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Biplanned Economy
The Russian economy is living through a difficult period. Its development goes down, whereas inflation goes up. The government should choose its priorities: either to work for the higher growth rates of the economy or for the lower rates of inflation. The Minister of Economic Development, Herman Gref, stands for raising the political component: according to his draft programme, the main task of the government is to develop the institutions of civic society. When the minister returns to the economy, he lobbies the growth of inflation. As a result, the government chooses a populist stand, which means that a difficult period will last long.
The World Bank Favours Herman Gref
The economy of Russia concerns not only Russians. This is why it is always interesting to know how the domestic situation in Russia is viewed from outside.
The World Bank (WB) presents its outline of the Russian economy every six months. The latest “Report on the Russian economy” was published on April 4. The first thing that struck the head economist of the WB office in Russia, John Litvak, was that “the overall lowering of the growth rates of industry registered previously disappeared.” The point is that during the latter half of 2004 official statistical data showed the lower growth in virtually all branches. But in the beginning of the current year the Russian Board of Statistics corrected the situation, having recalculated industrial statistics on the basis of a new classification. The WB experts regard the manoeuvres of Russian statisticians rather enigmatic, because, according to their calculations, the engineering industry registered certain growth, whereas the mining industry's performance declined. The WB was unable to guess the riddle of the Board of Statistics; according to the WB, the factors which influenced the downward trend in a number of industries “should have equally influenced the engineering industry.” In contrast to the government, the World Bank named the reasons for the slowing down of industrial growth, among them the overtaking increase of costs as compared to the growth of productivity due to the higher exchange rate of the rouble, the growing prices of fuel and energy, the bigger increase in wages as against low labour productivity, and a shortage of production capacities. As for decreasing growth rates in the oil industry and “some other sectors”, the World Bank experts believe that they are due to the consequences of the “protracted YUKOS case” and the growing state interference in the economy. They maintain that the negative influence of the above-mentioned factors will continue this year.
In the view of WB experts, economic growth can be saved by the inflow of private investments. They believe that Russian power is capable to improve the investement climate considerably “in the nearest future.” For this purpose the authorities should “win the reputation of defenders of property rights, supporters of a stable regime of regulation and opponents of state interference in the economy.” The World Bank calls on the government to adopt the economic programme for 2006 – 2008 prepared by the Ministry of Economic Development, and strictly adhere to it. The bank does not think that rich natural resources hamper the development of the non-raw-material sectors (many western and Russian economists hold this view.). On the contrary, the great reserves of raw materials in Russia create many advantages for the non-raw-material branches, primarily connected with their cheapness on the domestic market. The World Bank especially notes the cheapness of natural gas as compared with the competitor-countries, and warns that the tariffs on gas for industry should not be raised.
As for the Russian consumers, the World Bank has no optimistic forecasts for them. It will be very difficult to curb inflation, because it depends not so much on the prices of oil and petrol as on “the flows of capital.” In other words, the growing exchange rate of the rouble is answered by investors by the greater inflow of short-term capital, and this money immediately causes a rise in prices. The Central Bank has no instruments to curb the influence of this money, and, in the view of the World Bank, the role of the stabilization fund as an anti-inflation instrument is quite important. The bnak insistently calls on the Russian government not to give in to temptation to increase the unprofitable expenditures of the budget and instead “to pump” the petrodollars into the stabilization fund.
Herman Gref for the Growth of Prices
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| Photo: Dmitry Dukhanin |
| German Gref and Mikhail Fradkov Are Concerned over the Price of Separation, Whatever It May Be |
Herman Gref and Mikhail Fradkov are both concerned with their version of the programme. In the Russian cabinet of ministers most members do not believe in Gref's programme, in contrast to the World Bank. Premier Fradkov needs another programme, without mentioning the reforms for which the government is not responsible, such as the legal reform and the reform of the law-enforecement agencies, but clearly defining the contribution made by each branch to the double increase of the GDP. The cabinet of ministers evolves a special plan (even two plans) of doubling the GDP.
It's interesting to note that these two plans oppose one another ideologically. The first may be called liberal; it enviages the lowering of the VAT from 18 to 13% in 2006, with the use of the means of the stabilization fund for compensating budget losses. Businessmen welcomed it, but the liberal ministers, Aleksey Kudrin and Herman Gref, regarded it as a threat to financial stability. They calculated that the budget would lose over 360 billion roubles and claimed that the stabilization fund was meant not for ensuring tax experiments. The premier retreated.
Another plan has nothing to do with liberalism. Its author, Herman Gref, told our magazine's correspondent about it. It turns out that the main problem preventing economic growth is a limited infrastructure. The minister believes that it cannot be solved by private investments, in his view, government investments are needed. And since their only source is the stabilization fund, the ministry suggests to increase the cost of cutting off (if the price of the barrel of oil on the market exceeds this cost, then all petrodollars received as a result of the difference between the actual price and the cost of cutting off are added not to the budget, but to the stabilization fund) from $20 per barrel today to $27 in 2006.
The government is not happy about this. Aleksey Kudrin, the Minister of Finance, is responsible not only for the budget, but also for inflation, this is why he'd be happy to leave the present cost of cutting off as it is , in order not to touch the stabilization fund, but he is forced to take into account the President's demand to increase the wages and salaries of the employees in the budget sphere and old-age pensions by 2008. The budget will need money for the purpose which will be taken from the stabilization fund, for which the cost of cutting off, according to the estimates of the Ministry of Finance, should reach $25.
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| Photo: Ilya Pitalev |
| Crystalina Georgieva, head of the World Bank office in Russia, thinks that the state should listen to the Economics Ministry to ensure further development. |
The head of the World Bank office in Russia, Kristalina Georgiyeva, maintains that the government should heed the Minister of Economic Development in order to develop the country's economy properly.
When economic goals are sacrificed to social ones, with the understanding that the latter will not be achieved because of inflation, these actions are called populist. Kudrin tries to smooth over the picture, insisting on not borrowing more money from the stabilization fund, consequently, it's not permissible to raise the cost of cutting off higher than $25.
However, Herman Gref is not alone in favouring infrastructural state investments from the stabilization fund, he is supported by the Minister of Industry and Energy, Viktor Khristenko. Premier Mikhail Fradkov also tends to favour the idea. If this plan is implemented, inflation will definitely be bigger, but growth rates will hardly increase. And not only due to inflation: infrastructural projects by definition are long-term and often ineffective.
When the government refused from stepping up economic growth by lowering taxes, its efforts should have been directed to curbing inflation. First, because this would have prompted economic growth. Secondly, because the initial plans of the government for lowering inflation were quite ambitious. By 2008 the government promised to lower it to 3.5 – 5%. However, this plan proved unrealizable already this year. Price increases were initially planned at 8.5 – 10%. But already in the first quarter of this year prices went up by 5.3%. And officials began to talk of the very difficult task to keep them within the 10% limits. And the only efficient instrument of curbing inflation is the stabilization fund. This is admitted by Sergei Ignatyev, the head of the Central Bank, Herman Gref and Aleksey Kudrin. But there is another task facing the stabilization fund now, namely, to double the pensions and salaries of employees by 2008, and this contradicts the promise to lower inflation up to 5% by the same deadline.
In a conversation with the magazine “Dengi” correspondent, Herman Gref mentioned another instrument to curb price rises, namely, the power of conviction. The minister believes that one of the motive forces of the growth of prices in Russia is the inflation of expectations. In other words, if the consumer is being told about growing inflation all the time, he will definitely provoke a rise in prices by his behaviour. Thus, the minister hinted that it was not the authorities who are responsible for a rise in prices, but journalists.
Alexey Shapovalov
All the Article in Russian as of Apr. 11, 2005
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Photo: Alexey Kudenko
