Natural rent: The controversy continues

Russia is the wealthiest country in the world in terms of natural resources

It boasts one-third of the world's gas and coal, and 28% of the iron ore. Russia leads the world in forest stocks (25%), while Russia's oilmen claim that it may account for up to 13% of the world's oil reserves, with half of them already confirmed.

It stands to reason that people living in such a country need not experience serious material problems. But this is not the case. According to State Statistics Committee estimates, about one-third of Russians live in poverty, with millions having an income below the subsistence level. On the other hand, companies exporting raw materials prosper. Oligarchs such as Roman Abramovich (oil), Vladimir Potanin (nickel), Mikhail Fridman (oil) and others are extremely rich people not only by Russian, but also by world, standards, as their fortunes have been put at hundreds of millions and even billions of dollars.

Workers employed by the corporations involved in the raw materials sector are also well off. The average wage in the oil sector is four to five times higher than the nationwide average. This is not a matter of an oil well worker putting in five times the amount of effort expended by a rocket designer, a surgeon or a university professor.

This is the basic information for promoting an increasingly popular idea in Russia about resource use. Raw materials are a gift from nature or God, which depends neither on labour, intellect, nor even capital investment, but enables the primary corporations to build their prosperous "state within the state".

The sectors concerned usually also agree that formally, according to the law, the country's natural resources are public property, and every citizen may claim his or her piece of the pie. But these sectors have not been in a hurry to share with others until recently.

Deep resentment of the unjust share-out of the money made from resources in Russia has existed at all times, but the State Duma election campaign (voting is to be held on December 7) has suddenly catapulted the theme to the fore of debates.

"The country's natural resources must belong to the entire nation," said Boris Gryzlov, leader of the United Russia party, a month before the elections. He immediately became the man of the day. The party's ratings soared. Previously, only the Communists had been so blunt. But they have been and remain in opposition, their political prospects are dim and their prestige far from assured. United Russia is a different matter. The party is the election race favourite (opinion polls credit it with up to 35% of the vote at the moment), and Russia's extremely popular president calls it his main political bulwark.

In brief, what United Russia is saying is this: the unearned super-profits obtained by raw materials oligarchs that fell into their lap during the Boris Yeltsin years, must be contributed to the state budget, and from there channelled into social programmes, regional development, and making national industry more modern and competitive. This is what is called "natural rent." Apart from everything else, this would also be a step towards resolving part of the poverty problem, a key task set before Parliament by Vladimir Putin. Economist Dmitry Lvov, who has been advocating natural rent nationalisation for years, claims that it can double Russian budget revenues (which are currently running at about 80 billion dollars). The consequences would include political stabilisation and a powerful boost to economic development once a considerable part of the tax burden is lifted from the economy.

"By using natural rent, Russia might in general do without any labour and capital taxation, abolish value added tax, abolish or at least drastically cut profit tax, free companies from paying into the pension fund, and the bulk of the population from income tax," Academician Lvov argues. He is convinced that the elimination of traditional taxes will improve the investment climate in the country, and lead to large-scale modernisation of fixed production assets, which are at least half obsolete.

The economist's case for his revolutionary ideas is that among production factors in Russia, labour and capital, which he suggests should be freed from taxes, contribute too little to GDP growth. This is particularly true of labour: its contribution, as calculated by Lvov, is no more than 5%. Capital in Russia is more productive, as its share in the domestic product is estimated at roughly 20 to 25%, but compared with the productive force of Russia's nature this is not much either.

"Russia lives off its resources, and so its budget must be 70% or so made up of the rent from them," Lvov asserts. But his opponents are sceptical. Doctor of Economics Grigory Yavlinsky, leader of the Yabloko party, believes that the economist's calculations regarding the budget's doubling thanks to rent are ten times too high. Considering that the natural super-profits will most likely be redistributed by the corruption-prone state bureaucracy, the positive effect for the population and economy, in Yavlinsky's view, may be zero.

There are other difficulties, too. One, according to Academician Viktor Ivanter, is that even if the state obtains all the resource rent from the primary producers, it will not be able to "digest" it all, i.e. use it appropriately. The result would be runaway inflation, rather than the creation of modern branches of production. The paradox is that, on the one hand, Russia needs finance to invest, but, on the other one, the state guided by a liberal economic model shuns any large-scale investment activity, believing that this should be the job of private corporations. In other words, those same primary resource companies which accumulate most of the money from resource use should do it.

But they, unfortunately, are not rushing to invest, or rather, trying not to overdo things, and instead of investing in production, live in style. The episode of Roman Abramovich, one of Russia's wealthiest men, buying the British football club Chelsea made headlines all over the world. The press has now picked up on Abramovich's 122 million dollar five-decked yacht and his plans to buy a hotel complex in Switzerland.

"Why not in Russia?" wonder millions of ordinary Russians. The answer seems to be a foregone conclusion. Enterprises comparable with raw materials production and exports in profitability simply do not exist in Russia. And so, after investing required sums into their own super-profitable sector, the oligarchs prefer to avoid anything else.

It is quite likely that the state will have to step in, however unwilling it may be to do so. Following the nationalisation of the natural resource use, which is practically a decided issue, something will have to be done with the super-profits.

Yuri Filippov, RIAN