Arguments, concepts, and political rhetoric
Recently, well-known opposition politicians Boris Nemtsov and Vladimir Milov released a joint report entitled "Putin and the Crisis" (presented at the Nezavisimaya Gazeta on February 20). The report once again drew the attention of the public to the deplorable state of the Russian economy and the inadequacy of many Government decisions.
While many of its propositions are indeed correct, the report's tone, numerous inaccuracies, and the obvious weakness of its conclusions leave an impression that the authors, just like many bureaucrats, do not address their arguments to a critically thinking reader. Otherwise, it would be difficult to explain the biased selection of facts, gross exaggerations, and demagogical assertions.
Numbers
In the first part of the report Nemtsov and Milov recall that "the crisis originated in the US and some other Western countries, primarily in the UK, and spread promptly throughout the world... Compared with other countries, the crisis is more painful and acute in Russia." While this is overall true, several comments must be warranted.
Let us begin with the devaluation. Is it correct that the rouble has devalued by 50%, as our experts argue? Devaluation means that a currency loses a portion of its purchasing power. How many dollars could the rouble "buy" last summer? 1/23 dollars or 4.35 cents. How many can it "buy" now? 1/36 dollars or 2.78 cents. What is the percentage of 2.78 cents in 4.35 cents? It is 63.8%.
Consequently, in this time period the rouble lost: 100%-63.8%=36.2%. This is a simple calculation that any pupil would understand. Are the authors good in mathematics? They certainly are, as they use the same methodology when calculating the Russian stock market decline. They just had to make an "error" when describing the rouble devaluation. However, during the same period, in countries where there is no Putin, other national currencies also devalued against the dollar: Indian rupee - 15.8%, Polish zloty - 23.6%, Brazilian real - 24.7%. The rouble devalued more, but it is still not an exception to the rule.
The report argues that for a long period Americans were pumping the financial bubble - the Federal Reserve policy during the entire Bush presidency "was aimed at reducing interest rates, to make loans cheaper." While the authors are experts in Russian affairs, not American, they should still know that between 2001 and 2003 the Federal Reserve reduced the annual interest rate from 6% to 1%. For the next four years, the interest rate was steadily increasing. Only beginning in the fall 2007, it started to go down again. We should be reminded here that President George W. Bush was in office from January 2001 to January 2009.
The authors also mention that the Russian stock market fell by more than 75%, comparing this figure with the decline of the U.S. stock market by "less than 40%." Using the most representative American index S&P500 as a benchmark, indications show that the stock market fell by 52.1% between 2008 and March 2009, but of course, this is just a trifle not even worth mentioning. Everyone knows that developing markets are more volatile. Take China, for example. The reserves there are not given to waste, and a recession is nowhere near; still, the Chinese stock market fell by 72.1% between October 2007 and November 2009. The authors, however, are not interested in China.
Our economy is too dependent on raw materials export. This is, of course, true, but the following statement is clearly inaccurate. The authors argue that "while in 2000, oil and gas accounted for 30% of the Russian exports, in 2007 the share was 65%; in 2000, oil and gas revenues in the budget accounted for 25%, while in 2008 this figure was over 50%." In reality, the changes were not as big: the oil and gas export share increased from 50.3% to 61.7%, while the revenue - from 36% to 51%. While this does not justify Mr Putin, under whose leadership the two thousands became "a lost decade" for Russia, it also does not give credit to Nemtsov and Milov.
The authors would like to hold the current authorities accountable for the failure of the Russian economy during the recent months: "industrial output decline as of December 2008 amounted to 10.3%; housing completion rate fell by 4.5 times compared with 2007."
While this is agreed as true, the economic downturn has been experienced not only in Russia. In Germany, South Korea, and Taiwan, where Mr Putin is not the President or the Prime Minister, the industrial output in December 2008 fell by 12%, 18.6%, and 26.3% respectively. The number of new housing projects in the U.S. as of January 2009 was 4.6 times less than the number in December 2007. There is no demand for coal, steel, aluminium, and construction materials throughout the world. Nowhere in the world is there large-scale housing construction, but Mr Putin has nothing to do with this.
Accusations
It is clear from the title of the report that the root cause of the country's economic woes is the Prime Minister. Granted, the authors of the report are known to be harsh opponents of the Prime Minister. Still, if they accuse Mr Putin of certain misdeeds, they should be extremely accurate and consistent while presenting their arguments. Let us consider some of them.
Looking first at devaluation, Nemtsov and Milov accuse the authorities and Mr Putin personally that they lied to the people about the stability of the rouble and the financial market, while at the same time devaluing the national currency. It is true that the Government was too slow in reacting to the financial crisis in the fall and winter of 2008/2009. The rouble exchange rate issue was not thoroughly thought out, and there was no clear strategy to support the national currency's stability. At the time, we indicated that such policy was unacceptable and that urgent measures were necessary to control the currency market, preclude the capital outflow, and contain the course of devaluation as much as possible.
What do the authors suggest? They propose a "transition to a floating rouble rate, which will be determined without the Bank of Russia involvement (except for restraining speculative pressures when the rate changes sharply within the same day)." In other words, the rouble should have been set free just as it was done in 1998. The authors completely disregard the harshest social consequences of the proposed measure. Do they believe that their proposal would have made them popular half a year ago? We do not think so.
The report says that Prime Minister Putin "allocated to Vnesheconombank, where he is the Board Chairman, 175 billion roubles, an enormous amount of money, allegedly to support the stock market." According to the report, "the 175 billion roubles were allocated from the National Welfare Fund. This Fund is sacred. It was established to finance pensions in case there is a shortage of pension funds." The authors argue that these actions are subject to criminal charges under article 285.1 of the Russian Federation Criminal Code Inappropriate Use of Budget Funds and article 286 of the Criminal Code Abuse of Office.
Reference for the opposition: in accordance with the Ministry of Finance decree N 517 of October 21, 2008, the National Welfare Fund resources can only be placed on deposits and only at the "state corporation Bank for Development and Foreign Trade (Vnesheconombank)." Placing on deposits means that the resources are transferred for temporary placement. The authors would have been better off raising the state corporations issue (according to the Law On Non-Profit Organisations, a state corporation is not liable on the Russian Federation obligations, while the Russian Federation is not liable on the obligations of a state corporation), but apparently they were not interested in that.
Finally, the last example. "In 2008 and 2009, the total amount allocated by Mr Putin through Vnesheconombank for repayment of the corporations and banks foreign debts was 1.3 trillion roubles. This incredible amount of money was allocated from the National Welfare Fund." This is also not true. Vnesheconombank received 50 billion dollars not from the National Welfare Fund, but from the Bank of Russia. Furthermore, out of the 50 billion dollars, only 11 billion have been spent. The remaining funds were returned to the Bank of Russia.
Apparently, the authors believe that since the public accepted the Government rhetoric, it will also trust the opposition's stand.
Oligarchs
In the section on oligarchs the report should have discussed how in the previous years the "big boys" were paying dividends to themselves. For example, at Uralkaly owned by Mr Rybolovlev the dividends amounted to 50.2%; at the Nizhny Tagil Metal Factory owned by Mr Abramovich - 89.6%; and at the Oskol Electrometallurgical Factory owned by Mr Usmanov - 100%. The authors could have also disclosed the foreign financing sources of the Russian enterprises - for 9 months in 2008, our companies received from offshore zones $81.5 billion, or 54.6% of all foreign loans. It would have also been very interesting to reveal the information on the founders, beneficiaries, and financial standing of at least some of the 295 strategic enterprises.
The section, however, begins with discussion of bank loans. "The industries that suffered the most are construction, metallurgy, engineering, and trade. In other words, those industries, where business is impossible without bank loans." Construction, engineering, and metallurgy have indeed suffered; trade, however, has not. The January statistics indicate that trade was one of the few industries that showed growth (in January 2009, the commodity-based retail trade volume increased by 2.4%). Even if this is just a temporary phenomenon, the authors should not have used an incorrect example.
"Naturally, a decreased industrial output leads to an increased unemployment... What is Putin suggesting? He wants to increase the unemployment benefit to 4,900 roubles. This is just sheer mockery that warrants no further comments."
Indeed, 4,900 roubles would be sheer mockery for the authors; their drivers probably spend more on gasoline. However, for such regions as Ingushetia (the average per capita income in 2007 amounted to 4,270 roubles per month), Kalmykia (4,480 roubles), or the Ivanovo Region (5,653 roubles), the increased unemployment benefit would provide considerable support in a difficult period.
Furthermore, increasing the unemployment benefit is one of the few truly commendable Government measures, which also corresponds with international practice. Of course it would have been more efficient had the State Employment Fund not been dissolved in 2001. The agency's insurance funds could have been used to relieve the pressure on the budget. The authors, however, did not find it necessary to accuse the Prime Minister of that.
The authors argue that Mr Putin "allocated $4.5 billion to the loyal oligarch Deripaska to take under personal control the Norilsk Nickel (Nornikel) company; but the workers of the latter did not receive even a penny from the amount." It is amusing to hear about the workers not receiving their share, as the funds were allocated not for benefit payments, but to repay the company's foreign debts. As a result, Deripaska will essentially lose his share in Nornikel, as he will hardly be able to return the loaned funds to Vnesheconombank. In essence, this amounts to nationalisation, although not free of charge.
The authors continue listing the Prime Minister's anti-populist social measures. "Mr Putin proposed to increase the Unified Social Tax (ESN) from 26% to 34%. This tax is levied on people's salaries. Even though the salaries have been decreasing, the Government still decided to increase the tax. These measures can only be characterised as incompetent and aimed against the majority of the country's citizens."
In this case, the Government actions are more than adequate. Despite the ESN rate decrease from 35.6% to 26% in 2005, their share of "under the table" salaries has stayed at the level of over 44%, whereas the voluntary employee insurance spending in 2007 did not exceed 2.7% of the total employee expenditures. The Tax Code permits 12%. Hence, gentlemen, the taxes directly reflect the level of social responsibility.
Proposals
Some of the anti-crisis measures, proposed by the authors, such as decreasing bureaucracy expenditures, stopping the use of reserves to support the rouble's exchange rate, and developing domestic agriculture are important and useful. Most of the proposed measures, however, indicate that the authors show incompetency in analysing the simplest economic issues.
Nothing else can explain the proposal to have the income tax payments returned, considering that 70% of the tax is transferred to regional budgets and the remaining 30% - to municipal budgets. Besides, the previously paid taxes have long since been expended.
What else can explain the persistent promotion of someone else's idea on reducing the VAT, particularly during the crisis period when the budget deficit will be at least 8% of the GDP? How can we explain the proposal to introduce "tax holidays" for small businesses, considering the high probability that the "rested" business will disappear after the "holidays"? According to small business owners, the tax burden is nothing compared to the burden of administrative barriers and corrupt bureaucrats.
Regime Change
We would like to believe that Nemtsov and Milov are genuine advocates of their country. They see that the policy of recent years has failed to achieve an industrial breakthrough, did not guarantee political freedoms, and failed to improve the efficiency of government. Their report, however, demonstrates that the opposition, presenting unverified facts and distorting every situation to their benefit, is quick to adopt the very same method of interaction with the society, used by the Government. Furthermore, the authors are badly mistaken if they think that should a regime change happen tomorrow, it will change Russia.
We are convinced that the country's current development course needs a significant revision. Russia needs an industrial modernisation, a reformed government, and a renouncement of the individualist model in favour of socialisation principles. We are not idealising Vladimir Putin and, together with the authors, believe that he is responsible for many problems experienced by the Russian economy over the recent years. However, we do believe that our politicians, both in the government and opposition, should be honest in their arguments and capable of conceptual thinking.
Vladislav Inozemtsev, PhD Economics, Director, Centre for Post-Industrial Society Studies
Nikita Krichevsky, PhD Economics, Professor, Head Researcher, National Strategy Institute
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Russia needs an industrial modernisation, a reformed government, and a renouncement of the individualist model in favour of socialisation principles.
Vladislav Krichevsky