Commentary, 07.11.2013

Sergei Ivanenko, famous economist and member of YABLOKO’s Political Committee comments on the government’s plan to fully spend the National Welfare Fund (NWF).

YABLOKO proposed to establish a reserve fund in early 2000s. Then the government supported the idea, but as usual gave it for their own. The idea was that huge oil and gas revenues our country began to get at that time should not be “eaten up” completely, but only a half or two thirds of the amount should be spent.

Today’s oil prices have remained on a very high level – USD 100-120 per barrel, sometimes they even rose to USD 150. A mechanism was developed that an amount, say, exceeding USD 80 per barrel had to be allotted to the reserve fund via export duties and other taxes, and the reserve fund virtually froze these funds and kept them on the Central Bank accounts. The money was kept in first-class assets – in American and European banks and bonds of large companies. This led to the situation that in 2000s we turned into one of the world’s leaders in foreign currency reserves that amounted to USD 500-600 billion.

In early 2000s the position, including that of Vladimir Putin, was as follows: we should not “eat up” this money, as one can never know what may happen. The crisis of 2008-2009 demonstrated that this point of view was justified. And these means were really used for “plugging the holes”.

Today, people supporting another point of view which can be reduced to the following: money should not be saved, it must be spent, came to the leadership of the Russian government’s economic bloc. And [according to them] the money should be spent on public investment.

As there is a point of view that public investment, as opposed to private, is able to improve the economy as a whole. And the production system should be encouraged by strong public investment, especially in infrastructure projects – roads, energy, global communications system and so on. This is done, for example, in China and Japan. This point of view certainly has a right to exist, it represents the ideology of the state capitalism which has a lot of supporters.

And the [Russian] Reserve Fund has been already divided into a proper Reserve Fund and the National Welfare Fund (NWF). As it was reported, the NWF was primarily intended for covering of the Pension Fund deficit.

In general the Pension Fund must be financed from insurance deductions from wages. However, these funds are not sufficient and the Pension Fund annually completes its work with a very large deficit, which is replenished from the state budget. So it was decided to allocate a special source from which the money will be used for pensions. Maybe this is a forced measure, however, it should have time frames, because anyway a sound pension reform must be developed and implemented.

However, today it is proposed to use the NWF on almost anything. Vladimir Putin has already promised that the money from the Fund will be allocated to three large projects – the reconstruction of the Tran-Siberian Railway, Trans-Baikal-Amur Mainline and construction of the Central Ring Road in the Moscow Region. And these promises, apparently, have been already laid in the NWF budget.

The fact that they begin spending the money from the state reserve, which was kept for over ten years as an important resource ensuring Russia’s solvency, on the goals that must be virtually financed from the state budget, are short-term and are not connected with the targets of maintaining stability of the whole economic system.

It is obvious to everyone, that Russia’s economy is stagnating and there are no good prospects in sight. However, an attempt to stimulate economic growth with the methods of state capitalism is, in my opinion, inefficient in modern Russia.

We should not look at China, Japan and other countries that have been successfully implementing similar large-scale public investment projects. The specifics of modern Russia is that any public money is simply stolen, the level of corruption exceeds by several-fold the level of corruption that always exists in such economies.

According to the Russian experience, the level of corruptive “cuts” in the construction of roads, exceeds 50 per cent of the contract price. This leads to such a situation as the construction of a road in Skolkovo, where huge money was spent, and the cost of the road was, according to some estimates, up to USD one billion per kilometer. And two years later, the road got out of order and required repairs.

There are so many doubts that public investment will be able to give the required efficiency. Some experts believed that when the Moscow Ring Road was built which was more than ten years ago, the price of a square meter of the road was comparable to the price of one square meter of housing, which was USD 200. Such “golden roads” lead to very serious consequences in the economy.

So I would not hurry to spend the Reserve Fund.

We must remember that the Reserve Fund has played a large role, as the crisis of 2008-2009 passed without catastrophic effects [on Russia], because most of foreign currency reserves was simply spent on supporting financial institutions and large companies. Clearly, this was first of all help to the oligarchs, but as a result the economy did not collapse.

Russia is not immune from the global crises, our economy is peripheral, depending on raw materials, and it also depends on what is happening in the world. We are a country which only supplies raw materials for the world economy.

We need to carry out reforms targeted at combating our giant corruption. Corruption will eat up any investment projects, no matter how beautifully the government would justify their need.