Independent expert's report
The global economic crisis and the effect it has on Russia have been widely discussed by our media organisations. Today, we will give the floor to two radically different points of view, two voices which do not belong to supporters of the Government's policy. We offer you several excerpts from a report by politician Boris Nemtsov and economist Vladimir Milov (text is given according to the website www.nemtsov.ru), and some commentaries by economists Vladislav Inozemtsev and Nikita Krichevsky, known for their articles published in many newspapers, including Nezavisimaya Gazeta. We hope that this article, regardless of the offshoots of our political discourse, will serve as a useful exchange of views.
Official propaganda states that the crisis was a product made in the United States, and that we should blame the mistakes of the American Government for all our troubles. Yes, the crisis did originate in the US, but its effect on Russia was much more serious and painful than it had on the West. The deep devaluation of the rouble, which is over 50%, 75% stock market crash (only 40% in the US), 29% budget deficit in December 2008, [...] over 1 million of unemployed, a steep decline in real wages, growing poverty and the destruction of the middle class. [...]
The crisis started in the US and several western countries.
[...] And so, the virus of the crisis hit the US and other western countries, first and foremost Great Britain, and began spreading all over the world.
But it turned out that different countries have different economic immunity. Some can cope with the crisis easier, but in Russia, which has economic immunodeficiency, the economy has simply started to collapse.
The development of the crisis in Russia
[...] Let us start with rouble devaluation. From the summer of 2008 to early February of this year, the rouble fell by 50%, from 23.5 to 36 roubles for one dollar. The causes of devaluation are well known: Russia is an oil country, and its national currency is tied to the price of oil. The cheaper oil gets, the cheaper the rouble. During Mr Putin's rule, Russia's dependence on oil grew significantly. In 2000, oil and gas accounted for 30% of the country's exports; in 2007, it became 65%. The share of oil and gas revenues in Russia's budget was about 25% in 2000, while it was 50% in 2008.
The rouble turned out to be absolutely unprotected during a steep decline in prices of rough materials, and all attempts to maintain it were expensive and risky undertakings. It is obvious even to a non-expert that during a decrease in currency inflow caused by a crash in oil prices, hard currency is in deficit, which means that one has to pay more roubles for it.
But the Russian Government led by Mr Putin decided to keep the rouble exchange rate by all means. They spend enormous sums from the country's gold and currency reserves: over $200 billion. And what did we get? Money wasted, the rouble falling, the economy collapsing. [...]
On February 5, 2009, the rouble exchange rate to the US dollar was 36.01, down 55% from August 1, 2008. All this time, the Russian authorities have been telling us a barefaced lie: "there will be no rouble devaluation."
The collapse of the rouble and the banking crisis are connected not only with falling oil prices. During 2008, the capital flight accounted for enormous $130 billion, which is two times more than capital inflow in 2007.
Stock markets crash
Not so long ago, Mr Putin persuaded citizens to buy shares of Russian companies. First, he agitated for investing in Rosneft shares. On October 27, 2006, Mr Putin said in Novo-Ogaryovo that 115,000 Russian citizens took part in the public offering of Rosneft shares in July 2006, which, according to the Prime Minister, contributed to the company's stability.
During two and a half years after the public offering of Rosneft shares, their cost fell by 55%. Those who bought the shares, lost 55 kopecks from every rouble they invested in the company.
Then people were told to buy Sberbank shares, then those belonging to VTB. Tens of thousands trusted the Government and bought shares in Sberbank and VTB, whose price has collapsed since that time. Now they cost about 14% of the price they were sold at.
Giving privatisation cheques (vouchers) in comparison to this is an example of honesty. At least, people were given vouchers for free, they did not lose anything, and some of them even earned some money. And what do we have here? Hundreds of thousands of people paid enormous sums because they trusted Mr Putin, and they were fooled.
The crash of the Russian stock market was a catastrophe. The market lost 75% of its price during the crisis. Now, all Russian companies cost less than Gazprom alone in May 2008. In the US, the homeland of the crisis, indexes fell by 40% in 2008. It is impressive, but nevertheless two times less than in Russia. And what did Mr Putin do? He allocated as much as 175 billion roubles to Vnesheconombank, which guardianship board he chairs, allegedly to support the stock market.
And so what? The market started falling even faster. Since mid-September, when the Government announced its plans to allocate money to support the stock market, the RTS decreased more than two times: from 1,300 to less than 550 points. Where did the money go, who controls spending, and why they allocated the money at all? Who will be responsible for the squandering of our money?
175 billion roubles were allocated from the National Welfare Fund. This fund is sacred, for it was created to finance pensions in case of a pension deficit. The Finance Ministry's website (http://www.minfin.ru/ru/nationalwealthfund/mission/) says, "The objectives of the National Welfare Fund is to provide co-financing of voluntary pension contributions of Russian citizens and balancing (covering the deficit) the budget of the Russian Pension Fund."
How much more incompetent, dishonest and cynic should people be to waste this money on swindles? Where are our valiant law enforcement agencies that vigilantly control the spending of the money from the National Welfare Fund? Improper spending of budgetary funds is applicable to Articles 285.1 and 286 of the Criminal Code of the Russian Federation ("Improper Spending of Budget Funds" and "Abuse of Authority") should bring a criminal prosecution against the officials guilty of misusing budget funds, which are supposed to be used as pensions. [...]
Why does money run from the country?
1. It all started with another raid by Mr Putin on business that involved the companies Mechel, TNK-BP, and the raiders' seizure of the Euroset company. Investors who were vainly waiting for a thaw when Dmitry Medvedev came, witnessed new evidences of the fact that the objective of Putin's regime is to forcefully deprive entrepreneurs of their assets. Capital began to fly from the country in as early as July.
2. The situation deteriorated after the Russian-Georgian conflict and the recognition of Ossetia and Abkhazia's independence. Harsh confrontation with the West, unprotected business, and lawlessness did their work: money started leaving Russia. And when the crisis came, money flew form the country with redoubled energy. Who dares to keep money in a hostile, unpredictable country?
3. Business does not trust the Government, which spends all the time lying about the crisis and depriving enterprises of their assets. Only the Government's friends were provided support.
Banking crisis
[...] The banking crisis is a result of a very high dependence of Russian banks on foreign loans taken on long term basis and at low rates.
Russian banks took cheap western loans and offered them to Russian citizens and companies at high interest rates. Millions of consumer loans and one million of mortgage loans were given. When western banks started experiencing problems, they stopped crediting the Russian ones, and the country's banking system got a huge hole.
Loans were given, payments not received, no money to cover the deficit. Bankers came to Mr Putin and begged for help. He allocated enormous $200 billion to support the banking system. The money was supposed to provide stability of the banking sector and credit the economy. It did not happen. Because instead of giving loans bankers converted the money into currency. Why? During the devaluation, the revenues from currency conversion were 1,000% per annum! In the end of January-February 2009, a virtuous circle appeared: the Central Bank gave rouble loans to banks, the banks converted roubles into currency, the Central Bank threw out from $10 billion to $30 billion a week from the gold and currency reserves. The rouble was falling, so was the economy, and the reserves were melting away.
How Mr Putin helps oligarchs
Those industries based on bank loans, such as construction, metallurgy, machine building and trade, were affected the most.
Over 5 trillion roubles allocated by Prime Minister Putin to support the economy at the beginning of the crisis mostly went to banks. The real sector and manufacturing enterprises did not receive the money because banks preferred to keep it or buy currency instead of giving loans.
No loans are given, so construction projects are frozen, blast furnaces do not operate, railway traffic decreases, and enterprises stop working. A decline in industrial production in December 2008 was 10.3%. [...]
The decrease in production leads to unemployment growth. Since the beginning of the crisis, over 1 million people in Russia have lost their jobs. According to Yevgeny Gontmakher, the renowned Russian social policy expert, there will be 10 million unemployed people in the country by the end of 2009 (now 5.8 million).
And what does Mr Putin propose? Set up unemployment benefit at 4,900 roubles. A simple humiliation, no comments needed.
But whom does he really help? Oligarchs. One of the first decisions he made after the crisis broke out was to reduce taxes for oil companies by about $6.5 billion by 2009. Apart from that, Mr Putin has increased the unified social tax from 26% to 34%. This is a tax on people's salaries. They have been reducing steeply enough, and the Government decided to increase the tax. It is nothing but inadequate actions directed against most of the country's residents.
Meanwhile, quietly and without explanations, Mr Putin gave loyal Oleg Deripaska $4.5 billion to gain personal control over Norilsk Nickel. The company's workers did not receive a single kopeck from this sum. [...]
All in all, Mr Putin allocated 1.3 trillion roubles through Vnesheconombank to settle external debts of corporations and banks in 2008 and 2009. Such a vast sum was allocated from the National Welfare Fund. It's worth reminding ourselves that the fund was created not to provide support for bankrupt oligarchs but to pay pensions to retirees.
Mr Putin uses our own money to repay debts of banks and corporations. [...]
Budget
It all started when Prime Minister Putin and other high-ranking officials announced that there was no crisis in Russia. "There are some difficulties, but it is not a crisis," Mr Putin said in the autumn, while other Russian officials called Russia "an island of stability" at the background of the global economic downturn.
The apotheosis of the Government's incompetence was the adoption of the 2009 budget. The budget was approved in the autumn when the crisis was raging in the country, and was based on absolutely unrealistic criteria:
- inflation rate in 2009 - 8.5% (in 2008, it was 13,3%, forecast for 2009 is 13%);
- rouble exchange rate - 24. 7 roubles for one dollar (!!);
- 6% GDP growth (now the Government admits that GDP will fall in 2009);
- oil price - $95 for one barrel (!!!), budget surplus at 3.7% (now we are talking about budget deficit at least at 7-10% of GDP).
The State Duma docilely adopted the budget. On November 12, when the Federation Council gave its approval, one barrel of oil cost $50. It was clear that the budget is absolutely false, and they needed to adopt another one, because no one was going to implement it. For the first time since 1991, Russia has entered the year 2009 not having a budget. The new project is based on more realistic figures, but nevertheless, we wait for a budget deficit of 2.5-3.5 trillion roubles and a deficit in the Pension Fund of 500 billion roubles. Thus all the reserves (as of February 2009, budgetary reserves were roughly $200 billion) that were collected during recent years from the oil revenues will be spent in 2009. The safety factor of the regime is one year, and if the crisis continues, Russia will have no money to pay pensions and salaries. Behold, this is Putin's stability and the price we paid for his power and the power of his corrupt clan. [...]
Increasing tariffs of natural monopolies
Mr Putin, intending to support oligarchs and monopolies, decided to increase the tariffs of natural monopolies. Electricity tariffs will grow by 27.5% this year, gas tariffs by 25%, railway transportation rates 18-20%.
Increasing tariffs on gas and electricity will inevitably affect utility rates. They will grow at least by 30% during this year and will be growing every quarter like gas and electricity, boosting inflation. In January 2009, inflation rate was 2.4%, even higher than in 2008.
Crisis and censorship in the mass media
When the economic crisis began, the authorities ordered the media not to use the word "crisis." Just as in the Soviet times, "they have a crisis and we enjoy stability and prosperity."
Then, in late autumn, the Government admitted that Russia has entered into a crisis, i.e. recession, and began to give information, but only in small portions. The most important corrupt decisions were under strict censorship, especially on TV.
[...] The anti-crisis measures were not discussed publicly, which led to a large-scale squandering of the country's vast resources, coupled with corrupt and harmful decisions.
Our proposals
A disappointing conclusion:
The closed, authoritarian and corrupt state model authored by Mr Putin has turned out to be ineffective in dealing with the crisis. No objectives were achieved, huge resources wasted. The corrupt system is helpless in combating the crisis. Apparently when the state is weak and corrupt, when laws do not work, and all decisions are made behind closed doors, the effect is minimal, or even negative. [...]
In other words, today's Russia needs a large-scale political reform.
[...] In order to combat the crisis, the united democratic movement Solidarnost [Solidarity] proposes:
1. Providing financial state support directly to citizens, not corporations:
[...] This will help to support the purchasing power of people (domestic demand) and will prevent the increasing looting of state funds by lobbyists.
2. Reducing budget expenditures on the Government, special services and support for state enterprises to create conditions for lowering VAT; abandoning the planned increase in the unified social tax; announcing tax holidays for small business:
[...] An increase in the unified social tax from 2010, announced by Putin's Government, will deal a lethal blow to Russian business, in particular, the small and medium-sized businesses.
3. Ending the deceiving of citizens about "no rouble devaluation" and the wasting of international reserves of the Central Bank on the artificial support of the rouble:
The artificial support of the rouble leads to the cheapening of imports and wasting of the Central Bank reserves. We need to transfer to the floating exchange rate of the rouble, when it is set up without the Central Bank's participation (apart from smoothing speculative fluctuations, when the rate sharply changed within one day). This will defend the country's economy from external shocks (falling oil prices, etc) and will keep the Central Bank's reserves for other purposes - it is better to use money to support citizens directly during the rouble devaluation than to waste it desperately on trying to maintain the exchange rate.
4. Combating growing prices; lowering budgetary costs (see above); abandoning the increase of utility rates and infrastructure monopolies rates; demonopolising the most important markets. [...]
5. Abandoning the protectionist policy which turns Russian enterprises into "companies in charge of wheedling money out of the state;" abandoning the increase of import car duties.
6. Developing real infrastructure projects, i.e. construction of roads and airports instead of issuing "infrastructure bonds" to finance the construction of a useless oil pipeline to the Pacific Ocean; implementing political reforms directed at strengthening public control over the spending of money on infrastructure projects [...].
7. Implementing a programme to support the development of food production of agricultural companies to eliminate negative effects of imports appreciation;
Providing agricultural enterprises with free access to the cities' food markets and distribution networks, combating monopolists in the sphere of food purchasing and food trade, developing competitiveness through supporting farming enterprises and private farms, and establishing consumer and sales agricultural cooperatives.
8. Abandoning censorship concerning the crisis; abolishing repressive trade unions legislation. [...]
What comes next?
Vladimir Putin's actions during the crisis were in fact directed at providing support to a narrow circle of oligarch structures that are being given vast resources. This money is not spent on the revival of the economy, financing of new projects, paying salaries - it goes abroad, to the foreign exchange market, to save the oligarchs close to Mr Putin.
At the same time, the rouble has been losing value, unemployment growing, GDP and industrial production falling, as well as people's salaries.
Russia does not need such an "anti-crisis" policy.
We need to save the economy, not oligarchs.
The anti-crisis measures proposed by the Solidarnost movement are directed towards this goal.
When the state is corrupt, when all decisions are made behind closed doors, the effect is either negligible or negative.