Translated material
Money smells like oil
The battle for the stabilization fund may change the mechanism for forming the Russian budget
Paradoxical as it may seem, it seems that the high inflation recorded at the beginning of the year (4.1% in January-February) worked into the hands of Finance Minister Alexei Kudrin. It is the curbing of “runaway” consumer prices that has now been declared an absolute priority at the highest political level. Therefore, it is a little easier for the head of the Ministry of Finance to resist that part of the political-economic elite that demands new budget expenditures, as well as the use of funds from the stabilization fund within the country. However, “a little easier” could easily transform into “much more difficult”, given the increased pressure on the Ministry of Finance from the “unlimited contingent” of supporters of budget injections into the economy. For them, every new billion rubles in the stabilization fund (its size as of March 1 was 1.56 trillion rubles, and will soon reach 10% of GDP) is no less an irritant than salt in an open wound.It is no secret that the head of the Ministry of Finance remains today almost the only high-ranking official who continues to insist on limiting the growth of budget expenditures, the volume of which is already threatening macroeconomic stability. Mr. Kudrin defends the idea of sterilizing petrodollars as much as possible in the stabilization fund. “After two years of existence, the necessary “safety cushion” accumulated in the stabilization fund (the amount established by law is 500 billion rubles, which makes it possible to avoid budget problems in the event of a sharp drop in oil prices. - Ed. ) fades into the background in importance, the task comes to the fore ensuring low inflation,” the minister never tires of saying. He is confident that if there is political will, it is quite possible to reduce inflation to 4-5% by 2008 and to 3-4% by 2009 (at the end of 2005 it was 10.9%).
Yesterday, at a round table at the Higher School of Economics, Alexei Kudrin, who had not appeared in public for more than two weeks due to illness, gave an entire lecture on financial and budgetary policy, simultaneously “slamming” those who had become emboldened in the corridors for attempting to assassinate the stabilization fund the power of opponents. True, although a number of participants in the discussion did not agree with some of the minister’s statements, there was no emotional argument, as at one of the recent government meetings. Absent from the hall was the minister's main opponent today - Deputy Chief of Staff of the Government Mikhail Kopeikin, who, to put it mildly, has a different view of the role of the stabilization fund in Russian history from the head of the Ministry of Finance.
To be fair, we note that the main objection of the discussion participants was caused by Mr. Kudrin’s statement about the impossibility of using the funds of the stabilization fund for the purchase of high-tech equipment abroad, including medical equipment. “If we say today that we do not import in order to maintain domestic production, then we can not import anything at all. It is more effective to spend money on medical equipment than to keep this money,” said, for example, Vice-President of the Russian Academy of Sciences Alexander Nekipelov.
Meanwhile, Mr. Kudrin decided to adjust the tactics of the macroeconomic discussion: not to limit himself solely to the search for new arguments proving the inconsistency of opponents’ proposals, but also to put forward counter initiatives, the implementation of which would, in his opinion, make it possible to push back the threat of macroeconomic destabilization, in particular, rising inflation and excessive strengthening of the ruble. Previously, the minister spoke in favor of transferring excess income from the export of oil products and gas to the stabilization fund. And yesterday he announced his readiness to change the very mechanism of budget formation if the authorities do not have enough political will to limit the spending of petrodollars. The essence of the proposal is the formation of, as the minister put it, a “non-oil” budget. In other words, the budget is formed not as it is now, when part of the income from the export of “black gold” goes to the budget, and part to the stabilization fund, but without the use of petrodollars at all. Funds from the stabilization fund are allocated to cover the budget deficit (according to preliminary calculations by the Ministry of Finance, in 2004 the non-oil budget deficit amounted to 2.8%, and in the first half of 2005 - 4.7%). The main thing is that the volume of the deficit, which is covered by petrodollars, is limited by law. “We propose not to immediately reduce expenses, but to determine the deficit of the non-oil budget and not increase it,” Mr. Kudrin explained.
According to his calculations, “if the entire increase in the stabilization fund over the past year had been spent within the country, the increase in the money supply would not have been 38%, but would have exceeded 70%, and inflation would have reached 18-20%.”
However, for now Alexey Kudrin does not propose changing the procedure for forming the budget. According to him, “the current order in Russia is preferable: it creates less distortion of the traditional principles of budget policy, which have justified themselves and ensure effective budget formation.” However, “if the state and the government cannot limit themselves in any way in spending, they are led by lobbyism and populism, then, apparently, we need to move on to the experience of Norway and Kazakhstan, which divided the budget into two parts,” the minister said, answering a question newspaper "Vremya Novostei" after the round table.
The idea of forming a “non-oil” budget was supported by the head of the Russian Union of Industrialists and Entrepreneurs, Alexander Shokhin, who said that “a creeping increase in spending is the main threat to both a stable financial and budgetary system and the stabilization fund,” as well as the scientific director of the Higher School of Economics, Evgeny Yasin. He, however, considers it still possible to allocate part of the revenues from oil exports to the budget, but set the cut-off price at $8 per barrel (this was the price of oil in the crisis year of 1998), and not $27 per barrel, as it is now.
The idea was also liked by the head of the Federal Service for Financial Markets (FSFM), Oleg Vyugin, who, by the way, stunned those present with the statement that “macroeconomic policy in the last two years was the worst since the 1998 crisis,” and the money “was mainly directed to maintaining pants of the growing bureaucracy." According to Mr. Vyugin, “if the government wants to manage the macroeconomic situation, it is necessary to develop clear indicators of the structure of the budget deficit without oil revenues.” In addition, the head of the Federal Financial Markets Service believes that the stabilization fund needs to be divided into a reserve fund and a fund for future generations. The volume of the reserve fund can be about 1 trillion rubles, and it should be managed according to a conservative model. The remaining funds will form a fund for future generations, the main goal of which is long-term capital growth. “A large share of his funds could be invested in shares and bonds of companies with high ratings,” Mr. Vyugin emphasized.
During the round table, Alexey Kudrin sharply criticized the idea of reducing taxes through the stabilization fund (Mikhail Kopeikin insists on reducing VAT from 18 to 13%, and proposes to cover the budget shortfall from the stabilization fund). The minister cited the example of Norway, where, despite a stabilization fund of $200 billion, rates on a number of taxes have been increased in recent years. But another proposal from the government apparatus, which was repeated yesterday by Prime Minister Mikhail Fradkov, who was in Norway, was supported by the head of the Ministry of Finance. We are talking about investing, following the experience of the same Norway, the funds of the stabilization fund in securities of the largest foreign companies and attracting a management company for this purpose. True, Mr. Kudrin did not say when this would happen, making it clear that it would not be soon. The new amount of the fireproof amount that is necessary to maintain the budget for a number of years in the event of a sharp decline in oil prices has not yet been determined.
According to the minister, in order today to satisfy the requirements that were set for the fireproof amount during the formation of the fund, it is no longer necessary to 500 billion, but 1 trillion rubles. However, it is far from certain that this particular amount will be considered sufficient. “A number of countries have defined for themselves the volume of the “airbag” as the entire volume of government spending plus the entire government debt. But this is a last resort. We will look for an option between the most extreme points,” says the minister.
Yesterday, journalists directly asked Alexei Kudrin whether he was ready to resign if the Cabinet of Ministers did not accept the plan of anti-inflation measures developed with his participation and decided to unseal the stabilization fund. Mr. Kudrin replied that he did not want to comment on this issue, but made it clear that there would be no resignation. “Today, in general, a common position is emerging: the priority is the fight against inflation,” the minister seemed to say, either with pleasure or with relief.