RUSSIAN ECONOMIC PARADOXES AND THE POWER OF “STUPID MONEY”

Macroeconomic dynamics have dominated the political debates in Moscow in mid-June, while the frenzy of speculation about Vladimir Putin’s third presidential term or identifying a possible successor has taken a short respite. The government reviewed a colossal four-volume report on the main directions of its activity in 2006-2008 and found it potentially helpful, but as yet too raw (Kommersant, June 17; Expert, June 19). Putin approved the final version of the 2007 state budget, which will be presented to parliament after the summer break, and requested that the draft budget for 2008 be prepared ahead of schedule since the MPs would have less free time in an election year (Lenta.ru, June 20). Besides these often-quarrelsome “technicalities,” the St. Petersburg Economic Forum, held June 13-15, offered all of Putin’s key ministers and leading experts an opportunity to outline their visions beyond the currently clouded economic horizon (Ekho Moskvy, June 18).

Economic pictures of this kind are seldom coherent and too often misleading, but their juxtaposition and testing against verifiable indicators might yield some unexpected results. First Deputy Prime Minister Dmitry Medvedev delivered the central presentation at the St. Petersburg Forum and spared no praise for the glorious achievements and argued for further strengthening the state’s role in the economy (Nezavisimaya gazeta, June 14). This was, perhaps, the first elaborate declaration of an intention to expand direct control over key economic sectors to come from a top-level official who is also currently the frontrunner in the race of presidential hopefuls. Observers were surprised by the firm disagreement with this position expressed by other ministers, led by Minister of Economic Development German Gref, who asserted that state control was “dangerous and unproductive” and in fact just a “fiction” covering the parochial interests of particular bureaucrats (Expert, June 19).

Unlike Medvedev, most other ministers and lower-ranking officials emphasized their worries about Russia’s economic health so that collectively they performed the role that former presidential economic adviser Andrei Illarionov once played (Gazeta.ru, June 15). Finance Minister Alexei Kudrin complained that too much oil income had slowed down reforms and reduced the efficiency of economic regulation, while Deputy Prime Minister Alexander Zhukov saw the limits of an economic development strategy depending primarily on the export of hydrocarbons (Rosbalt, June 15). Many experts argued that the period of “easy growth” was coming to an end, while the politically driven pumping of “petro-rubles” into populist “national projects” would inevitably fuel inflation.

These arguments make absolute sense economically, but Russia’s performance in the last few months has definitely defied the dire warnings. After a slow start, the GDP in the first five months of 2006 increased by 6.2% compared with 5.4% last year. But running against the “Dutch disease” diagnosis, it was the 10.6% jump in industrial production that contributed the most to this growth, and manufacturing led the pack (Kommersant, June 20). Inflation was also firmly under control with only 0.1% in the first half of June and an expected 6.3% in the first half of 2006, compared with 8% last year (Vremya novostei, June 20). Yevgeny Yasin, a highly respected Russian economist, warns against attaching too much importance to the spike of activity in the last few months and points out that many structural imbalances are left unaddressed (Nezavisimaya gazeta, June 20). It is clear, nevertheless, that the economy is expanding beyond most forecasts, and it is only the stock market, which was widely expected to reach new heights, that has in fact sharply contracted. Since early May, the stock market has lost some 25% of its total value, which is significantly deeper than the levels of most other emerging markets at this time (Kommersant, June 19).

This paradoxical performance humbles expert wisdom but does not quite disprove it, because they generally tend to emphasize an economic rationale while on the Russian market there is too little “smart money” that is able to recognize and follow such sound guidelines. The plentiful “stupid money” generated by enormous energy rents would rush to the stock market when it is about to peak and then stampede out, or would march according to the latest political order and then abandon the flag when the “boss” turns away (Vedomosti, June 19). Some of these maneuvers could produce decent short-term returns but their mid-term efficiency is inevitably negative, since nothing resembling a moderately consistent economic policy has emerged from the Kremlin’s attempts at shepherding these “golden rams.”

The over-abundance of free capital forces Finance Minister Kudrin to apply progressively stricter measures at “sterilization,” which in the case of “stupid money” may be indeed the most appropriate method. These efforts bring a $1 billion-per-week increase in hard currency reserves, while the Stabilization Fund is expected to reach $100 billion by the end of this year and 50% more next year (Nezavisimaya gazeta, June 19). These treasures attract a lot of greedy attention, so Kudrin is defending his corner by every available means, including his personal rapport with the president. For the moment, he can play on his ability to build trust with the G-7 finance ministers who are quite reluctant to expand their club. He also earns points with his promise to make the ruble not only fully convertible but even one of the global “reserve” currencies that could compete with the weakening dollar. Kudrin’s struggle, nevertheless, appears increasingly desperate and his daring attempt to tax Gazprom’s profits may very well precipitate his fall (Gazeta.ru, June 20). The closer the political elites come to the fatal moment of power transition in 2008 (and Putin’s still-possible decision to accept a third term would also signify a transition of sorts), the more they are inclined to exploit the economy to gain any possible leverage. The power of “stupid money” is set to increase, and that basic fact of Russia’s economic development cannot be overestimated.