The Russian authorities are deciding which path of further economic development to follow. For now, there are two distinct views of how to reform the Russian economy.
Russian President Vladimir Putin's press secretary Dmitry Peskov, left, speaks to Russia's former finance minister Alexei Kudrin, one of the critics of Kremlin's economic policy, who argues that Russia urgently needs structural reforms. Photo: AP
Over the past two years, against the backdrop of the economic crisis and the sharp drop in oil prices, the Russian government has had little or no time to pursue long-term strategies of economic development. Instead of structural economic reforms, the Russian authorities have pursued quick anti-crisis measures.
Although the crisis is not yet over, the pressure has clearly weakened. The rate of decline of GDP is only one-third of what it was just a year ago, inflation is only half of what it used to be, and capital outflows from the country are five times lower.
In short, the authorities have now gained a bit of breathing space, and can return to the process of drawing up long-term development plans. Moreover, the presidential elections are not too far off, and the main candidate – President Vladimir Putin - simply cannot enter these without a large-scale economic program.
Kudrin vs. Glazyev
To help him solve this problem, last spring Putin brought back his longtime friend and colleague Alexei Kudrin, who for many years had served as the finance minister. However, Kudrin came into conflict with then President Dmitry Medvedev, resulting in a fall from grace.
Until recently, he has been watching events from the sidelines. However, Putin has now put him in charge of his “economic staff” – the Center for Strategic Studies, which had drafted the county’s economic program for Putin before his first term in 1999.
However, Kudrin has not been given complete carte blanche. The fact is that the ex-finance minister belongs to the rank of “liberals,” which include many of the current leaders of the financial and economic sectors of the country – Elvira Nabiullina, head of the Central Bank; Alexei Ulyukayev, minister of Economic Development; and Anton Siluanov, the current finance minister (who for many years was deputy finance minister under Kudrin). Therefore, it is clear that Kudrin’s new program will be a liberal one.
However, liberal ideas, including in the economic sphere, are not in favor in today’s Russia. It has become fashionable to blame the liberals for all the ills of the country, starting with the “wild 1990s” of the Yeltsin era. This has brought to the forefront the so-called “statists” – those who favor a strong central government that controls all spheres, including the economy.
As a result, the representatives of the “statists” also received an order to write a strategy for economic development, using their preferred recipes. The authors of this will be the representatives of Russia’s influential Stolypin Club – Sergey Glazyev, an advisor to the president and prominent academic; Boris Titov, business ombudsman and leader of the Party of Growth; and Andrei Klepach, vice president of Vnesheconombank and former deputy minister of Economic Development. [The Stolypin Club is named for Pyotr Stolypin, a legendary economic reformer in late imperial Russia – Editor’s note].
And while Kudrin can count on support for his program from his liberal peers in the government and the Central Bank, it is believed that the Stolypin Club members also have a powerful patron – the presidential aide on economic issues, Andrei Belousov. The battle between the two strategies, one might say, is just beginning, and at the moment, it is not clear which of the two strategies Putin will choose as the fundamental one for the near future.
Should the printing press be turned on?
For now, the competing strategies have not been written yet, and public discussions on them have not started. True, this May, the two concepts were discussed during the meeting of the Presidential Presidium of the Economic Council, but only behind closed doors. Nevertheless, over the last couple of months, the two sides have made a sufficient number of statements and allowed some “leaks” that can provide the basis on which to judge the content of future programs.
In December 2015, representatives of the Stolypin Club issued a report, which, apparently, will form the basis of their strategy. In it, they outline how to boost the economic growth in the country. They proposed to increase investments, pumping up the economy with state money from the budget, and by having the Central Bank issue 1.5 trillion rubles. Simultaneously with that, they expressed the idea of cancelling the “free floating” ruble (i.e., the pure market determination of its exchange rate), by having the exchange rate set by the Central Bank, while at the same time limiting speculative assaults against the national currency.
At the second stage, they plan to bring the tax system into line with the standards used in developed countries. In particular, this calls for the return of the unified social tax (UST) that was canceled in 2010, as well as the reduction of the tax burden on businesses from the current 49 percent, to an average 41 percent level. Also outlined were such measures as “soft” currency regulation, as well as reforms to land laws, the judicial system and certain aspects of the old age pensions program.
A different concept was proposed by the Center for Strategic Studies, headed by Kudrin. In his opinion, investments should come from the private sector, but the state needs to create favorable conditions for this – by ensuring macroeconomic stability, low inflation and reduced budget deficits. This also means carrying out reforms, as well as ending the new “cold qar” with the West, reducing geopolitical tensions and seeking foreign investments.
In addition, Kudrin does not believe that economic growth is being hampered by a lack of money, which allegedly the country needs to print. Corporate bank accounts currently have accumulated savings of 14 trillion rubles, which is sufficient for the investment needs of the country for one year. However, according to Kudrin, in the current circumstances, business simply prefers not to invest these funds, but keep them in reserve for the proverbial “rainy day.”
Commodity companies have also acquired a stockpile of money, which they are not planning to invest. This money is sitting in bank accounts, earning very good returns due to high interest rates, argues Titov of the Stolypin Club. The demand for cheap money is huge – if one were to announce the availability of loans at below market rates, lineups would form from the Kremlin to the Garden Ring Road, he insists.
Titov refers to the economic program of his rival Kudrin as the “lazy economy.” According to him, Kudrin’s plan, which involves inflation targeting and following a tight fiscal policy, does not imply active actions - one just needs to wait for the economy to adapt to external conditions. For their part, Kudrin and his supporters are convinced that the active stimulation of the economy, through the use of the printing press and the issuance of cheap loans, as proposed by the Stolypin Club, will, in the end, only lead to the acceleration of inflation and ruble volatility.
Dilemma before the elections
These two competing concepts have only two points in common, something that became clear immediately after the May discussions at the Economic Council. Their authors agreed on the need, over the next 10 years, to reduce the state’s share in the economy – from the current 50 plus percent, to just 35 percent, as well as on the fact that the gray sector of the domestic economy must be brought out of the shadows.
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Differences in the approaches are much greater. Therefore, it is obvious that it is not possible to combine the two programs, based as they are on opposite basic principles, by simply editing them. The authorities will have to make a choice, and most likely, the last word will be that of Putin.
Which one will he finally decide upon?
With his program, Kudrin is forcing the head of state to make a tough choice – either ambitious political goals and economic stagnation, or modest political goals and moderate economic growth. The ex-finance minister’s concept is strong, in that it will preserve the financial reserves of the government and the Central Bank, which, in turn, ensure the security of the state.
However, Putin is unlikely to look favorably on Kudrin’s defeatist position, which involves talk about backwardness and a lack of faith in a positive future, as well as conviction that Russia cannot rely on four-percent GDP growth in the coming years.
The same applies when it comes to improving relations with the West: Putin has already clearly stated that Russia will not sell its sovereignty. Nevertheless, many experts believe that, in the end, priority will be given to Kudrin’s program. After all, Putin, over the years of his reign, has shown himself as a statist in the political sense, but at the same time, he has always favored liberal approaches when it came to the economy.
Andrei Movchan, director of the Economic Policy program of the Carnegie Moscow Center, says that Glazyev’s approach has been tried in several countries, such as Zimbabwe and Venezuela. Everywhere the same dismal results were achieved, and Russia will hardly become an exception.
“Apparently, the government understands this, and is using the marginal theories and their supporting arguments, to appear, in comparison, as a balanced and ‘centrist’ force. Kudrin’s approach is perfectly clear, although the details can be argued about, and on the whole, his recipes are likely to give the country a chance to break out of stagnation,” says Movchan.
At the same time, the well-known political analyst Evgeny Minchenko believes that before the elections in 2018, Putin needs to create a kind of system of “checks and balances” in the field of strategic programming. For now, both strategies are being written and are supported by the authorities, and positive signals are being sent to the entire electorate – both the liberal-oriented part, and the supporters of the statists.
Moreover, rumors coming from the high corridors of power, suggest that many important people in Putin’s entourage – from his aide Belousov to Prime Minister Medvedev – are unhappy with the sudden strengthening of the influence of Kudrin, and rumors about his possible return to power. If this happens, many will be forced to “make room” and share the responsibilities.
However, while Medvedev has recently stated that the “printing press” categorically cannot be used in this situation, referring to the Stolypin Club’s proposal to issue cheap loans.
“On paper, it all looks great, but the result could be inflation, not at 6 percent, as we hope it will be next year, but much more,” said Medvedev, calling such ideas “dangerous.”
Ruslan Grinberg, scientific director of the Institute of Economics of the Russian Academy of Sciences, shares the same views.
“Indiscriminate use of the quantitative monetary easing policy, which is now being used in Europe and America to stimulate their national economies, is absolutely unsuitable for our country,” he said. “Therefore, in this matter, I am on the side of the Central Bank leadership, which believes that pumping unsecured rubles into the market will immediately lead to higher inflation.”
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“Due to the fact that very few products are being produced in Russia today, and very often these are monopoly markets, any increase in liquidity will automatically lead to a jump in inflation,” Grinberg added.
Sergey Zhavoronkov, senior fellow at the Gaidar Institute for Economic Policy, is also skeptical about the basic idea of the Stolypin Club members.
"There is a need to print a lot of rubles is a road to nowhere," he said. "The money supply in Russia is growing very rapidly.”
Meanwhile, if neither of the two competing programs satisfies the head of state, or if they fail to find a compromise policy, the final written strategy may in fact never be implemented. For example, the Concept of Long-Term Development Until 2020, a previous economic strategy, suffered from such a fate.
Developed in November 2008, this was an optimistic program with very ambitious goals. However, two intervening economic crises have managed to undercut its relevance. Currently, no one wants to be reminded of it, and for good reason. According to the experts, less than 25 percent of its goals were implemented. Therefore, the same fate could, in the end, await the new program, which the liberals and statists are fighting over.
That has led to inevitable talk of a possible compromise option. Movchan believes that, in practice, neither Kudrin’s nor Glazyev’s approaches have any chances of being realized, and Russia will follow a “middle” path. What will this path look like? The authorities will not dare to implement liberal reforms, but will still maintain a reasonable monetary policy. And this will result in economic stagnation or a mild recession, which will stretch on for years.
Fortunately, the country still has huge reserves of strength. Russia still has large international reserves (about $395 billion), while the per capita annual GDP is still $8,500, instead of $2,000 like in some neighboring countries. And Russia can afford to lose one to two percent of its GDP each year, for many years, while gradually reducing its defense budget, expenditures on mega projects, and bureaucratic costs.
“When Putin speaks of stability as being a priority, I think he is being honest. I think that, simply, he has his own logic, according to which, stability and moderate recession are much better than unstable growth. And that is how he is acting – pragmatically, clearly, without excesses,” says Movchan.