The government treats

State capitalism declared the source of the Russian economic miracle

Previous sources of economic growth in Russia have practically exhausted their potential. The growth in the most profitable raw materials sector for the country is only 1.5-2% per year. The second day of the St. Petersburg economic forum was devoted to the search for the path that will lead the country to an economic miracle. As Minister of Economic Development German Gref said, “it’s time for us to move from economic reforms to economic policy.”

The speeches of the members of the cabinet of ministers left no doubt: they see the salvation of the country in state capitalism, calling it, however, the softer term “state investment.”

As Deputy Prime Minister Sergei Ivanov said, “the state is ready to cooperate with business.” Mr. Gref, in turn, explained: there are industries, such as the military-industrial complex or nuclear energy, where it is impossible to live without government intervention. Otherwise, the trend of increasing government intervention in the economy seems to him “dangerous and unproductive.” However, according to the minister, we are talking only about “talented businessmen among officials”, and not about global trends.

However, German Gref's subordinate admitted that state investment is the only possible path of development. As Andrei Klepach, head of the macroeconomic forecasting department of the Ministry of Economic Development and Trade, said, “Russia is at a turning point, which will end either in the creation of a new economy or in a new shake-up.” Salvation lies in the sharp increase in investment. Investments in the Russian economy amount to 18.2% of GDP per year, while the average for the CIS countries is 22.4%, and “Asian tigers” such as Korea and Singapore receive more than 30% annually. “It is impossible to cope with this situation without government investment,” the official admitted.

In addition, it is necessary to stimulate the influx of private investment in all possible ways, including at public expense. “The intention to invest part of the stabilization fund’s money in Western securities indicates that we have not learned how to invest in our economy,” Mr. Klepach believes. “Then what’s the point of withdrawing this money from a business; it’s better for them to invest it themselves.”

The head of the presidential expert department, Arkady Dvorkovich, suggested that all possibilities for reducing taxes have not yet been exhausted. “Taxes are still very high,” he said and proposed reducing the rate of the single social tax. True, in his opinion, this can only be done after pension reform and health insurance reform are carried out. In addition, Mr. Dvorkovich proposed replacing VAT with a sales tax with a maximum rate of 10%.

Only Finance Minister Alexei Kudrin stood up to protect public money from squandering. According to him, our peculiarity is that the strengths and weaknesses of the economy coincide. He was referring to the well-known fact that the basis of Russian prosperity is petrodollars, but critical dependence on them makes the Russian economy very vulnerable. Although this dependence, according to the minister, has decreased five times since 2000. If in 2000 an increase in the price of oil by one dollar gave 0.2% of GDP growth, now it is only 0.04%. However, even now, an increase in government spending using money from the stabilization fund, according to Mr. Kudrin, will lead to disaster. “We cannot continue to make the mistake we are already making—increasing government spending,” he warned. We need to stimulate private investment. “Our norm is a three-year bank loan at 15%, but it should be 5-7% for ten,” said Mr. Kudrin. The financial department's recipe is to fight inflation, primarily by strictly limiting budget expenditures.

According to the head of the Economic Expert Group, Yevsey Gurvich, three scenarios for the development of budget policy are possible. An ultra-tough policy will lead to the stabilization of the ruble exchange rate, the rapid accumulation of funds from the stabilization fund and the creation of a fund for future generations. But its disadvantage is that it cannot be implemented for political reasons: after all, 88% of the population is in favor of the fact that it is time to spend the stabilization fund. The second scenario is an increase in government spending while simultaneously trying to contain the strengthening of the ruble. This path leads to high inflation. And the third, most suitable, in the expert’s opinion, way from a political point of view is to increase government spending while the ruble strengthens. This is not as dramatic as is commonly believed, Mr. Gurvich is convinced, but it will help cope with inflation. Albeit not at such a fast pace as the government plans.

However, there is an opinion that neither public nor private investment alone will save the Russian economy. "Investment will not solve Russia's economic growth problem," said World Bank spokesman Isaac Goldberg. In his opinion, only half of economic growth is explained by investments in fixed assets of enterprises, the second half depends on labor productivity. So far, little thought has been given to this in Russia. “You have a lot of companies that have nothing to fear. And that's bad. Only those who are afraid of competition innovate,” explained Mr. Goldberg.

There is a lot of talk about corruption, which, according to investors themselves, is the main obstacle to working in Russia, but mostly in a general way. However, this year there should finally be a change for the better. State Secretary of the Ministry of Economic Development Andrei Sharonov said that by the end of 2006 two important regulatory documents will be developed: a presidential decree on the rotation of officials and a law on lobbying activities. Deputy Prosecutor General Vladimir Kolesnikov proposed to do something even more radical - to amend the Constitution and toughen penalties for bribery. “Give ten years for a bribe, and twenty-five years for a particularly large bribe, and there won’t be any criminals,” he said confidently.

Vera SITNINA, St. Petersburg