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Opinion: The economists vs. the Kremlin

MOSCOW October 3 (RIA Novosti political commentator Peter Lavelle) - In an unprecedented open letter to Prime Minister Mikhail Fradkov’s government, Moscow-based brokerages and banks banded together to offer some friendly and very much needed advice: Stay the course of fiscal responsibility or risk Vladimir Putin’s most important achievements - political and economic stability.

Eleven prominent Moscow-based economists from leading brokerages and banks offered the Kremlin some wise council in an on open letter published in the business daily Vedomosti last Friday.

"We fully support the intention of the president and the government to raise the living standards of Russian citizens," the economists wrote. "But we think that this problem cannot be solved with budget policies alone."

The signatories rightfully fear the expected dramatic increase in budget spending without continuing structural reforms that could ignite an inflationary spiral and needlessly waste the government's accumulation of massive financial reserves. They also have doubts surrounding the government’s recently announced $2.45 billion investment fund. Established to finance infrastructure projects starting in 2006, spending on such projects could take on a life of their own in a number of years and waste state resources.

Essentially, what the economists claim is that all the money the government has slated to increase wages and welfare spending - a 30% increase in nominal terms or $16 billion this year alone - will be in danger of being eaten up by double-digit inflation. This claim is worth listening to: Fradkov’s government has proven itself woefully unable to control inflation, never once meeting its own its targets. High inflation not only dents personal expenditures of those millions of citizens on fixed incomes and the estimated 25 million people living below the poverty line, but also discourages much-needed investment in the economy.

What the economists are also worrying about is the politicization of Russia’s budgets as the country heads toward the 2007-08 election cycle. The government is clearly aiming to curry favor with the electorate, believing it has the means to do so. With hard currency reserves of $155 billion on the back of high oil prices and social pressure for the government to use these reserves to increase living standards, Fradkov’s government feels it can be generous.

Indeed, Fradkov’s government can afford to be generous, but not irresponsibly so. There is a well-grounded fear that Fradkov and the Kremlin’s pedestal political party, United Russia, will use this embarrassment of riches for short-term political gains at the expense of fiscal discipline.

If this is the case, Fradkov and United Russia should be careful what they wish for. Indirect state subsidies to the tone of billions of dollars in a short period of time come with political perils and could needlessly stoke social unrest. United Russia's voter base is very sensitive to raising inflation - the public outcry earlier in the year over the monetization of social benefits and shrinking real disposal income should serve as vivid examples of how government policies can bring about unintended consequences.

Fradkov should give serious consideration to the economists’ warnings. The letter reminds the government that political stability can only come from fiscal responsibility. The government’s presumed plans to buy political stability and voter loyalty by tapping into currency reserves and bloated surpluses could come back to haunt it in the most unexpected of ways.