NOTE: This is the fourth part of a serialized translation of Boris Nemtsov's white paper critiquing the Putin years. It includes the fifth and sixth chapters of the work. Part 1 (introduction and chapter one) appeared on Monday, Part 2 (chapter two) on Wednesday, and Part 3 (chapters three and four) appeared on Friday. look for Part 5 on Monday. You can display all the parts in reverse sequence on a single web page by simply clicking the "nemtsov white paper" link at the bottom of this post.
by Boris Nemtsov
First Deputy Prime Minister of the Russian Federation, 1997-1998
Deputy Minister of Energy, 2002
Translated from the Russian by Dave Essel
The Pension Crisis
One of the most depressing results of Putin’s presidency is the collapse of the pensions system. A modern pensions system able to cope with the less than simple demographic situation in the country really needed to be created when external events were favourable.
But the pensions reform was a total failure. The government these days only remembers pensioners just before elections by indexing pensions a little. Before the State Duma elections of 2007, Putin as usual gave the government a ticking off and ordered that the princely sum of 300 rubles [$12] be added to pensions before end 2007.
What else the authorities can offer, besides a little indexation, is unclear. The pensions system is going deeper and deeper into deficit. The population is aging and the proportion of workers to pensioners is only going to get worse. As a result, the pension fund is going into ever deeper deficit: the subsidy to cover the Russian Pension Fund’s deficit in 2007 was 88.2 billion rubles. This will rise to 251.4 billion in 2009 (over $10 billion). According to Mr. Batanov,who heads the RPF, up to 1 trillion rubles will be needed by 2015!
Meanwhile, pensions are laughably small, amounting on average today across Russia to less than 4000 rubles [$162] per month. Over the period the Putin-Zurabov pension scheme has been in operation, the ratio between average pension and average salary has decreased from 33% in 2000 to 24% today. By 2018, the average pension will amount to just 20% of the average salary , and by 2027 this will go down to 15-18%. In European countries, pensions amount to 40% and more of average salary.
In a distributory pensions system such as the one we have in Russia, the employed pay contributions to the Pension Fund which then go to pensioners. Such a system can only provide a decent level of pensions if the ratio of employed to pensioners stands at approximately 3:1. Today, this ratio in Russia stands at 1.7:1 and by 2020-2030 demographers believe that it may drop as low as 1:1. Ratios such as these mean that the only way to provide pensioners with a reasonable pension is to have an investment-based pension system. If we continue with the distributive system, pensions will be miserably small.
But the creation of an investment-based pensions system has failed. Payments from it will start no earlier than 2022. At the same time it is likely that a considerable proportion of the invested fund will be lost: the profitability of the invested funds has so far been to all intents and purposes negative. In 2006, the pension fund managed by Vneshekonombank achieved a return of 5.7% while inflation ran at 9% during the same period. Private fund management companies have been achieving returns of 20% per annum but 97% of people did not express a choice and specifically ask for their money to be managed privately and so remain in the default scheme managed by Vneshekonombank.
People simply do not have the information needed to decide how best to have their money managed, do not know anything about how the various management companies work, and cannot make a sensible choice for themselves. Furthermore, it is not always easy, even if one wants to, to transfer one’s money to a private management company. Those who try do so generally have to face opposition in their local Pension Fund office.
If an effective investment-based pension system were to be set up, it would solve other problems as well: capital assets would exist which could be used to invest in projects for the long-term modernisation of the country such as the electricity and power infrastructure and upgrading housing. Competition for investment from the pension fund would lead to more attractive investment offers.
But the reforms went only half way: Vneshekonombank and the Pension Fund were given a monopoly and the civil servants in charge are barely making an effort (by mistake or perhaps deliberately). As a result, the move to an investment-based pensions systems has not been successful.
In February 2007, former minister Zurabov proposed in a letter to the government that the pension reform be cancelled, that the savings-based system be liquidated and the individual savings of citizens be (compulsorily) used to finance the pension fund deficit. As a matter of interest, after his retirement in October 2007, Zurabov was secretly appointed an adviser to president Putin and now has an office on Old Square and receives a salary from the Presidential Administration. Putin must have been afraid to let the public know that he had found a sinecure for the unpopular ex-minister: the ukase appointing Zurabov was not posted on the presidential website.
Russia has thus missed its chance to modernise the pension system during good times and it is steadily moving towards total collapse. The pension fund deficit is growing larger at a time when there is a serious possibility that world oil prices will fall. The investment-based system is out of commission.
There are ways out. It would be possible, as Yegor Gaidar proposes, to follow Norway’s example and create a unitary pensionfund of about a trillion dollars by paying into it the windfall income from a tax on oil exports, from the income on the shares of state-owned companies, and income from large-scale privatisation of state assets. (What the government actually did was mainly to spend billions of dollars buying back assets from Abramovich and other oligarchs.) The Pension Fund should not have to be continually topped up with injections from central funds. Instead a system should be created which actually brings in income itself. If this fund was of, say, a trillion dollars, it would be possible to double the size of pensions even in the fund’s returns were quite moderate.
We need to take more decisive steps towards an investment-based pension system. The Russian pension system cannot be allowed to limp forward to its collapse in 2015-2020. Putin will have gone by that time and it is all of us who will have to rue the consequences.
The Basman Courts
The Putin era has led people to lose all faith in justice and legal protection and to the collapse of the idea of the supremacy of the law. “We insist on just one dictatorship – the dictatorship of the law,” said Putin in his first speech to the Federal Assembly in 2000.
“Dictatorship of lawlessness” are the words for the situation at the end of his presidency. Russia has become the world champion in selective application of the law to serve the interests of the authorities. Judges are totally subordinated to the executive and wholesale infraction of civil rights is the order of the day in any court case. Russia has earned the dubious rank of first place in the number of applications by its citizens to the European Court of Human Rights in Strasbourg. Over one fifth all applications to this court emanate from Russia and in over 90% of such cases, the state has lost. Unfortunately, Strasbourg cannot oblige our judges to review their decisions; it can only oblige the state to pay compensation to citizens. Our legal authorities therefore feel quite secure in their positions.
The Yukos affair crowned the victory of lawlessness in Russia: the courts were used as a tool for the removal of private property in favour of Putin’s inner circle. During this affair, Russia developed a type of judicial procedure that has come to be called Basman justice “in honour” of the Basman District Court which heard the case, working wonders of lawlessness and displaying total servility to the executive in rendering its decision against Yukos, Mikhail Khodorkovsky, and Platon Lebedev.
As soon as Yukos’ assets had changed owners, the judges immediately reviewed their previous rulings that Yukos owed taxes which it had to pay. After Yukos' main asset – Yuganskneftegaz – passed into the control of Rosneft, the tax claims against it evaporated and the judges “miraculously” began to drop tax claims against the company. In February 2005, the Federal Arbitration Court of the Moscow Assize annulled its previous ruling that over 9 billion rubles of back taxes from 1999 were owed by Yuganskneftegaz. Prior to this, while it was still a Yukos subsidiary, Yuganskneftegaz had lost its case twice. In October 2005, the Moscow Arbitration Court ruled that the Federal Tax Service’s claim for extra tax for the period 1999-20001 amounting to 5.6 billion rubles was unlawful .
The Yukos affair untied hands for the start of the “tax terror” – massive arbitrary tax claims against enterprises at the whim of the tax inspectorate. Enterprises were forced to pay to the government not how much they owed in law but how much the authorities thought right. In most cases, the courts sided with the tax authorities. The presumption that the taxpayer has correctly calculated his taxes, which is enshrined in the Tax Law Code, was to all intents and purposes replaced by a presumption of guilt. It became practically impossible to carry on business in Russia without making unlawful payments of tax. Tax terrorism is used ubiquitously as a stick for the removal of property from “outsiders” for redistribution to “insiders”. This happens at all levels – federal, regional, and local.
This system holds back the development of enterprise in the country, its worst effects being felt by small and medium-scale business which cannot afford to pay bribes to civil servants and judges. This is leading the country to the total triumph of monopolism, a monopolistic alliance between criminal business and corrupt civil servants. How the “state racket” operates to snatch property from entrepreneurs and gift it to organisation linked to the civil service was described in an interview with Kommersant in November 2007 by Oleg Shvartzman, an entrepreneur who had himself taken part in some of the Kremlin’s business projects. Putin’s system was actually devised by Shvartzman. Not just Yukos’ assets are feeling the pressure of the state racket system via the administration, the courts. Others include: Sakhalin-2, Russneft, Nortgaz, Tambeineftegaz, the Kovykta gasfield, United Machine-Tool Factories, Domodedovo airport. The list could be continued.
Legal reform supposed to underpin the Constitutional guarantee of the independence of the judiciary has had the very opposite effect. Independence has turned into dependance. Putin re-appointed the majority of Russian judges and in 2000 successfully maneuvered to have presidential appointees included in the Qualification Colleges which are supposed to be organs of oversight and control and have the right to dismiss judges from their posts. The wording of the laws On the Status of Judges in the Russian Federation and On the Organs of Judicial Organisation in the Russian Federation do not provide clear criteria for what “disciplinary offenses” of judges warrant removal from their posts. On the other hand, however, this lack of clarity makes it easy to get rid of judges who make difficulties and to blackmail the remaining ones. One former judge on the Novosibirsk District Court was removed from her post by the Qualification College, for quote “repeated requests to the authorities in defence of her rights and interests”.
It will come as no surprise that judges strive to make rulings that suit the authorities.
The dependence of the courts on the authorities is yet another reason for the lack of protection of Russia’s citizens. Corporate solidarity with the government – of investigators and prosecutors – inclines the courts towards guilty verdicts and in fact, in many cases, judges simply rubber stamp the indictment documents. In one area, however, the inclination towards guilty verdicts is not to be found – in cases to do with the civil servants involved in the redistribution of assets, and others who by dubious means have amassed billions thanks to their links with Putin. People such as these are in a privileged position.
At the other end of the scale, an ordinary Russian can land himself in prison for stealing a piece of sausage. The world was quite shocked in early 2008 by a case which reached the ECHR: Olga Gavrilova of Nizhny Novgorod, a registered invalid and at the time also seriously ill, was kept for several months in pre-trial detention, accused of such a theft.
The legal system needs to be radically changed in order for Russians to get the guaranteed right to judicial protection and to a fair and just examination of their cases. The country needs to implement the principle of the independence of the judiciary enshrined in the Constitution. This will take not just political will on the part of the executive: to achieve this we will also need an independent parliament, public oversight of the authorities, and, as we have several times said already, freedom of the press and of political activities.
In addition to guaranteed independence of the judiciary, we also need clearer legal definitions of the misdemeanours for which the Qualification Colleges have the right to discipline judges and in the case of the most serious offences – above all corruption and indulging the interests of the executive – a legal basis from removing such judges from their posts. When appointing new judges, it will be important to keep in mind the need to form a new judicial generation that has not experienced collaboration with the law enforcement authorities and which is not bound by corporate solidarity with the authorities. This is the only way in which we will be able to get rid of the judiciary's patently open inclination to convict.
Until these conditions are met, there is not much hope of getting unprejudiced justice in Russia.