Other author’s opinions
System failure: how Russia fell out of the path of reform Aug 22, 2016, 18:40
The government’s expectations for a return to sustainable economic growth could be justified only if political reforms
Political and economic history of the new Russia clearly splits into periods, showing the close connection between political policies and economic dynamics. After going through a painful structural transformation after the fall of the Soviet system, the Russian economy started a dynamic growth in the early 2000-ies. Incomplete reforms and political changes led to stagnation and then to a rapid drop in the welfare of citizens, economic growth and the withdrawal of investors from the Russian market. An example of the main economic cycles of modern Russian history gives the diagnosis and to identify ways out of crisis the impasse that brought the country authorities.
In the early 1990-ies after a tough introduction market power is not able to stabilize state finances and the ruble, to establish fiscal discipline and to fulfil budgetary obligations to the population, enterprises and creditors.
These factors led to the default in August 1998 resulting in the largest bankruptcy of private banks and the ruin of small and medium business. By 1998, the country’s economy in comparison with 1991 was reduced by 40%. However, by the end of this period, formed a market-based institutions arose, the legal regulatory environment of the economy.
Since 1999, thanks to a skilful use of the results of devaluation, deficit reduction and debt relief country authorities failed to create conditions for carrying out systemic reforms and the transition to sustainable economic growth.
Beginning in 2000, the systemic changes of foreign and domestic investors believe in Russia’s future. Began to grow revenues and consumption. Stabilized the ruble. With the adoption of the 2000 budget, the country got rid of the budget deficit: gone multi-month delays of salaries, pensions and non-payment “credits” in the tax debt account obligations of the budget and barter transactions.
From 1999 to 2003, Russia’s GDP increased by 38%, despite low oil prices ($25 per barrel in average for the period). Investment growth was at least 10% annually. Wages began to grow at a rate of 20% per year.
The President and the government, which I chaired from 2000 to 2004, worked closely with the Duma, which at that time was still a “place for discussion”. The budget process was completely under the control of Parliament. In Parliament the government had a stable majority. We work separately in each case formed the majority for the adoption of a specific bill.
Oil helps, power brakes
Only implemented and initiated systemic reforms bore fruit in the subsequent period from 2004 to 2008. The impetus given to the economy and coupled with the outbreak of higher commodity prices, increased GDP by 40%, although no reforms were not carried out. For ten years the volumes of investment in the economy has tripled.
Unfortunately, the economic breakthrough was not supported by the continuation of reforms. The rejection of further change and reversal of the already started reforms back led to a depletion of energy growth. An acute crisis of 2008-2009 has shown the inadequacy of reforms and the increased dependence of the Russian economy on foreign markets.
At the same time there has been a foreign policy u-turn. The so-called Munich speech of Vladimir Putin in February 2007, the five-day war with Georgia in August 2008 marked the transition to confrontation with the West. By 2008, it was completed the vertical of power, and the information space to take full control of the Kremlin.
By 2012, the Russian economy has lost momentum, despite the renewed rise in oil prices (to $100 per barrel.). No help came from the expectations of the liberalization associated with the presidency of Dmitry Medvedev, nor hope for “Putin’s first term,” in 2012. Political course of the country remained unchanged.
Saving and insulation
2015 economic recession. His reasons — low oil prices (average $40-50), the international isolation resulting from foreign adventures. The volume of investments in fixed capital reduced for three consecutive years. Rapidly falling incomes with the growth of consumer prices for the years 2014-2016 by 32.5%.
The government recognizes that the prospects for the transition to sustainable economic growth is not seen even after three years. In the baseline scenario, the government assumes that the economy only by 2019 will be released on the growth rate of 2.1%, whereas the global average rate is 2-3% per year. Thus, the share of Russia in the world economy in the early 2020 years will reach historically low levels — less than 2% at purchasing power parity.
The government promises in the next three years to reduce the budget deficit from 4 to 1% of GDP. To cover its planned by domestic and foreign borrowing. But the government recognises that the lifting of sanctions will not, therefore, the authorities intend to increase taxes and fees. Increased excise taxes on fuel, tobacco and alcohol. Rising property taxes citizens. Expanding the introduction quasianalogue payments, such as payments for major repairs.
Over the past 15 years there has been explosive growth rates that significantly exceed inflation. Only on water supply services and heating prices rose by 48 times (4.7 times higher than the inflation rate). Probably before the presidential election the authorities want to show people his care, promising to gently raise tariffs. But the financial resources are redistributed from the public in favor of the monopolists-suppliers.
The government continues to believe that incomes and consumption will grow. We are assured that wages will rise and the year will start slow investment growth. But inherent in the financial plan numbers are too optimistic.
With the fall in domestic consumption and the health of the retail sector that we have seen, there is hardly brave, ready to expand their business. For non-oil exports of goods and services need serious investments, but the funding sources are on private international capital markets. The gap between the. Fixed assets in industry, transport infrastructure and in the social sphere worn. In a catastrophic condition of the housing stock and utilities infrastructure that require trillions in private investment. The need for modernization of imported equipment and technology, but the devaluation of the ruble has made them more expensive. The government scenario is based on the dreams of the rise in oil prices and plans “structural changes” that he is afraid to let the leadership of the country.
As you know, “no money”. In the budget three-year plan is missing not only the growth of public investment. Fall in real terms and the usual current expenses on wages and salaries. Education funding will fall to 3.5% of GDP in 2019 (the international recommendation is not below 4% of GDP). The government plans on health care provides for the stabilization of expenditure at 4% of GDP, with international figures 5-7% of GDP. Not growing investments in transport infrastructure in such a vast country as Russia, it becomes clear impediment to economic development.
In a fit of power saving abandoned in 2016, from indexation of pensions on inflation rate of the previous year. Defense costs reduce with a huge 4.7% of GDP last year to 2.9% of GDP in 2019.
No political reforms, no development
Some “will not get pills”: increasingly, economists and experts say that as soon as possible to initiate structural and institutional reforms. Of course, for their success is the necessary guarantee of private property, modernization of the judicial system, reduction of state involvement in the economy, access to modern technologies and capital. This is obvious and banal.
But above all we need political reform. They will allow you to run normal democratic process, political competition, alternation of power at all levels. It is necessary to break the direct link between business and government by removing political competition in a non-controlled Executive power in the sphere of civil activities. To achieve all this only through the guarantee of holding free and fair elections, restoration of parliamentarism and the system of popular representation. All guarantees is formally written in the Constitution and in international treaties signed and ratified by Russia.
It is necessary to establish relations with the West — the main source of investment, technology and managerial competence. Inside the country all in the right amounts just yet.
I am confident that the establishment of relations with the West and the political reforms will allow Russia to reach a GDP growth rate higher than the world within two to three years and five years — more than 5% without an increase in oil prices. The return investors will avoid hard fiscal consolidation, one of the consequences which a reduction in the consumption and public investment, which in itself is damaging to the economy.
The country’s leadership continues to hold on to power, total control over society and over the main economic resources. It suits this role, despite evidence that the current system of governance contrary to the national interest.
I would like to believe and to do everything possible to ensure that this contradiction was resolved by peaceful political means on the basis of constitutional procedures. And while the country through the efforts of the leadership is wasting your main resource — historic time.
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