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Russian Audit Chamber Says Government Spending Beyond Its Means

Moscow, 11 August. The growth in government spending in Russia, first of all on national defence and security, as well as servicing government debt, is exceeding state capacity, the deputy chairperson of the Russian Audit Chamber, Valeriy Goreglyad, has said.

According to a press release from the Audit Chamber, this announcement was made on 10 August during a sitting of the expert consultative group on budget policy and macroeconomic growth parameters, established within the framework of preparing a conclusion on the draft federal budget for 2012 and the 2013-14 planning period.

"The structure of the Russian budget is such that it can only be balanced given extraordinarily high oil prices," Goreglyad said. He also said that the Russian government should thoroughly consider the expedience of the declared programme of foreign and domestic borrowing for the purpose of covering the budget deficit.

The draft of the key directions of (state) debt policy developed by the Finance Ministry envisages that throughout 2012-14, Russia will borrow R6,333bn (about 204.2bn dollars at the current exchange rate) domestically. As at 1 July 2011, the size of the Russian government debt stood at R4,600bn, including domestic state debt of R3,600bn and foreign state debt of 36.8bn dollars, or R1,000bn.

Growth risks

Goreglyad named high inflation, rapid growth in imports and capital outflows, a distorted investment structure, an unstable structure of the federal budget and an imbalance in the tax and pension systems as some of the factors that impede economic growth and complicate economic management.

Specifically, the forced growth in imports and the outflow of capital create mid-term risks for the country's developing a current account deficit and the deep devaluation of the Russian currency, he says. The greatest part of investment is concentrated in the resource sector, rather than real sector fields that can turn out products with a high degree of added value, Goreglyad said. He stressed that "he does not share in the optimism of the Ministry of Economic Development as regards the growth in investment by private companies in the technological modernization of their own production facilities".

"We have an intolerably low level of investment. There is not enough of them (investments) just to replicate the extremely obsolete production assets and infrastructure. The economy is literally starting to chew through itself," the chairperson of the Opory Rossii expert council, Nikita Krichevskiy, said.

Krichevskiy expressed doubts as to the expedience of stepping up the privatization of the state sector of the Russian economy, citing examples of the successful work of state enterprises in developed countries. "Our problem is a poor culture of corporate management," he said.

In the opinion of the deputy head of the analytical department of VTB Capital, Aleksey Moiseyev, an economic model that is based on progressive growth in government spending has exhausted itself.

"It is too expensive to produce even poor-quality goods in Russia. This is the very reason behind capital flight. State spending, and consequently, taxes, need to be reduced. Government spending should be redirected towards investment into fundamental energy and transport infrastructure, towards the creation of modern market institutions that stimulate production, not consumption. Accordingly, ministries should be competing for (the right to) establish the terms of economic growth, not for government funding," he said.

The director of the Centre for Fiscal Policies, Galina Kurlyandskaya, pointed to a need to fight corruption: "For as long as state purchases, which account for 30 to 40 per cent of government spending, see kickbacks of 40 to 50 per cent of the state contract value, talk of increasing the efficiency of government spending and targeted budgeting do not have a lot of value."

No crisis yet

The antecedents for a second wave of a global financial crisis, even factoring in the latest events on global stock exchanges will not be created earlier than 2013-14, said the head of the Centre for the Study of Post-industrial Society, Vladislav Inozemtsev. He said that deep and unfounded splits in people's incomes were an important obstacle in the way of economic growth in the country. Moreover, he said that the incomes of well-to-do members of society contributed to a growth in imports, not domestic production.

An economist at the Otkrytiye financial corporation, Polina Badasen, said that today, the Russian banking sector was more resilient to possible crisis phenomena than it was in 2008. In particular, she credited a more balanced currency structure in bank balances with this.

Capital outflow and inflation

The head of the market conjuncture analysis department of Gazprombank, Andrey Bogdanov, said that breaking the growing trend of major Russian businesses investing abroad will require Russia to boost its investment appeal, including by lowering the tax burden.

The chief economist of the Troyka Dialog company, Yevgeniy Gavrilenkov, said that inflation could be reduced by one-third if the government was able to evenly spread out budget spending throughout the year. "A massive dump of government money into the economy in November-December of each year programs inflation hikes in the first quarter of the next year that are destructive for the macro-economy."

In wrapping up the meeting, Goreglyad told the experts that the opinions they have expressed and the contributed working materials would be thoroughly examined by the Audit Chamber. The next session of the expert consultative group will take place at the Audit Chamber on 17, 24 and 31 August and 7 September 2011.

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