#13 - JRL 7137
Russian State Debt, Economic Policy, Likened to 'Reaganomics' Under Russian Conditions
3 April 2003
Report by Vladimir Gurvich:
"'Reaganomics' Under Russian Conditions"
Yesterday's parliamentary hearings in the Federation Council were devoted to the topic of state borrowing: "Problems of Formulation of Effective State Policy in the Sphere of State Debt."
History knows of cases when such a policy brought serious economic dividends. The most telling example of recent decades is the so-called "Reaganomics." At that time, the government of the USA opted for a drastic tax reduction, compensating for the lost revenue through domestic borrowing. This allowed the economy not only to emerge from stagnation, but also to surge forward.
The problem facing Russia today is to write the strategy in the sphere of state borrowing into the overall macro-economic model of economic development. The difficulties are that, for the present time, such a model is rather nebulously outlined. It is no wonder there was the rhetorical question, posed to the audience by Deputy Minister of Finance Bella Zlatkis: Must we increase borrowing and reduce taxes, or reject the reduction of the tax burden and throw all the funds into payment of the foreign debt? And can we repay our debt obligations at the expense of tax revenues? Estimates show that, if we succeed in reducing the expenditure portion of the budget by 600 billion rubles (R), then we would be able to do without attracting additional funds from the market.
In the next 3 years, the country must get through the peak payments on the foreign debt. Therefore, we can speak of the fact that borrowing may become a serious factor of economic development only at the end of this time, believes Bella Zlatkis. According to the estimates, by 2006 the amount of the state debt will decline from the current 36 percent to 29 percent of the GDP [gross domestic product].
However, judging by all, the country's monetary authorities are ever more clearly realizing that, already today, we must lay the foundation for the future strategy in policy of the state debt. To the surprise of many, in March Minfin [Ministry of Finance] issued 15-year bonds, even though quite recently it had refused to issue even 10-year bonds. The Bank of Russia is also preparing its bonds for emission. Central Bank Deputy Chairman Konstantin Korishchenko admitted that, after the default, the Bank of Russia had focused its primary attention on budget and currency policy. And, in essence, it did not have its own securities portfolio.
The problem of domestic borrowing is naturally divided into two parts: Federal and regional. Gradually, the ideas of Russian "Reaganomics" are beginning to be perceived in the provinces. Bela Zlatkis assures us that, this year, there will be no regional defaults, even though certain regions are in a difficult situation.
Experts predict that interest in sub-federal and municipal securities will quickly grow (annually--R7-R8 billion each). Very much will depend on the policy of the regional authorities: Whether they will be able to get a credit rating, whether they will manage to build a positive credit history, whether they will make their regional budget and finance flows transparent. And, most importantly, will they manage to punctually repay their obligations?
Increasing the volumes of regional borrowing may give a great impetus to the development of local financial markets. And this would lead to growth of tax deductions, accumulation of investment resources, and involvement of public money into financial circulation. In other words, such a policy may become that ignition spark, which will start up the investment mechanism in numerous territories.
A unique situation has been formed in Russia today in regard to the ratio of foreign and domestic debt: 85 percent to 15 percent. In most countries, it is exactly the opposite, and in some places--as for example in the USA--domestic borrowing accounts for practically 100 percent. At the same time, the domestic debt, for the most part, is not a debt at all, but a method of re-distributing the general investment resource. Obviously, in the case if it is used effectively. So that we may agree with First Vice-Speaker of the Federation Council Valeriy Goreglyad about the need for the fastest possible development and adoption of the concept of the state debt.