Publication: Eurasia Daily Monitor Volume: 2 Issue: 164

Hurricane Katrina forced the United States and the European Union to open their strategic oil reserves, but Moscow is confident that the dip in prices is only a minor deviation from the unstoppable upward trend. This conclusion was incorporated in a draft state budget for 2006 that the government presented to the State Duma on August 26. The scale of Russia’s income growth was set at an unprecedented 59%, and that level assumed the average price for Russia’s Urals crude at only $40 per barrel. This year, the money has been filling the state coffers much faster than anticipated, but the government has kept expenditures under firm control, so in the first six months the budget intake amounted to unprecedented 10.1% of the GDP (Kommersant, September 1; Gazeta.ru, August 31). The tight fiscal policy has helped keep inflation in check, so that in August a slight decrease in consumer prices was registered, but still the overall index of inflation for 2005 is expected to break through the official ceiling of 11% (Nezavisimaya gazeta, August 19). In 2006, the picture shapes up rather differently.

The increase in expenditures at about 30% — approximately twice lower than income — may appear not excessive at all, but it is essential to remember that the growth of GDP will not reach 6% this year and is expected to slow down further next year (Izvestiya, August 15; Newsru.com, September 2). What worries the economists even more is the low demand for money in the private sector related to protracted lull in investment activity (Ekho Moskvy, August 30). The government has agreed to step in and expand its activity, but the portfolio of investment projects gathered by Minister of Economic Development German Gref remains thin and underdeveloped even in basic aims, not to mention details and figures (Ekspert, August 22). In the situation where only trade shows any traces of dynamic movement, pumping money into the economy is certain to fuel inflation. Finance Minister Alexei Kudrin last week held a meeting with investment bankers trying to secure their support for a “responsible” fiscal policy (Vedomosti, September 2). In a follow-up interview, he appeared almost desperate about the prospect of “sinking into a swamp,” since the colossal extra income from oil “kills all incentive” for implementing reforms (Rossiiskaya gazeta, September 1).

So far, Kudrin has been able to withstand pressure to squander the “oil dividend” from all political quarters, but now the spending spree is apparently beyond his control. According to anonymous sources in the Kremlin, President Vladimir Putin is preparing a “presidential imitative” that amounts to spending an additional 115 billion rubles (about $4 billion) on various social programs in 2006 (Vedomosti, August 31). This bold breach of the fiscal levees that Kudrin still constructs may appear to constitute an attempt to overtake the “left turn” that was outlined by Mikhail Khodorkovsky from behind bars (Vedomosti, August 1). Indeed, the massively increased state support for health care and education would answer growing expectations in the society, which sees a fast and steady climb of petrol prices — but only a slow growth of disposable income. A real “left turn,” however, would require the state to shoulder greater responsibility for planning and running the economy as well as for modernizing basic infrastructure. The incessant squabble in Putin’s team for juicy oil assets and muddy financial streams does not resemble this responsible central planning at all.

For any committed reformer in the Kremlin, the sudden inflow of petro-rubles would have been a godsend that could have eased the inevitable pains of restructuring and downsizing. The small group of bureaucrats who populate the apex of Putin’s pyramid of power instead find an opportunity not to implement any reforms and to “soften” the accumulating problems by pouring money over them. This “oil populism” is certain to backfire in the near future, so the analysts in Moscow who are not busy tapping into one of the Kremlin reservoirs argue that the new budget augmented by the forthcoming “presidential initiatives” makes only one sort of sense — electoral (Polit.ru, August 26). The regular parliamentary elections in December 2007 would come uncomfortably close to the end of Putin’s second term, and it might be politically expedient to shift them to mid-2006 so that a convincing victory, bought by oil money, would lay a solid foundation for solving the larger-than-life problem of forging an elite consensus around a successor to President Putin.

The main weakness of the scheme is not in the significant probability that such a consensus could prove impossible to achieve. It is rather in the assumption that spending the “easy money” is a fun pastime that could not go wrong. In fact, the experience so far shows that the main result of the extra-generous spending has been the widening and deepening of the administrative corruption that is now astonishing even by Russian standards. Risk analysts in Moscow are trying to figure out the impact of the “housing bubble” in the United States on oil prices, but it is the home-grown “corruption bubble” they probably should be most worried about (Vedomosti, September 1). This bubble cannot be gently deflated, and a sudden burst is entirely possible. When macro- and micro-bureaucrats begin to steal like there is no tomorrow, chances are that there indeed will not be one. Putin’s courtiers may hope that the stream of money would wash away the specter of a “color revolution,” but those crowds in Tbilisi and Kyiv were driven not by poverty and despair but mainly by anger and disgust against the thoroughly corrupt leadership. A sharp drop in oil prices can at least be partly compensated by the now-swollen Stabilization Fund, but their further increase tempts the regime into the trap of self-serving overspending.