Mikhail Delyagin: Pestilence, starvation, capital outflow and worsening of the payment balance

Capital outflow is still one of the determining factors in Russia’s development. According to official estimates, the capital outflow made up $205-285 billion over 1988-1995; over 1994-2001 the unofficial outflow reached $169,8 billion.

Despite the small currency inflow (the balance of current operations on the external account lost 26.1% in 2001), the reduction of the unofficial capital outflow was insignificant – from $22,0 to $21,1 billion (4,1%).

As a result, as compared with the year of 2000, the share of earned capital removed from Russia increased from 19,0% to 61,7%. The main reasons for the capital outflow remain the same – the government in still reluctant to solve the key strategic problems: vulnerability of the property, arbitrary rule of the monopolies, degradation of the depressed territories and decay of the state machinery. That is why the economic subjects have no sources to invest the earned money.

Here are the new reasons for the capital outflow:

- intensification of corruption that has assumed a systematic, institutional character (for example, the new privatization law and probable repayment of Russia’s debt to Czechia through the Falcon company and RAO UES of Russia) and has considerably exceeded the scale of the one fixed over Yeltsin’s presidency. Businessmen say, bribe-taking of the Russian authorities doubled over 2000-2001, and this is at the time when reduction of paper work in the authorities is so much spoken about.

- liberalization of the currency management, that is considered as a total amnesty for all tricks with the capital;

- worsening of prospects of Russia’s economy caused by the state’s unwillingness to react to the reduction of oil prices.

Worsening of Russia’s prospects is connected with the external account’s worsening.

Import is steadily increasing in Russia: it gained 17,8% in 2000 (services are included as well), and 18,5% - in 2001. Russia’s export gained 24,6% in 2000, but lost 2,1% in 2001 (decreased by 2,4% in the third quarter of the year and by 15,6% - in the fourth). As a result, the positive balance of the current operations lost 26,1% in 2001 (from $46,3 to $34,2 billion). The downturn was steadily growing: by 3,4% in the first quarter, by 13,8% - in the second, by 27,6% - in the third and 2,3 times – in the fourth quarter of 2001). The reduction of the currency inflow at the stable outflow means unrestricted devaluation, probably in 2003-2005 (it depends upon the situation). And this is all despite the incredible gold and FOREX reserves and foreign loans.

The year of 2002 will face a different danger: a reflexive strengthening of the financial policy that is on a currency board principle oriented on currency inflow. The financial policy was extremely strict when the money was frozen in the budget (idle remains of the federal budget gained to 264,3 billion rubles by October 1, 2001). The money supply reduced 0,1% in November’2001 for the first time since August’1998 (except for the January reductions). Over January – November’2001 the money supply gained 25,8% (the increase made up 42,1% over the same period of 2000 and 39,4% - in 1999). The liberal fundamentalists want to restrain the monopolies-caused inflation by strengthening of the financial policy. The line has proved to be a failure (the inflation rate made up 0,6% in September, but it gained to 1,1% in October, to 1,4% - in November and 1,9-1,9% - in December). The line has also worsened the financial result (earnings minus losses) of the Russian enterprises: the result over January – October’2000 was 1,9 times higher than that one over 1999, but the result over January – October’2001 was 6,5% lower than over the same year-ago period). The worsening of the financial result in the current prices reached 2,4% in August – September and 26,5% - in October.

Increase in the number of unemployed people also reveals the industrial worsening. It started in June and has already reached the showing of 232 thousand people, including 100 thousand people in November (the unemployment gained from 8,5% to 8,8%).

The arrears of wages gained 6,3% over September – November, and 9,8% - since beginning of the year. The arrears at the enterprises gained 12,7% since beginning of the year.

These tendencies may make the current year a pre-crisis one.

The situation can be improved by settlement of the structural problems: restructuring of the government and the presidential administration are to be started. This is to become a measure necessary for a successful work. For a quicker improvement of the situation liberalization of the currency regulation is to be limited (other forced liberal reforms are to be restrained too, including reform in the housing and communal economy and Russia’s entry into WTO) and export is to be stimulated. Import of goods to Russia is to be limited only in case when Russian businessmen submit feasible programs for revival of the domestic enterprises. Certainly, it is necessary to work out programs for development of regional productive capacities. Direct state guarantees are to be provided to compensate insufficient property protection and excess of the investment cycle over the political stability’s cycle. Off-budget stimulation of investments (for example, the Central Bank’s stock-taking of the 1st class borrowers’ loan notes) will detain rubles in the production sphere and make the capital inflow inflationary safe.

Mikhail Delyagin PRAVDA.Ru

Translated by Maria Gousseva

Read the original in Russian: http://www.pravda.ru/main/2002/01/19/35746.html