Russian economic miracle to stem from state-controlled capitalism

Former sources of Russia’s economic growth have been virtually used up. Annual growth in natural resources, the most profitable sector of the economy, is a mere 1.5-2%. The search for ways of bringing out an economic miracle in Russia was high on the agenda of the economic forum in St. Petersburg. “It’s about time we switched from economic reforms to economic policy,” as Russian Minister of Economic Development and Trade German Gref put it.

Speaking at the forum, members of the cabinet dispelled all the doubts with regard to an economic strategy. Despite using a milder term “government investment”, the government apparently favors state-controlled capitalism.

According to Vice Prime Minister Sergei Ivanov, “the state is ready to cooperate with business.”

In his turn, Gref specified that such sectors of the national economy as military-industrial complex or nuclear power simply could not survive without support of the state. As for the rest of the economy, Gref believes that the trend of increasing government intervention in the economy is a “dangerous and nonproductive policy. Gref pointed out that he was not referring to any global economic trends, he meant some “talented businessmen among the bureaucrats.”

In the meantime, Gref’s subordinate admitted that government investment was the only conceivable way of economic development. According to Andrei Klepach, head of department of macroeconomic forecasting of the Ministry of Economic Development and Trade, “Russia has reached a turning point, which will either lead to the formation of a new economy or a new upheaval.” A dramatic rise in investment is the solution. Investment in the Russian economy amounts to 18.8% of GDP per year. Meanwhile, average investment indicator for the CIS countries is 22.4%. The same indicator for the “Asian tigers” like Korea and Singapore exceeds 30%. “We won’t be able to tackle the problem without launching a program of government investment,” said Klepach.

Besides, all possible means should be used for stimulating the inflow of private investments in the national economy, including private investment activities at the expense of the state. “The intent of investing a part of the Stabilization Fund in the Western securities clearly indicates that we haven’t yet learned to invest in our own economy. What’s the point of taking the money from business then? Let business itself invest the money,” said Klepach.

Head of the president’s expert assessment directorate Arkady Dvorkovich believes the government still has a few possibilities to continue cutting taxes. “The taxes are still very high,” said Dvorkovich. He suggested that flat social tax rate be decreased but not before the retirement plan and health insurance reforms have been completed. Apart from the above proposal, Dvorkovish also suggested that a sales tax with the capped 10% rate should replace VAT.

Russian Finance Minister Alexei Kudrin was the only one who stood up to protect the state coffers from wasteful spending. According to him, the Russian economy’s peculiarity has to do with some factors shared by both the weak and strong sides of the economy. He referred, no doubt, to petrodollars, the cornerstone of the Russian wellbeing. On the other hand, the critical dependence on petrodollars makes the Russian economy highly vulnerable though the dependence has decreased by five times since 2000, according to Kudrin’s estimates. He is confident that increasing expenditure at the expense of the Stabilization Fund will pave the way to a catastrophe. “We shouldn’t continue making the mistakes that we’re busy making now – we shouldn’t increase government spending,” warned Kudrin. At the same time, private investment should be encouraged. “Presently a 3-year bank loan is usually lent at 15% interest, we should change the situation. A 10-year bank loan should be lent at 5-7% interest,” said Kudrin.

According to Evsei Gurvich, director of the economic expert group, there are three scenarios for pursuing the budgetary policy in Russia. One provides for super severe steps, which are likely result in the stabilization of the ruble exchange rate. Those steps will also fill the Stabilization Fund with cash and create a fund of generations to come. On the downside, the police cannot be implemented due to political reasons – opinion polls indicate that 88% of the population would rather spend the Stabilization Fund money. The second scenario is based on increased government expenditure and efforts aimed at curbing the strengthening of the ruble. The scenario will result in high inflation. The third scenario is thought be the most politically feasible. The scenario provides for increased government spending while the ruble gets stronger. The last scenario is not so radical as it may seem but it can help the government to combat the inflation, says Gurvich.

However, some economists are quite skeptical about private and government investment being portrayed as tool to save the Russian economy. “Investment won’t resolve the problem of Russia’s economic growth,” said Isaac Goldberg, a representative of the World Bank. He believes that only a half of economic growth can be explained by investments in capital assets of an enterprise. The other half depends on productivity. The issue of productivity has not been given proper attention so far. “In Russia there’s a lot of companies which fear nothing. It’s no good. Only those who are afraid of competition seek to introduce innovations,” said Goldberg.

Participants of the forum speak quite a lot about corruption, which investors believe is the biggest setback for operations in Russia. Yet the debate over corruption is mostly in broad terms. But the situation is expected to change for the better later this year. Andrei Sharonov, a state secretary of the Ministry of Economic Development and Trade, said that two anticorruption laws would be enacted till the end of 2006. The first of two laws is actually a decree to be issued by President Putin. The decree will lay down the rules of the rotation for officials. The other bill will regulate the lobbying activity. Deputy Prosecutor General Vladimir Kolesnikov proposed to take more severe steps in an attempt to uproot corruption. He called for changes in the Constitution and longer prison terms for bribing. “There’ll be no criminals left in this country if a bribe will be punished with 10 years in prison, and a very big bribe will entail a 25-year prison term,” said Kolesnikov.

Vremya Novostei

Translated by Guerman Grachev

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Author`s name Dmitry Sudakov