The suggestion to re galvanize the government’s investment activity laid upon yet another grounds: that is, institutional reforms require rather a long period of implementa tion, while their effect on acceleration of economic growth implies considerable time lags that appear practically unpredictable. By contrast, investment has an immediate effect on growth. But there exists the resident’s order to ensure a 7 8% growth annually. Naturally, public investments begin to be viewed as an important instrument of accomplishment of the political mission15. It is a different thing, however, that it will take time to realize how ef ficient these investments have been and if they can form a growth factor not only today (when they are being made), but in the future, too. It should not be forgotten, that the USSR, and later Russia’s, experiences of employment budget resources for investment purposes have been, by and large, negative.
The year of 2004 saw a widespread of the idea of capitalizing on the use of such an instrument as the public and private partnership. Essentially, it is a joint implementation of large projects by the state n cooperation with the private sector. It is assumed that while the government would create infrastructure, private businesses would be developing pro duction around it. This mechanism in principle can prove to be efficient in some cases, but it requires a very high level of mutual trust between the state and businesses, which is not the case in today’s Russia, no matter how much both parties hail to this idea. It should also be mentioned that by their concept PPP appears an imperfect alternative pt privatization and leasing, as it suggests charging the public assets transferred to private companies with the requirement to use them as per the purposes set by the state.
Price regulation. Last year, after a long pause, ideas of introducing the state price regulation once again began to circulate within the political circles. So far, they were re duced to a restoration of the regulation of domestic prices for oil and ferrous metals, due to a rapid price rise for these commodities, as well as to the respective export restrictions.
It was MP=s that very especially vigorous in raising these issues, while in December the State Duma even produced an official recommendation to the Government to start regulating oil prices16.
The mission of securing high and sustained economic growth rates sometimes leads to unforeseen consequences. The priority attention begins to be focused not on long term and efficient projects, but on those that meet two criteria they should be at the stage of great readiness for implementation and almost immediately secure high economic growth rates.
Today, in Russia, these criteria is met most of all by investment in the fuel and energy sector – because of a high level of its development and a great staffing potential. Plus, the sector is in possession of well designed investment projects and can provide a visible contribution to the rise in GDP – both at the stage of construction and with its exports. As a result, the advo cates of reactivation of the state investment policy often find themselves in a dual position: on the one hand, they believe state investments should promote diversification of the national economy, while on the other, they propose to concentrate the government’s investment activity on development of the infrastructure of the fuel and energy sector. It is evident that the second task is poorly correspondent to the mission of diversification of the economy and exports.
It would be incorrect to associate such ideas with the Soviet legacy. The eagerness to regulate market problems by means th of state price regulation was characteristic of the period of industrialization of the Russian Empire between 19 20 centuries.
In the period prior to the World War and especially in 1907–1910) the State Duma repetitiously addressed the issue of price rise for oil and saw its causes lying in the monopolist collusion between oil producers. MP=s, mostly those from the right wing parties, demanded from the government to take steps that would range from the introduction of the state price regula tion to the state monopoly in the oil sector.
The Socio Political Background Whilst some of such recommendations on intensification of government interference can be explained by challenges the national economics facing these days, in the current Russian practices there exist fundamental obstacles to implementation of the dirigist ideas. First, they lie with extremely limited possibilities for forecasting sectoral and struc tural priorities characteristic of the present stage of technological development. Second, the lack of maturity of political and legal institutions by itself forms a barrier to deploying state regulation instruments, as the absence of an efficient law enforcement system ham pers the design and selection by the state of actually effective projects. Thirdly, the already noted lack of mutual trust between all the participants in the economic life – be those households, firms, or the state itself. In other words, as long as the law enforcement insti tutions remain inefficient, the government’s decisions continue to scare or appall entre preneurs, while human development remains underfinanced, a direct state interference with the economy (and, primarily, investments) will remain inefficient.
The search of funds to ensure the budget expansion encourages some experts and policy makers to refer to two pools of funds – the Stabilization Fund and foreign reserves.
The latter proposal appears clearly bizarre and evidencing the absence of understanding of the nature of reserving, for a use of foreign reserves is equal to the CBR directly credit ing the national economy, as the Rb. mass equivalent of the reserves, has already be is sued against the purchase of foreign exchange. I.e. some experts de facto suggest using the same forex reserves to once again issue their Rb. denominated equivalent, which is an unsecured money issuance.
Theoretically, the Stabilization Fund can be spent on current financing, but it conse quently would find itself incapable of servicing to its principal mission, which is preclusion from the dependence of the state budget and, accordingly, recipients of budget funds from the state of affairs in the foreign trade area. However, the Stabilization Fund is doomed to be subject to an intense political struggle. With the presence of such a pool of free funds available, a financial agency finds it extremely complex (even impossible) to re sist a united pressure of sectoral agencies and other groups of interest, especially when we speak of a country involved in a war and overcharged with huge social obligations. Be ing keen to protect the fundamental guidelines of their course, in late 2004 the MinFin staff put forward some compromise ideas, such as, in particular: to use the Fund in part to cover the shortage of resources at the Pension Fund in 2005; to raise the cut off price for completing the Stabilization Fund from USD 20 to 21/barrel, effective as of 2006, to spend the resulting extra budget revenues (a. Rb. 60 bln.) for investment purposes to be set by the RF Ministry of Economic Development and Trade17. This undoubtedly forms the prece dent, and the fundamental becomes the question as to what extent this compromise would mirror the trend towards the loosening of the budget policy. But these modifications were not included in the 2005 budget and the excess of the Stabilization Fund over its threshold level is allowed for spending only to cover the Pension Fund’s deficit and an early foreign debt repayment, which is in line with the presidential Budget Address.
Proposals on intensification of the state investment activity appear especially embar rassing, given the unpredictability of oil prices. With the account of this, one should be ready to answer a number of tricky questions. First, what is he going to do if after the Naturally, the proposals to expand the state investment activity is accompanied by declarations on creation of conditions for a maximum efficient use of the funds. According to the RF Minister of Finance A. Kudrin, “ the RF Ministry of Economic development and Trade and the Ministry of Industry and Energy in cooperation with the RF MinFin will be assigned with a task to design procedures for formation of such a fund in the budget frame and consequently develop procedures of project se lection and spending funds. It will undoubtedly be an international evaluation, independent assessments, tenders, independ ent, hired managers, rather than civil servants” (INTERFAX AIF. 2004. 4 November).
RUSSIAN ECONOMY in trends and outlooks launch of projects back upped by huge state investments the price for oil falls and the USD inflow fades Second, what will be the destiny of the sectors that have failed fall under the state patronage, once Rb. further appreciates resulting from an expansion of the state fi nancial activity, which, in turn, leads to a drop in competitiveness of a considerable part of the economy Third, how would one neutralize effects from a fall in the country’s credit rat ing and what is going to happen with the budget, once a tension arises in this regard Fourth, what is one going to do with non interest expenditures in the situation when oil prices have fallen, while the Stabilization Fund has been spent While designing the Medium term program for 2005–2008, proponents of the institu tional approach entered in a heated debate with those advocating the dirigist approach.
The program ultimately highlights the problem of fostering modern market economy insti tutions, but coupled with some sectoral references, thus presenting in part a digest of the strategies, while partly – the description of sectoral problems typical of preceding docu ments of this kind.
In such a situation, it is especially important that the Program provides an unambigu ous reference to the necessity of provision of macroeconomic stability and budget con straints under implementation of any economico political decisions. The document par ticularly emphasizes the sound macroeconomic policy, with its fundamental parameters, such as predictability, ability to adapt to external changes, and transparency, as a critical condition of fostering a favorable entrepreneurial and investment climate.
All the above has not yet testified to the prevalence of the institutional approach in the country’s present economico political life. The actual economic policy in the short run will be much more important that declared intentions, but that will depend on the price dynam ics for oil. Should export prices for major Russian commodities remain high, they will strengthen the position of those who prove the status quo will be there in the log run, thus provoking a turn towards softer budget policy and populism.
1.1.4. The 2004 Main Domestic Political Outcomes Presidential Elections The presidential elections in Russia took place in March 2004. After CPRF refused to pursue the goal of breakdown of the elections (recommending Mr. N. Kharitonov for the presidential race, appointing observers, propaganda of boycott of the elections in order to decrease the number of votes to less than 50%), there remained no doubts of Mr. Putin’s victory. However, it was important both to Mr. Putin and the opposition to understand the level of their popularity.
According to the Central Electoral Commission, 64.3% of voters took part in the elec tions, i.e. at 10% more than at the parliamentary elections in December 2003. V. Putin gained 71.3% of votes, i.e. at 20% more than in 2000, followed by N. Kharitonov (13.6% of vote), while S. Glazyev and I. Khakamada lagged far behind them with 4.1% and 3.8% of vote, respectively, and yet another 3.4% of votes were against all the candidates. Interna tional organizations that monitored the race and elections claimed that the public, primarily electronic, media had put the candidates in different positions, clearly favoring the winner.
The OECD observers believed the elections were well organized, but not correspondent to the European standards.
As long as the party and political spectrum is concerned, the communists kept their positions, while deprived of the sponsors’ support, Mr. Glazyev suffered a catastrophic de feat. As concerns I. Khakamada, who had counted on attraction of additional “generally Section 1.
The Socio Political Background democratic” vote, she failed to at least repeat her own party’s (URF) result at the parlia mentary elections. But it does not make any sense to seriously comment on results of the rivals to Mr. Putin, for too meager were the resources they had spent on delivering their messages to the electorate. The presidential elections became the first signal of the deg radation of the existing parties and their transformation into political plaster casts.
The State Duma of RF Once the 2003 parliamentary elections resulted in the rise of the pro presidential majority in the State Duma, some experts speculated of the opportunity for introducing constitutional amendments that would increase the president’s role or even the one played by United Russia. That did not happen. Instead of that, the emasculation of the constitu tional provisions was opted for. That primarily concerned the provision on democracy and implied passing through the Parliament amended statutes on elections, referendum, po litical parties, procedures of formation of executive power agencies in the Subjects of RF, among others. Thus, referendum (that has not taken place since 1993) appears rather a strong form of influence on the government and an advertising campaign for political par ties, while the new statute on referendum contains such a critical innovation as the proce dures of collection of signatures: after having their own signatures certified by a notary, 4.Thos. individuals, by 100 ones in each region (there should be not less than 45 regions), should collect a 2 mln. signatures within two months, while other individuals have no right for collection of signatures. As a result, the procedures of conduct and organization of ref erendum became prohibitively bureaucratic and sophisticated.
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