Publication: Eurasia Daily Monitor Volume: 2 Issue: 183

Last week 11 leading Russian economic experts sent a letter to Prime Minister Mikhail Fradkov warning about the possible – and possibly grave – negative economic consequences from the planned massive increases in budget spending on various social programs (Vedomosti, September 30). The government is used to devastating criticism from such radical economists as Mikhail Delyagin or ultra-liberal presidential economic adviser Andrei Illarionov (, September 21; Rossiiskaya gazeta, September 23). This time, however, the alarmist assessment comes not from maverick freelancers but from respected professionals who work in such reputable companies as “Troika Dialogue” or “Renaissance Capital” or Bank of Moscow.

The essence of the argument is clear and straightforward: Spending the colossal “oil dividend” is a serious business that requires hard thinking about priorities. Merely piling money on top of all sorts of accumulated problems is a recipe for fuelling inflation and sliding down the spiral of expanding expectations towards an economic disaster of the same scale as the catastrophe of August 1998. One part of the problem with this argument is organizational: In this government, there is no experience or capacity for designing investment projects and estimating their efficiency (Russkii zhurnal, September 27). Gosplan possibly was a cumbersome and ineffectual planning agency in the Soviet era, but now funds allocation has become so corrupted by bureaucratic thievery that every “strategic” investment program becomes just another elusive exercise in “reconstructing Chechnya.”

Another part of the problem is the pressure of expectations in a society that has heard a lot of good news about growth and abundance of money – and now wants their share of the oil windfall. Russian President Vladimir Putin turned decisively towards meeting these expectations and in his recent live Q & A session and made a wide range of promises to deliver tangible benefits no later than next year (Izvestiya, September; EDM, September 28). Immediately after the presidential “talk show,” the revised budget for 2005 was announced with an increase in expenditures of more than 15%, while income ballooned by an astonishing 50% (, September 30). The budget expands far greater than the GDP, and in 2006 this gap will further widen as economic growth slows to perhaps 5.3%, according to the recent International Monetary Fund forecast (Kommersant, September 22). The IMF specifically warned about the “relaxation of financial discipline” and international rating agencies, like Standard & Poor’s, have also expressed concerns about too generous spending of the oil money (Ekho Moskvy, September 30).

The authors of the alarm-raising letter wisely avoid direct argument with the president and pretend that it is the prime minister who fails to check the growth of inflation-accelerating expenditures. This leaves Putin some space for macro-economic maneuvering, but it is highly unlikely that he might reconsider the wisdom of his “left turn.” Populism may not necessarily be an essential feature of his political system (he tends to rely more on manipulative “political technologies”) but dirigisme certainly is. He is a firm believer in control and the power to distribute money constitutes the central element of his ability to implement this control through the overgrown state bureaucracy. For many Russians this paternalistic “care” is a natural way of organizing relations between their state and its citizens, and that is why Putin was bombarded with demands to raise pensions, increase funding for healthcare, or organize water supplies to a remote village (Ekho Moskvy, September 29). They understand perfectly well that the main source of money is exports of oil and gas, and so they support wholeheartedly expanding state control over this crucial sector.

Last week saw a major breakthrough in this re-nationalization. Gazprom purchased Sibneft, the fifth-largest Russian oil company with annual production of 34 millions tons of crude. The natural gas giant agreed to pay the market price, which reached $13 billion for 72.7% of the shares, while another 3% had already been bought on the stock exchange for some $500 million (Vedomosti, September 29). If the deal does not fall apart – like the near-certain merger between Gazprom and Rosneft earlier this year – the state-owned companies would control about a third of Russia’s total oil production by the end of the year. More than half of this capacity consist of assets that have been (and continue to be) confiscated from the unfortunate Yukos (Kommersant, September 29).

The speculations around this record deal have fired up the Russian market. The Moscow stock exchange closed Friday (September 30) above its previous historic milestone of 1,000 points, while from March to July it was fluctuating at the level of 700 (Kommersant, October 1). In this atmosphere of frenzy and jubilation, the letter by the 11 experts comes as a cold shower. Working for investment companies, they certainly do not want to discourage foreign investors from entering the Russian market with its promising niches and undervalued assets. But they also do not want to participate in the government-led PR campaign that seeks to talk stability into existence in a situation that shows all the typical features of a bubble (Izvestiya, September 30). These experts know too well one simple truth: The state is never an efficient owner, but in Putin’s state efficiency is measured only by political usefulness for the Kremlin. That is why Russia is placed so low in the Competitiveness Index of the World Economic Forum, despite all its natural riches (Vedomosti, September 29). The desire to control and the eagerness to redistribute cannot form a foundation for a sound economic policy, but they can cause serious deformations in the most productive sectors. There are no natural limits to greed and wastefulness, so even if oil prices climb to $100 per barrel, it would never be enough.