Prime Minister Putin wants to invest our pension savings in oil and gas.
Vladimir Putin seems to have settled down to his job of prime minister and has moved on to manual control of the economy in the same way as he was manually building the vertical power structure as president. First the Prime Minister was in the front ranks of the advocates of a drastic cut in the VAT, now he is preparing to solve in one fell swoop the problem of pension savings that are managed by the state.
The problem has its roots in the structure of the pension reform carried out five years ago. To recap, it was decided at the time to direct part of the single social tax not into the common kitty but to leave it in people's individual accounts so that they could use that money when they retire. It was assumed that the money would not just accumulate, but would be invested in financial assets and grow into a tidy sum over several decades.
In theory, every person had a chance to choose at his own peril the company that would manage his pension savings, or, by default, leave the money to the state-owned Vnesheconombank. In practice 95% of citizens fell in the "say nothing" category. It means that the state has the responsibility of increasing these savings, or at least not losing them.
Under the law Vnesheconombank (VEB) had the right to invest the money in a limited number of assets, mainly the bonds issued by the Russian Finance Ministry. At the time, in 2003, the strategy appeared to be reasonable. It could work - and it did work - as long as inflation in Russia was going down. That enabled VEB to ensure at least a minimum growth.
But over the past two years inflation in Russia has been growing and the savings of the "say nothing" citizens naturally depreciated. There are two options for rectifying the situation: increase the yield on Finance Ministry bonds (thus rebuilding the GKO pyramid, which collapsed in 1998) or enlarge the roster of assets in which VEB is allowed to invest pension money.
Putin apparently opted for the second way and indeed personally determined the enlarged list. In the Prime Minister's opinion the best guarantee of preserving and increasing the savings is to invest them in the oil and gas sector. This seems logical today as oil and gas prices rise, but in the long run it is a very risky move.
Investments in an industry whose well-being directly depends on international prices can hardly be described as conservative or safe. Yes, the price of oil has increased more than tenfold in the last ten years. This fact may prompt different conclusions, not the least of which is that the oil price has a colossal potential for falling. This is not about how soon it may happen and how big the fall will be, etc. The fact is that such a fall is possible and so any investments in the energy industry are risky.
This is not to say that one should not invest in the oil industry, but it is not a wise decision to invest all of one's assets or even a large part of them in this sector. I remember that when I was an intern and was collecting comments, every analyst kept drumming it into my head that you cannot put all your eggs in one basket. That is right. That is as natural as not taking to the wheel if you are drunk or turning off the iron when you go out. It's an elementary precaution.
In addition to the general macro-economic arguments there are some factors unique to Russia that dictate great caution in assessing the prospects of investing in the Russian oil and gas sector. Most big companies, both private and public, are burdened with heavy debts and have problems servicing and refinancing them in the context of the global financial crisis. Rosneft practically presented an ultimatum to the Government in spring to bail it out to avoid the prospect of a technical default. And who can guarantee the safety of the pension money?
In this scheme of things it will not be Rosneft that will rescue the savings of pensioners against inflation but, on the contrary, our savings will help Rosneft to stay afloat. The same is true of other Russian "energy monsters". For example, if the Government chooses to invest not in the oil and gas sector in general, but specifically in Rosneft or Gazprom bonds issued to redeem the existing debts. I am not suggesting that this was the Prime Minister's original aim. But for now it is a possible consequence of the idea he has articulated.
P.S. The moral for all of us is that "to say nothing" is not the best way of building our relations with the Russian state.
By Alexei Polukhin, editor of the economics desk