Russian Economic Reform

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Russian “maneuvers”

Published on April 09 2012
Posted by: jeff

Disagreements about economic policy within the Russian government often spill over into the public arena and get reported in the media to an extent which would surprise most people in such English speaking countries as Australia, the UK and the US.

In part, public exposure of internal government economic policy differences reflects less need for government discipline than when faced with an effective political opposition ever ready to attack (particularly as in the Westminster system used in Australia and the UK).

However, it is also partly a way of trying to influence the views of the president and prime minister. President Medvedev has, on occasion, had different views to Prime Minister Putin and has been quite insistent on specific economic measures (such as the payroll based insurance contribution and privatization) even if actual implementation of his demands has been tardy. It will be interesting to see the extent to which such public airing of ministerial differences (and those of official advisers) will continue when the roles of Medvedev and Putin are reversed: Putin will be calling all the shots with Medvedev (psychologically defeated by Putin in the unspoken contest to be the presidential candidate) having little independent authority.

I would also note that the public debates of economic policy by Russian ministers (and various official advisers) are often more sophisticated than what appears in the media of most “modernized” English speaking countries. The Russian system of appointing cabinet ministers is more akin to the US than to Australia or the UK and in the area of economics, at least, the result is often greater intellectual competency. Of course, as in any country, this does not necessarily mean that the final decision makers are competent economic policy makers.

Last week a Higher School of Economics (HSE) “conference” to discuss economic reform essentially turned into a mini-debate on budget issues between Elvira Nabiullina, the Minister of Economic Development, and Finance Minister Anton Siluanov.

According to a report in “Vedomosti” Nabiullina told the conference that without oil “doping” Russian GDP growth would slow to 2-3% per year, and expressed the view that oil production would “stagnate” over the next 20 years while oil prices will soon come-off their present cyclical high. As a result the international balance of trade may become negative in 2014. Thus, in her view, maximum effort is needed to increase growth in non-resource exports and make the economy more attractive for investment.

Annual GDP growth could be 4.4% if the economy is “successfully modernized” away from raw materials, she said. She suggested lowering taxes on labor and does not want to see “economic policy” guided only by the “budget maneuver”. The state should support economic restructuring, including the use of national welfare funds to develop “strategic projects” within Russia and abroad. “Those that bring us the necessary technical competency”, she specified.

For those readers not closely following this issue, the “budget maneuver” is part of the “Strategy2020” report which suggests that spending on such things as infrastructure and “human capital” (eg education, health) be increased by 4% of GDP in the period to 2020, with expenditure cuts equal to 2% of GDP in defence and law enforcement, changes to the pension system etc. It has been dubbed the “plus 4, minus 2” maneuver. In a recent media interview Vladimir Mau (Rector of the Academy of National Economy and Public Administration), who was one of the two lead authors of the report, downplayed the importance of these exact numbers, saying instead that the main issue was a serious restructuring of budgetary spending instead of just increasing it. He said a “structural maneuver” was needed to increase the effectiveness of spending (and specifically noted the need for spending on “human capital).

Siluanov told the “conference” that 80% of budget expenditures consists of “obligations” which cannot be changed. Moreover, “pumping” additional money into inefficient sectors to make them efficient will not work, he said in an apparent dig at Nabiullina’s “strategic projects” idea. He said that on a recent sovereign Eurobond road-show potential investors asked: “Why do you have such a high non-oil deficit and when will it be reduced to pre-crisis levels?” He said that from a pre-crisis level of 2-3% of GDP the deficit, without accounting for oil and gas income, grew to 13% and in 2011 was about 10% of GDP. To achieve pre-crisis non-oil deficit levels, expenditures would need to be cut by 4% of GDP – or about 20% — and this is very unlikely, he said.

Siluanov then took aim at part of the “Strategy2020” report, saying that “plus 4, minus 2” figures were “overstated” (while mentioning that the pre-election spending promises of Putin amounted to 1.5% of GDP) and that  in the first instance, expenditure savings should be sought in the areas of  “public health and education”.

While the new cabinet is yet to be named, it is clear that that the word “maneuver” can also be used to describe the activities of ministers. Indeed, it began almost as soon as the “Strategy2020” report began to seep in to the public domain (before its official public release in mid-March).

In mid-February the Ministry of Finance was letting it be known that it had its own version of a “budget maneuver” with expenditure reductions of about 6% of GDP (the candidate areas similar to the “Strategy2020” report) and increases of less than 2% (including much smaller increases in education spending and nothing for public health). Of course, these numbers were calculated before Putin’s pre-election promises, but Siluanov would appear to still be aiming for a “budget maneuver” that reduces the deficit – rather than increasing it – as Russia moves toward 2020.

So where does all this leave us?

Siluanov – not unexpectedly for a Finance Minister – is concentrating on the bottom line. Whether this is myopic or not depends significantly on oil prices over the next few years. Siluanov is playing up fears of a large collapse and possible huge Russian budget difficulties. Nabiullina is also playing the oil price card to gain support for some focus on government determined “strategic projects”. The authors of the “Strategy2020” report are less worried about the budget than Siluanov and more focused on general development issues (such as “human capital”) than, it would seem, Nabiullina and Siluanov.

The above account is perhaps a simplification of the views of the various players but, I think, helps illuminate what the debate is about.

What is my view? I vote for the authors of the “Strategy2020” report.