Sergey Aleksashenko, former Deputy Minister of Finance of Russia and former Deputy Governor, Russian Central Bank, responds to the release of Russia’s new $35 billion anti-crisis spending plan, announced January 28:
1. The Russian government’s 60 point anti-crisis plan was approved by Prime Minister Dmitry Medvedev on Jan. 28. Although half of the items in the plan call for budget expenditures, neither their size, nor the sources of financing are identified in the document. The entire plan is built with only the first quarter in mind, and the tasking of the Ministry of Finance with determining the size of the expenditures only applies to the first quarter.
2. The main domestic economic issue of the last several years has been the drop in investments, which in 2014 reached 5 percent. In 2000–2012, each 1-percent increase in GDP growth was accompanied on average by a 2-percent growth in investment. The reasons behind the drop in investments are well known: lack of protection of property rights, lack of rule of law, and the absence of real political and economic competition. Once again, the government has shown that it is blind to these problems.
3. The government is not yet ready to acknowledge the rising rate of inflation (which was up to 13.5 percent based on January results and will possibly reach 17-18 percent by the summer) and is not planning to spend additional funds beyond what is included in the budget. This means that all recipients of federal spending will soon feel a drop in their quality of life.
4. The Ministry of Finance proposes to fund a large part of the anti-crisis plan through a 10-percent sequester on all state expenditures (excluding defense and social spending). In Russia, this kind of approach to problem-solving has become known as hole-patching (“borrowing from Peter to pay Paul”) and is widely recognized as ineffective.
5. It is already possible to predict that like in the crisis of 2008-2009, the main beneficiary of federal spending will be the banking system (although there is no objective proof of any troubles within it so far). The Kremlin passed a law at the end of 2014 to recapitalize 27 of the largest banks in the nation using the federal budget (in the amount of 1 trillion rubles). The anti-crisis plan envisions appropriating 550 billion rubles from the National Welfare Fund to the state-owned VTB Bank and Vneshekonombank, and another 250 billion rubles to banks that finance infrastructure projects.
6. A significant portion of the plan (one quarter of the points) consists of various measures to decrease the fiscal and bureaucratic burdens on business, and small business in particular. The majority of these measures are formulated concretely enough, so it will be easy to tell whether or not they are implemented. The timeframe, for the most part, is set for the next two months. Will life for small businesses become easier after these changes? Will small businesses gain more access to government procurement? We will have to wait and see.
Sergey Aleksashenko is former Deputy Minister of Finance of Russia and former Deputy Governor of the Russian Central Bank. A former scholar-in-residence in the Carnegie Moscow Center’s Economic Policy Program, he is currently and independent consultant for Private Solutions LLC.
The Center on Global Interests does not take an institutional position on policy issues. The views represented here are the author’s own.