TOO MUCH OR TOO LITTLE?

By Andrei Afanasievich Neshchadin

Many people say that six changes of government in the last eighteen months is too many for a country like Russia. But a closer look reveals that all these governments–with the exception of the “little deviation” under Kirienko, who paid dearly for other people’s sins–are at heart virtually indistinguishable from each other.

First, these governments are all made up of politicians and masters of intrigue rather than professionals and specialists in running the affairs of state. Second, these are people who hope to be recalled in the near future, regardless of the achievements during their period in power, an attitude perfectly consistent with the earlier concept of the nomenklatura. Third, their achievements in the economy and in reform are assessed not in terms of real success, but in the number of mistakes they avoided. Fourth, they themselves are aware of their own ephemeral nature, because they cannot resolve the fundamental problems, and failing to solve these problems makes it impossible for them to run things successfully.

The main reason for this lies in the fact that most of the chosen officials rely on–and are confident of the great value of–their own experience of the last ten years of reform. With a poor understanding of the processes underway in almost every branch of public life since the crisis of August 17, 1998, their concern is not to shift things in the direction of reform, but rather to put the situation on hold, because then their experience really does appear valuable. We have essentially entered a phase of stagnation, when the best economic policy the state can come up with is a lack of any policy at all.

Theoretically, the government is in a position to take any measures it likes in the economy, if economics is approached as a system of balances and accounting. However, economics is more than simply mathematics; it has political, sociological and psychological aspects. The significance of what is happening is that since the crisis of August 17 the Russian economy has been adapting not to “fundamentalist” market-style reforms, but to world economic processes. Russia has become an open country.

This premise points to the conclusion that all the experience gained in adapting to reforms counts for little today. Attempts to use old administrative methods to solve the problem of curbing the growth in energy prices, at a time when world prices are rising, will simply lead to a sudden jump in gasoline prices or to shortages. In other words, it can be seen that any attempt to solve economic problems by using established methods to strengthen state regulation will have a very insignificant and merely short-term effect.

The current growth in industrial production should not deceive anyone; this is the result of movement in world energy prices and the effect of the devaluation of the ruble, and has nothing to do with the policy the government has pursued. Suffice it to point out that the three key indicators of stable economic growth–investments, per capita income and the level of individual and company savings–all fell significantly over the last eighteen months, and have not yet returned to their pre-crisis level. Here, the fall in income for the lowest income groups was quite insignificant, because their pattern of consumption remained practically unchanged. The blow affected mainly the middle classes–in other words, the most active section of the population.

Meanwhile, growth in production without growth in investments and buying power is very unstable in nature, and is affected by any–even very small–fluctuations in world prices. This is why the changes of government over the last year have had more political rather than real economic significance. The stock and currency markets demonstrate this very clearly. This stagnation period will clearly continue until a new president is elected, and only then will the question of the state’s real economic policy be raised. But for now, unless something out of the ordinary happens which requires a significant budget expenditure, the economic processes in the country will not depend very much on the government. Meanwhile, the government is following the tried and tested method of collecting as much money as possible for the budget and sharing it out.

THE NEW SITUATION IN RUSSIA

Since the financial crisis of 1998, Russia’s citizens have been through several stages in mass psychological rehabilitation.

First there was a state of shock, which developed into an expectation that the whole economic system would collapse. This had something to do with the vestiges of the superpower complex, whereby upheavals should have had repercussions for the whole economic process worldwide. However, this did not happen, and couldn’t have happened, because events in a country which accounts for only 1-1.5 percent of world GDP–and that mainly in the fuel and raw material sector–are of no significance to the world economy. There followed a process of stabilization and an examination of the moment of truth. This process involved picking over the bones in the financial graveyard and assessing the positive aspects of the crisis as well as the negative. The general conclusions contained several revelations: First, that every economist and political leader knew about the crisis and had warned the government of it (though some people were making out that they had been saying this since 1992, while other people’s forecasts were intended to refer to a later period); second, that the oligarchs had it coming to them; and, third, that it may even assist domestic production. (This is reminiscent of Griboyedov: “The fire made a great contribution to its [Moscow’s] beauty.”)

These conclusions were of great comfort to the people of Russia, and the sought-after economic growth figures comforted the government; a period of general calm began. World economic processes did indeed help Russia’s economy, and attention turned to other areas of concern: The assertion of superpower status (this time by means of military and political maneuvers in Bosnia and Chechnya) and also the scheduled elections for all and everything. In this sort of situation, much more attention is paid to political maneuvers and intrigues; it is rather awkward and unprofitable to try to explain the current situation in the economy, because one has to answer rather unpleasant questions which will not do anything to boost one’s image. Russians have gotten the idea that things cannot get any worse, that things can only get better in the new century. A major role here has been played by the growth–albeit small–in production, which has been most evident in the sectors worst hit by the crisis, first of all in light industry.

With all this euphoria, there is little point explaining that this is linked to import substitution, and that there has not been any growth in retail trade turnover, meaning that the prospects for further growth are severely limited. Almost everyone wants to believe that economic growth will continue after so many years of crisis. Under these circumstances, people react very badly to reminders of unresolved economic problems.

Today the conviction holds sway that if problems are not discussed then they don’t exist. Until the presidential elections, no one wants to hear anything about the problems facing the banking sector, investments and effective demand.

The reality of Russia’s economic development in the near future is such that, on the one hand, due to high prices for fuel and energy resources there is no reason to expect a sharp decrease in budget contributions or a fall in the foreign trade surplus. On the other hand, the effect of the devaluation of the ruble has almost been exhausted, and there is no visible growth in effective demand within the country. For Russian industry, then, the opportunity for growth can be related only to an increase in exports and a continuation of the import substitution strategy.

To achieve this, however, new equipment and technology is required–in other words, investment. But there are no real funds for investment in the country. The banking crisis has not yet been overcome, and further resources are needed to revive the banking system. The banks most comfortable at the moment are either medium-sized ones which simply had no access to the GKO machinations, or state banks which rely on support from Russia’s Central Bank. State banks, however, are not capable of making large-scale investments in the real sector. Neither are the large industrial groups which have been working more actively over the last year in a position to become large-scale investors, particularly in other branches of industry.

Investments from the federal and regional authorities are greatly restricted by their budgets and can only be treated as tax credits or investments in the form of participation in ownership and granting of tax benefits. People’s savings have either been taken abroad, or they are kept in cash and are inaccessible to investors for the time being.

In summing up this analysis of the current situation, certain prognoses can be made:

–In the absence of a significant influx of investments and with favorable world energy prices in the next two to three years will see a small growth in GDP of 1.5-2 percent per year.

–The main economic processes will be characterized by the adaptation of the Russian economy to world economic processes rather than to the process of internal reform.

–Russian industry can develop only by increasing its share in foreign markets and continuing the process of import substitution; there are currently no opportunities for increasing the capacity of the internal market.

–Against this background, Russia’s economy will for the first time see powerful internal competition between companies and regions for sales and investment markets.

–Russia will be seen by the world economy as just one of the many developing countries in the international competition for investments, without any special benefits.

–It will be impossible to get Russia’s industry onto a path of stable development without foreign capital and new technology in several branches of industry.

–There is a real possibility, if an influx of investment and new technology is secured, that Russia’s industry can both be restructured in the next two to three years and show stable development of up to 5-8 percent growth in GDP per year. If this does not happen, then another sharp fall in world energy prices will lead to another budget crisis.

–The government’s efforts over the next two to three years should be directed toward completing institutional reform with the aim of creating a competitive investment climate in Russia.

–The social and psychological state and the expectations of society are entirely favorable for pushing through further reforms, particularly those related to a strengthening of the state and the rule of law.

At the same time, measures should be taken to maintain favorable macroeconomic conditions–low rates of inflation, a stable exchange rate for the ruble, a reduction in the bank lending rate, and an end to non-payment and barter.

RUSSIA’S INDUSTRIAL POLICY

Based on all this, Russia’s industrial policy will need to be implemented in two stages. The first must be implemented in the next two to three years, and will involve restructuring industrial enterprises and creating conditions for stable growth in industrial production. The second is one of stable industrial growth based on a significant influx of investment and increased buying power among consumers and companies. The central tenet of the coming period should be to give priority to ensuring industrial growth in Russia’s economy. All other tasks should be assessed according to their influence on the creation of the conditions required for achieving this aim.

Andrei Afanasievich Neshchadin is a doctor of Sociology and the executive director of the Expert Institute at the Russian Union of Industrialists and Entrepreneurs.