#8 - JRL 7218
June 10, 2003
RUSSIAN TRUMP CARDS IN ECONOMY
Nikolai Shmelev, member of the Academy, Director of the Institute of Europe under the Russian Academy of Sciences
The cause for the economic crisis in Russia is purely Russian in nature.
I have a strong feeling that we have passed the trough of economic crisis in Russia. The economy in our country is turning, albeit slowly and awkwardly, toward the revival.
The cause of the economic crisis in Russia has a subjective rather than objective character. Our country is not the only one that had to go through the transition toward market economy, toward democratic society. However, it's our country that has more than 40 million citizens living in poverty as a result of this transition.
I am not going to say anything new by quoting the example of China, which has been going through reforms for 25 years. That the reforms have been successful, in general, is definitely noteworthy - they benefit not only the State, but also the individual lives of ordinary citizens. Russia was simply unlucky to get a wrong kind of leadership that headed the process of economic reforms. The economic tasks were tackled in an amoral, purely Russian, way - with utter disrespect toward to ordinary people and their needs. It's a sin for which individuals like Yeltsin, Burbulis, Gaidar, and Chubais will answer before God in Purgatory, because nothing comes out of nowhere. The fortunes "appropriated" by Berezovski in reality were simply stolen from Russian people. Therefore, we could have avoided poverty, had the reformers been wise and humane. Here we are dealing mainly with the Bolshevik legacy - they managed to eliminate the first-rate humans in Russia. And the second-rate ones. Only the third-rate remained, in general. Let's hope that the first-rate Russians will reappear from somewhere in the course of one, two or three generations. Genetic scientists predict that we won't be able to make up for the damage to our gene pool suffered in the 20th century until the middle of the 21st century, at least.
Nevertheless, there is a huge difference between the former and the current Russian Presidents. The first was a professional destroyer without any moral restraints. The second, as it seems, is worried about the fate of our country and has a general respect toward human beings, as such. And that's very important. Our leadership finally has to show concern for Russian people whose four or five generations worked for pennies and lived in poor conditions to reflect their miserable salaries.
I can't say that I've seen some brilliant economic achievements during the last three years while Mr. Putin held the reigns of power in Russia. But, at least, he didn't make any grave mistakes in the economic sphere, either. I would also like to mention another Putin's merit, which directly relates to the economic development of our country - he holds back some adventurous reformers who would have continued to destroy our Motherland, had he given them limitless powers.
An ambitious goal
I believe that Russia can become a strong economic power in about thirty-forty years if we don't commit grave mistakes during that period. I doubt that natural resources give us a major advantage. Those are given to us by God alone, and that's great. Those resources, at least, will help us survive in the near future. But if we really want to occupy some place of importance on the world's economic arena and be equal partners with economically advanced world countries, we should actively start using our major potential - the intellectual potential. During past twelve years this potential has been squandered in a most shameless way. We must save the rest; fortunately, we still have some of it left. All lamentations that we have too many scientists and planners are a mere hypocritical whimpering. We can't afford saving at the expense of education. The funds needed for education are paltry compared to hundreds of billions of dollars that somehow "evaporated" in a thin air. To decrease expenditures on science and education is like to try saving on matches. However, in this case, these are the types of matches that will ultimately determine Russia's fate.
We have many reasons to be proud of our past, and I hope we will have even more reasons to be proud in the future. We have set a quite ambitious goal - to double Russia's GNP in a decade. In real terms, it means that we have to maintain a yearly economic growth rate of eight percent. It's very hard to reach this goal. However, applying our perseverance and solving a series of tough economic problems (of which I'll talk later), we might be able to do it.
Russia has several trump cards it can use for the successful economic development. Those are our intellectual potential, our rich natural resources, our wide-spread transportation infrastructure, and our leading role among the former subjects of the Soviet Union. I believe that none of the former Soviet republics, except the Baltic republics, has a chance to become a fully developed state without active cooperation with Russia. Besides, we opened the doors to our economy and stopped being economically isolated.
We are still facing 15-20 economic problems
I will focus on six major problems. I believe that Russia doesn't need the second round of free privatization. At least for another 10-20 years. In the near future, we don't have to privatize railroads, or energy industry, or gas pipelines, or postal services, or telegraph, or communications, or large defense industry facilities, or land, or natural resources. The problem is that our economic assets are undervalued by the factor of 20-60 compared to their actual value. If the first round of privatization gave us zero profits, the second round will be conducted at 1.5-3 percent of the real value of privatized property, which means - almost for free, again. In reality, it's a sort of a semi-criminal approach, when those who failed to gain profits during the first round will make a second attempt to do so.
Certainly, the State is not the best master. However, even during the times when Russia was plagued by instability, the state sector somehow managed to turn its wheels, may be not too efficiently, but at least more or less reliably. We shouldn't purposely undermine this stable foundation of our economy. It took several decades for European countries to privatize, for example, their respective energy industries. They had to create a stable market economy in the first place, develop clear rules of privatization and norms of business conduct for private owners. By the way, energy industry sector in France is still 70-percent state-owned.
It's time for Russia to abandon the pattern of the current, practically semi-criminal distribution of the so-called natural rent and excise duties, which used to be the backbone of the Russian state budget for as long as we can remember. We are still arguing about what part of the natural rent is taken by oligarchs, and what - by the state. According to some estimates, this rent is currently distributed at a 15 to 85-ratio in favor of oligarchs. The most optimistic estimates show the ratio of 40 to 60. We can say the same about vodka. We must return the stable sources of income from vodka sales from the hands of smugglers and bootleggers to where they belong - the state coffers.
Today, Russian citizens still don't trust very much either the State, or private banks, or the ruble, in general, albeit, to a certain degree, their confidence went up in the last couple of years. This vote of non-confidence is directed at the entire credit system. And that's quite understandable. In 1992, people's savings dissipated in a puff of smoke almost instantaneously. The 1998 crisis delivered the second blow at the savings of the Russian population. The Russian leadership is facing the task of restoring, by all possible means, people's confidence in itself, in the financial system, and in the ruble as a reliable currency.
We can't allow the situation where the internal price system matches the price systems of major European countries. The pressure in that direction is on the rise not only from within - on the part of Russian oligarchs, but, unfortunately, from outside - on the part of European economic circles. We simply can't afford having railroad tariffs matching European standards. If Russian citizens had to travel from Moscow to Vladivostok paying the price of a ticket according to European tariffs, many of them, I think, wouldn't have been able to go father than the border of the Moscow region. The same applies to internal electricity and gas tariffs. The country will simply collapse in this case.
Russia cannot count on quick revival while the current social atmosphere pervades every stratum of the country. When some people talk about balancing the internal price system with the European one, they tend to forget that the major commodity devalued in our country is not gasoline, or natural gas, but the working force. And the cost of labor in Russia is devalued to incredible proportions - it's currently 10-20 times less than it should be. Therefore, in the high-tech age, we cannot expect people to work efficiently for such miserable pay. The officials claim that the country doesn't have money to increase the salary level. Is that so? In most countries throughout the world, the salary constitutes 60-70 percent of the national GDP, and the rest (profits, taxes, etc) - only 30 percent. In Russia, the salary part of the GDP is only 30-35 percent, at the most. Therefore, if the government focuses on finding the real solution to this problem, it will have enough potential to do it. In terms of social differentiation, we've broken all safety barriers with traditional Russian elan and boldness. The official discrepancy ratio between incomes of various social strata in Russia is 1 to 20, and the unofficial is a mind-boggling 1 to 60. Russian people are known for their patience. Maybe they'll continue to be patient in the future, however, we shouldn't forget that the Russian history is full of striking examples like the Pugachyov insurrection, or the 1917 Revolution.
And here is the last thing I wanted to mention. I believe that the ongoing discussion about Russia's accession to the WTO is directed at diverting the public attention from more pressing problems. All experts agree that the only benefit from this move will be an extra US $3 billion in profits from Russian exports. Meanwhile, nobody yet tried (and I sincerely doubt if it's possible at all) to calculate the losses our imports would suffer if the membership in this organization strangled our automobile, aircraft and consumer-related industries. We are in the total dark on that one.