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Friday, February 29, 2008

Another Original LR Translation: Nemtsov on Putin via Essel, Part 7

NOTE: This is the sixth part of a serialized translation of Boris Nemtsov's white paper critiquing the Putin years. It includes the tenth and eleventh chapters of the work. Part 1 (introduction and chapter one) appeared on Monday, Part 2 (chapter two) on Wednesday, Part 3 (chapters three and four) appeared on Friday, Part 4 (chapters five and six) appeared on Sunday, Part 5 (chapters seven and eight) appeared on Monday and Part 6 (chapter nine) appeared on Wednesday. Look for Part 8, which may be the final installment, on Sunday. 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. The entire translated white paper document, including the final sections not yet published here as HTML, is now available as PDF (this link is now also permanently in our sidebar).

Putin: the Bottom Line

by Boris Nemtsov

First Deputy Prime Minister of the Russian Federation, 1997-1998


Vladimir Milov

Deputy Minister of Energy, 2002

Translated from the Russian by Dave Essel

Chapter 10

Worsening Inequality

Russia is a country of the most massive inequality. This can be seen everywhere and in many different things. And this inequality – between the regions and between people – is only getting worse.

The average nominal monthly wage in Moscow is 20 thousand rubles. In places rich in natural resources, for example the Khanti-Mansiisk, Yamal-Nenets, Chukotsk regions and the Nenets autonomous district, it is 25-30 thousand. Real incomes in Moscow are of course considerably greater than that. At the same time, the average wage in Dagestan is 4500 rubles and a bit more – 6-8 thousand rubles – in the Central Black Earth region. In fewer than a third of the Russian regions is the average over or equal to the average wage for the whole of Russia (11 thousand rubles per month); in all the rest of the country it is lower.

At the same time as in 4-5 regions of Russia people are now living no worse than in developed Western countries, in the rest of the country they are living on a par with Mexico. One of the reasons for this differentiation is Putin’s policy of budgetary colonialism. Back in 2000, government expenditure was divided 50/50 between the centre and the regions. Now it is 65/35. Another reason is state monopoly capitalism, the model whereby the country’s natural resources are exploited, that has taken shape in Russia. Smaller businesses and those not involved in raw materials in areas without such resources are unable to develop – because of the high barriers to market entry maintained by officialdom and the monopolies they have links with, because of the government’s tax terror policies, because of the risk of losing what they own, and because of the poorly developed infrastructure.

To overcome this differentiation, it is vital that support be given to economic activities by the people, to developing small businesses, to involving as wide a circle of people as possible in entrepreneurial activities. This is the only way to make a meaningful number of Russians if not rich, then at least well-off.

During Putin’s presidency, however, the number of small enterprises has practically not risen in Russia. There are about one million of these today. That is less than 7 companies per 1000 population. This should be compared to the EC average of 45 per thousand, 50 per thousand in Japan, and 75 per thousand in the USA! In Western countries, about 50% of the working population is to be found in such enterprises and in Japan nearly 80%. Only 9 million Russians – 12% of the working population – work in small businesses. And these small businesses make a proportionate contribution to our GDP. This may be compared again to the USA, where the contribution by small businesses to the GDP is 50% and to the Eurozone where it is 60%. It should come as no surprise that people live more richly and in those countries and that they have a large middle class, which is not the case in Russia.

As a result, the people who get rich in Russia are those who are close to where the earnings from natural resources are to be found. Some crumbs do fall off the table. And while plain people’s incomes have risen, they have not risen in anything like the way the wealth of the oligarchs has. The average wage in Russia has risen from $80 per month in 2000 to over $400 today. Over the same period, however, Putin’s Russia has beaten all records in growing numbers of billionaires. In 1999-200, Forbes List carried not a single Russian. By 2007 there were 53 and their total wealth amount to $282 billion.

First place went by rights to Roman Abramovich with $18.7 billion. We now rank third in the world for number of billionaires after the USA and Germany.

There’s “Combat the Oligarchs” for you! Under Putin, they have only become richer. And those who were able to build a tight relationship with Putin, to successfully sell Sibneft to him, have become richest of all. Bear in mind also that the wealth of top officials and those close to them – secret owners of property, of Swiss oil and gas trading companies, beneficiaries of a myriad offshore trusts, of ties with Putin & Co. – are beyond the scope of Forbes List and remain invisible.

This is not a call to arms against the billionaires. Russia needs billionaires. It is a sign that a market economy has taken shape and that large national companies have been created. However, the explosion in their numbers and their wealth in comparison to the modest enrichment of the rest of the country is more a sign that all is very much not well with Putin’s Russia and that the widely advertised battle against the oligarchs is just a propaganda slogan to cover up the government’s support for certain oligarchs.

We also think that a very different set of economic policies could create far more opportunities for many more Russians to get richer. A climate favourable to enterprise, open and free competition, reasonable conditions for business development, especially small and medium enterprises, independent courts of law, guarantees for property rights – these are the things which would help enterprises to develop in a big way and, just as importantly, help the middle class to develop. In Russia too many assets are concentrated in the hands of big business and a wider range of the population is unable to start up because of the high barriers to market entry – fruit of the alliance between the monopolies and corrupt officialdom.

The recipes for solving these problems exist. However, in order to be successful in this, the criminal-monopolistic economic system that has taken shape under Putin must be dismantled.

Chapter 11 The Economic Bubble

We are all supposed to be over the moon at the success of the economy under Putin. In reality, however, it is not doing that well. Given today’s oil prices, our GDP growth has actually been remarkably modest. With the windfall from oil that our economy has been enjoying, we should have been seeing growth rates of 10-15% percent like our oil-exporting neighbours Kazakhstan or Azerbaidzhan. Even oil-importing countries such as China and India, who pay today’s sky-high world prices for their fuel, have been growing at 8-10% a year. Our 6-7% looks modest against this background. Oil-rich Russia’s GDP growth rate is one of the lowest in the CIS. Back in 2000, our GDP growth rate was the second fastest in the CIS. By 2007, we ranked eighth.

Putin has not brought about even this GDP growth. Russia’s economy began to grow in 1997 and continued to do so after the crisis of 1998. In 1999, the growth rate was 6.4%, the same as the average growth rate under Putin. It would be weird indeed if we were unable to make our economy grow at such a rate at a time when oil prices are so high. It is notable that it is mainly the private sector of the economy which has seen any growth; the state companies have shown very modest results indeed.

For the economy to have developed faster would have needed structural reforms, the establishment of a climate favourable to investments in new projects, and a modernisation of the economy. We have furthermore failed to convert what we have achieved into a real economic modernisation of the country and revival of production capability. Instead of modernising, the Putin régime has devoted its attention to dividing the spoils, thus missing this favourable reform opportunity. We may not get another such chance again. We will evidently be forced to make painful social transformations (for example the pension reform we have already mentioned) when oil prices have fallen again.

Investment in production has slowed down as a result of the tough way private business is dealt with. Instead of creating new assets, companies have preferred to invest in real estate. A two-room flat built in Soviet times on the outskirts of Moscow now chnages hands for $200 thousand – a price inflation caused by investors buying up properties as capital investments. Gazprom’s capitalisation rose from less than $10 billion in 2001 to $350 billion today, despite the fact that its gas production has not increased while its costs and debt have risen threefold as it prefers to buy assets rather to to bring new deposits on line. What is this if not a bubble, a bubble that may burst with a very big bang?

Debt accumulated by corporations for the purchase of assets instead of investing in production now exceeds $400 billion and is nearly equal to the state’s financial reserves. The major borrowers are Gazprom, Rosneft, and the state banks. Should any of these corporations default, it is going to be the Russian public which will have to pay the cost as state reserves will be rapidly frittered away on keeping the inefficient state companies afloat.

Government expenditure, first and foremost for the benefit of the growing state apparatus and special services, has of course risen faster than GDP growth. Planned government spending on its own management, national security, and law enforcement for 2008 stands at $39 billion (compared to $4 billion in 2000). This is three times as much as has been allocated to the “national projects”. There are now over 600,000 civil servants. Government efficiency has nonetheless not improved; crime rates remain high and are in fact higher than in the 1990s.

The government policy favouring the mass creation of state enterprises has only increased the appetites of the recipients of government money. These corporations cannot compete on the open market without state aid. Pouring government money into the economy has already resulted in a burst of inflation which has hurt plain people (inflation is no abstract economic phenomenon). Consumer inflation of up to 15% and more means that prices are rising painfully fast. The monopolisation of the economy under Putin – the inevitable result of civil servants protecting “their” companies and hindering competition – has only poured oil on the flames. World Bank experts have tried to estimate how concentrated ownership has become in Russia and concluded that state companies and the 22 largest private financial and industrial groups control nearly two-thirds of industrial turnover. Over half the banking system’s assets are controlled by banks affiliated with the state or powerful officials. Of these, about 45% are controlled by just 4 banks: Sberbank, Gazprombank, VTB, and the Bank of Moscow.

And this is what they call the Putin “economic miracle”?

We need another kind of economy. We need a competitive economy with low barriers to investment, low levels of government involvement in corporate management and spending. We need alongside that a strong and effective state regulatory system, above all to control monopolies, aimed not at sheltering friendly businesses and dividing the spoils but at ensuring all the players in the market abide by civilised rules and compete fairly.

It is vitally important that small businesses develop in Russia. This was covered in greater detail in the chapter on worsening inequality. But small businesses are prevented from developing in Russia by administrative barriers, corruption, and the monopolism of commercial organisations with protection from officialdom. The barriers hindering the development of small businesses should be dismantled. Of the many things that could be done to help them, the most important is to combat corruption at all levels of the government and to de-monopolise the economy.

Government money should be used not to help state corporations and to inflate expenditure on the government apparatus and special services but on public health, education and the army. There should be the strictest of oversights over government spending. We need to sharply reduce state involvement in the economy and go back to arranging honest privatisations in the way we began to practise in 1997-2000. Businesses need guaranteed property rights, working laws, and independent courts of law.

It is entirely within our power to build such an economy. But to do so, we must refrain from making use of the services of Putin and his circle.

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