Prime Minister Vladimir Putin made his cabinet agree last week on a budget for
2010 that contains few anti-crisis ideas and hardly fits into the directives on
stimulating innovations issued by President Dmitry Medvedev.
As such, this budget proposal, which will be duly approved by the compliant
State Duma in September, is not necessarily a final executive order; for that
matter, the 2009 budget as executed now bears little resemblance to the
document signed and sealed last fall. Nevertheless, the budget that is
finalized now has significance beyond the usual appointment of winners among
interest groups.
Evgeny Gontmakher, an influential and controversial economist, argued a few
months back that the decision on priorities in this
budget might decide Russia's fate in no smaller measure than the coup in August
1991 or the financial collapse in August 1998.
Every budget in Putin's "era" contained a 20%-25% increase of expenditures from
the previous year, and the political decision on the 2009 budget was to
increase spending still further despite a 35% drop in income. That created a
deficit that by the latest estimate could reach 9.3% of gross domestic product
(GDP).
It was clearly impossible to continue the spending spree, so the expenditures
in the new budget are "frozen" at the current level, which still makes them
some 50% higher than the level of income. Consequently, the deficit is planned
at the level of 7.5% of GDP, which according to Putin is the limit beyond which
macro-economic stability could be affected. This stability is assured by the
"moderately optimistic" scenario of 1% growth in 2010, 2.6% in 2011 and 3.8% in
2012; these figures are taken as basic guidelines, while the "conservative"
scenario predicted zero growth in 2010 and weaker recovery afterwards.
The new budget therefore demanded clearer priorities than just small flat cuts
in every department, and the structure of expenditures proves two propositions
about Putin's policy: that he is afraid of the growing discontent within the
country and that he has no ideas on revitalizing the economy.
Much spin is put on the social orientation of the budget, but where Gontmakher
argued for investing in the quality of human capital while channeling funds
into education and healthcare, Putin has opted for various direct payments,
including a 50% increase in pensions, aiming at disarming "irresponsible"
protesters. It might appear that only cold-hearted economists could argue
against helping impoverished pensioners, but in fact the costs of populist
measures are very high as investments in infrastructure that create employment
and build a foundation for post-crisis modernization are mercilessly cut.
One way to improve the parameters of the budget was to increase taxation on the
gas monopoly Gazprom, but the half-hearted proposal from the Finance Minister
Aleksei Kudrin was firmly overruled by Putin after a meeting with Gazprom chief
executive Aleksei Miller. This special attention will not only push the budget
deeper into the red, it will necessitate a further 25% devaluation of the
rouble even if oil prices remain above US$60 per barrel, and that will keep
inflation in the mid-teens.
The main source of covering the deficit is the accumulated financial reserves,
which at present amount to $400 billion. That, however, will not be enough, and
Kudrin has acknowledged the need to resort to external borrowing that in 2010
could be limited to $18 billion and reach $60 billion by 2012.
These figures are quite moderate in themselves and the external debt reaching
15-17% of GDP is not a heavy burden, but there is also corporate debt, which
Kudrin estimates as exceeding $400 billion. Much of that debt is covered by
state guarantees and they are expanding as the government is indirectly
involved in negotiations on restructuring loans that have brought such
"champions" as aluminum giant Rusal to the brink of bankruptcy.
Entering again into the money market, Russia would have to think hard about its
credit ratings and reputation - and that implies certain changes in its foreign
policy behavior. Indeed, the ability to pay off the external debt was one of
the main sources of Putin's confidence in Russia's rising power, and his
arrogant challenging of Western interests was in no small measure based on the
assumption that Russia was free of this humiliating dependency.
Now it is necessary once again to bargain with uncharitable international
financial institutions, so Moscow would have to contemplate financial
consequences every time it feels tempted to offend potential creditors. It
might appear that the high level of defense expenditures preserved in the 2010
budget contradicts this as yet barely visible trend towards a more humble
foreign policy. However, the deep cuts in the officer corps envisaged by the
Defense Minister Anatoly Serdyukov's reform plan are very costly, and
long-standing programs such as the new submarine missile Bulava and the
satellite navigation system GLONASS, bedeviled by setbacks, must be brought to
fruition - again at a very high cost.
Putin's economic policy, of which the new budget is just one manifestation, is
increasingly disappointing for many economists, who argue that if a right
measure is taken with a six- to nine-month delay it becomes a wrong measure in
the context of the deepening recession.
The main source of these delays and half-measures is the dilemma that Putin is
facing: either to dismantle his system of rigid state control over key economic
activities or to focus on rescuing it and condemn Russia to protracted
stagnation. He tries to postpone this choice by experimenting with "manual
management" of local problems and harvesting PR dividends, but he can hardly
fail to see that his orders cannot make credit flow from banks clogged by bad
loans or generate demand for antiquated cars produced by Avtovaz.
Nothing in the budget suggests that Putin has recognized the imperative of
scrapping his model of a "command petro-economy", and that most likely means
that long hours of reconciling intake and disbursement were wasted because
someone else would have to take responsibility.
Dr Pavel K Baev is a senior researcher at the International Peace
Research Institute, Oslo (PRIO).
(This article first appeared in The
Jamestown Foundation. Used with permission.) (Copyright 2009 The
Jamestown Foundation.)
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