 level.

Natalya Zubarevich, the director of regional programs for the Independent Institute for Social Policy, confirms that the growth that began in 2009 and that was helping the economic recovery, has now come to a halt. Judging by this summer's performance, the economy is stagnating. And the main trouble is that no one is rushing to invest in production. You can talk about the growth of direct investment in Russia as much as you want, but in 2009 it declined. Thus, it's not surprising that only a few areas of the country feel stable: the oil-producing regions, the Russian South, which has received a lot of investment in connection with the 2014 Olympics in Sochi, and the Far East, where there is nothing but fish and forests and hence, nowhere to fall. The price of oil could still help revive industry in other parts of the country, but experts aren‘t making bets on the direction of oil prices, either.

Vladimir Bochko, the director of the Center for Innovation and Investment of the Urals branch of the Russian Academy of Sciences, believes that you can't make predictions in today's Russia, because the decisions made at the highest levels of government are made without any regard for economic realities. They tell the people one thing, do something completely different, and then the realities of life dictate a third path. This expert believes that not only is there no well-thought-out economic policy in place, but, in fact, no policy at all. Decisions are made in back rooms, frequently by people who have nothing to do with government agencies that are supposed to be in charge. It got so bad that the airport administration in Norilsk, which was under the control of the public corporation Norilsk Nikel, was deciding which planes the airport would accept and which not. There is the same kind of anarchy in the economy. The government claims that the country has sufficient supplies of grain and cereals, but the price of flour and buckwheat starts to surge anyway. This is "normal" for an economy run by clans and monopolies. "There can't be any industrial development if you don't have a free economy, only increases in prices," concludes this expert.

The prices for food and utilities in the Russian regions are really climbing. In the Chelyabinsk region, the price of that notorious buckwheat has gone up 73% since the beginning of summer, the costs of cold water and wastewater services - up 135% in 2010, and heat - 120%. Residents of the Sverdlovsk region are now faced with a 121% increase in the cost of heat (191% in some cities).

The government, concerned about an approaching social crisis, decided to curb both the growth of utilities prices and the independence of the heads of municipal bodies, by means of a coercive plan to transform the seats on those bodies from elected positions to appointed ones. But experts doubt that that will help. Under the current legal and economic instability, all business activities in Russia have been reduced to the sale of food and energy. In a narrow market like this, the only profit that can be made is in a monopolized economy. That's the kind of economy that's been built and now those who sell energy resources are doing all they can to slow the technological progress that is keeping utility costs in check. This is particularly evident in the field of thermal engineering.

Government officials and businessmen love to talk about what a sorry state the energy-generating facilities are in - the antiquated boilers, the rusty pipes that lose up to 40% of their heat, the complicated supply chains, etc. But the most interesting fact is that Russia could literally walk away tomorrow from a centralized system of heat distribution. The country possesses the technology to heat buildings using infrared rays. This would save so much money that Russian manufacturers of heating elements could find a way to sell them on the European market. But it's the Russians who persist in clinging to their centralized networks and bemoaning the terrible waste. One gets the impression that if they lost their rusty pipes they might lose their will to live. Literally. For many of those who sell energy for a living, milking their fellow Russians is their life's blood.

The government could probably break up this ugly business, but instead of removing barriers to technological progress, it prefers instead to personally intervene to regulate prices. As we can see from the statistics, this isn't doing anything to prevent hikes in the costs of utilities, but it does prevent a lot of people from wanting to invest in the Russian economy. The experts are afraid that the reduction of capital inflow to zero signifies the beginning of the end for a poor country.

Vladimir Terletsky