The level of the general government’s expenditures in those post socialist countries that are more developed than Russia and began their transition to the market economy at en earlier stage has now become comparable to that characteristic of the majority of the OECD members (Fig. 8).
Source: the data concerning Poland and Czechia are taken from EBRD Transition Reports; the data on Germany: OECD, http://stats.oecd.org/wbos Fig. 8. Budget expenditure of the general government in 1992 – 2005, in % of GDP In Russia the level of public load on the national economy is lower, but the demographic dynamic has shown that the approximation of this country’s corre sponding indices with the indices of the better developed East European countries is just a matter of time.
The popularity of distributive annuity systems in the first years of their exis tence was associated with the fact that those who were then retiring did not have to pay for their annuity. The system was financed from the taxes paid by the next gen erations of workers. During the transition from a distributive to an accumulative an nuity system there emerges a situation when those who work must not only pay for those who have retired, but also to accumulate the resources necessary for financ ing their own annuities. The earmarking of the revenues from the oil and gas sector for the capitalization of the funded component of annuity makes it possible to find a solution to the “double payment” problem. And here the experience of Norway may prove useful.
RUSSIAN ECONOMY IN trends and outlooks Norway and Russia are faced with rather similar sets of long term financial problems. In Norway, life expectancy is higher, but the retirement age is higher, too13. The specificity of demographic transition in Russia (a rapid reduction, during industrialization, of the number of births per female) created the trajectory of the population’s early ageing and rapid growth of the number of post retirement age groups against the number of actively employed. Those problems of the pension system that Russia should have experienced several decades later are already ex isting.
The replacement coefficient14 in Russia in 2005 was 27.6 %. When the inertia based scenario is realized, when no changes are made to pension legislation, the value of this coefficient will go down by 2015 to 20.2 %, by the early 2020s – to 16.%15. For this index to remain at a habitual level, the country will need resources in the amount of approximately 4 % of GDP, that is, comparable to the revenues of the Global Pension Fund of Norway.
The Norwegian Pension Fund sets the standards of financial responsibility to be achieved by a country dependent on the situation on the hydrocarbon market16.
The estimations of the scope of the problems associated with ensuring the stability of the Russian pension system yield similar figures. The mobilization of resources necessary for ensuring comparable and stable incomes is the key issue of Russia’s financial strategy.
The reserves of privatization and the incomes of pensioners Nobody knows how long the period of a favorable situation on the oil and gas market will last. Its price is represented by the difference between the 10 % of GDP accumulated in the Stabilization Funds and no less than 50 % of GDP needed for ensuring the stability of the national pension system.
The source of the funding to compensate for the deficit of pension savings is state property. Privatization in Russia took place against the background of the So viet Union’s bankruptcy, lack of foreign currency reserves, and political instability.
Big enterprises, chosen as the objects for privatization, were debtors both of the budget and of their own employees. Arrears of wages for many months on end were a habitual element of everyday life. The hopes of mobilizing big financial re sources through the sale of such state owned assets had little to do with reality.
The main goal then was to ensure the control of private owners with an interest in the efficient performance of such enterprises over their economic activity.
At the meeting on 18 April 1996 at the Ministry of Fuel and Power Engineering of Russia, the probability of a decline in oil production in this country by 2000 to the Mean life expectancy in Norway is 79.3 years, in Russia – 65.4 years, the retirement age in Norway is 67 years.
The ratio of average annuity to average wage.
The growth in average annual revenues of the Oil Fund of Norway, from the moment when the gov ernment’s funds were transferred to it (1997), was 6.3 % when estimated in the international reserve currencies, and 4.5 % per annum when adjusted by the level of inflation and less administrative costs.
Introduction Key directions of economic policy level of 150 – 190 million tons per annum and its transformation into a net importer of oil was discussed17. Approximately at the same time there was a discussion as to what should be done when, by 2000, the oil output of the amalgamation “Nizhnevartovskneftegas”, which was exploiting Russia’s largest oil deposit in Samotlor, would fall to zero, and the 200 thousand population of Nizhnevartovsk would have to be moved elsewhere18. However, this problem did not need to be solved. After the privatization of “TNK”, whose main asset was “Nizhnevartovsk neftegas”, 50 % of its property, at the price of $ 6.75 billion19, was purchased by the company “British Petroleum”. In Fig. 9 the changes in the dynamic of oil extraction in Russia after privatization are shown.
15% 10% 5% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* -5% -10% -15% * In the first half year, against the first half year of 2005.
Source: the RF Federal Statistics Service (http://gks.ru) Fig. 9. Growth rates of oil extraction in Russia in 1991 – 2006, in % per annum The growth of the national economy’s factor productivity, which gave rise to a trend of GDP’s long term growth, began when a predominating part of the Russian economy became private20. Economic growth, financial stability producing a lower ing government debt / GDP ratio, and higher credit rating of the country and its Kommersant. 18 April 1996.
Kommersant. 17 July 1996.
From the “TNK VR”’s website.
Entov R. M., Lugovoi O. V. et al. Faktory ekonomicheskogo rosta rossiiskoi ekonomiki [Factors of economic growth of the Russian economy]. Nauchnye trudy [Scientific Works] No 70R. M.: IET, 2003.
RUSSIAN ECONOMY IN trends and outlooks biggest companies all produced a revision of the notion as to how much the price of property in Russia might be (Fig. 10).
“LUKOIL“ “Surgutneftegaz” “Norilskii Nikel” 10.04.1997 14.02.Note: First data on capitalization of “Norilskiy Nikel” as of 30 May 2001 ã.
Fig. 10. Capitalization of “LUKOIL“, “Surgutneftegaz” and “Norilskii Nikel” in 1997 and 2007, $ billion From the year 2003 onward, the Russian authorities took a course toward re nationalization. One example is the destiny of “Yukos” one of the biggest compa nies. There are no facts, however, that could demonstrate any improvement in the quality of management in the oil sector.
The financial results achieved by the companies operating in the Russian oil and gas sector can hardly be regarded as a reliable argument in favor of the advan tages of state ownership. The arrears accumulated by state owned enterprises in 2006 were approximately 20 times higher than those of private ones. Russia’s ex ample is yet another proof that the State is not an efficient manager, while a corrupt State – even more so. However, the assets concentrated in the hands of the State are comparable to the funds necessary for ensuring the stability of the pension sys tem (Fig. 11).
Introduction Key directions of economic policy 251,83,64,51,“Gazprom” “Rosneft” “Sberbank” “RAO UES of Russia” Source: RTS.
Fig. 11. Capitalization of “Gazprom”, “Rosneft”, “Sberbank”, and “RAO UES of Russia” (data as of 14 February 2007), $ billion According to Alfa Bank’s estimates, the price of the shares in Russian state owned enterprises quotable on financial markets by early 2007 amounted to $ billion (approximately 35 % of Russia’s GDP in 2006)21. It is not easy to find argu ments in favor of the assumption that keeping these companies in state ownership is compatible with national interests. The pension system’s stability, which can be ensured by an unhurried privatization of the assets of state owned companies, timed with a favorable situation on the market, represents a goal that cannot be dis regarded. The choice of this particular direction of the economic policy will make it possible to mobilize adequate resources for the financing of this country’s pension system in the 21st century.
The price of the State’s generosity Economic growth, whose stability by 2003 – 2004 had become obvious, in a situation of rising oil prices was changing the background for financial policy. In 2003 – 2004 the government of Russia, believing that the lowering of tax rates could pave the path toward the legalization of business activity and increased tax collection, lowered the rates of two major sources of budget revenue: the value added tax (from 20 % to 18 %) and the single social tax (SST) (the base rate was decreased from 35.6 % to 26 %). The income legalization effect was close to zero.
The budget lost more than 2% of GDP approximately the same amount as that yielded by the income tax prior to the introduction of its flat rate. The differences between the consequences of reforming the income tax and the profits tax, on the Monitoring of investor activity in Russia. Alfa Bank. 12 February 2007.
RUSSIAN ECONOMY IN trends and outlooks one hand, and the lowering of the rates of SST and VAT, on the other, are illustrated by Fig. 12.
2003 2004 - 2001 - 2005 - 2002 - Profits tax Income tax VAT SST Note: The data of 2006 are for the period of January through October.
Source: the RF Ministry of Finance.
Fig. 12. Russia’s general government budget receipts from some taxes, in % of GDP The structural component of the federal budget’s tax revenues, which is not dependent on the level of oil prices, reached its historic high in 2002 (18.9 %).
Later it declined (to 15.2 % of GDP in 2006)22. The situational component, which is dependent on high oil prices, has been growing since 2003. In 2006 it amounted to approximately 7 % of GDP.
In 2005 – 2007, the already habitually high prices of oil and natural gas, cou pled with economic growth, inevitably resulted in the expansion of the State’s fi nancial liabilities. Hence the new national projects, the investment fund, and meas ures designed to finance the demographic policy. The RF Ministry of Finance has succeeded in maintaining the growth rate of budget expenditure within the limits imposed by the growth rate of GDP, and moreover, it managed to lower the share of the general government’s expenditures in GDP (see Fig. 13, Table 3).
The IET’s estimates. The structural component of budget revenue is estimated on the basis of the average oil price in 1990 – 2006.
Introduction Key directions of economic policy Source: IMF IFS, the RF Ministry of Finance.
Fig. 13. The revenue of the general government’s budget and oil prices in nominal terms, 2000 – Table The execution of the general government’s budget, in % of GDP, in 1999 – 1999 2000 2001 2002 2003 2004 2005 Revenue 33.8 38.3 38.4 37.8 37.1 37.5 39.7 40.Expenditure 35.3 34.3 35.2 36.3 36.0 32.9 31.5 31.Surplus –1.5 4.0 3.2 1.5 1.1 4.6 8.1 8.Source: the IET’s estimates based on the data provided by the RF Ministry of Finance.
This has nothing to do with the volume of budget liabilities. National projects have been planned for a period of 2 – 3 years. However, they create long term budget obligations. One hardly object to secondary schools being equipped with electronic devices and provided with an access to the Internet. But while making such a decision, it would be quite reasonable to remember that these are not going to be one time investments. The electronic equipment will need to be upgraded, and the access to the Internet – to be paid for.
The resources of the investment fund are being spent on the financing of the development of infrastructure, which is considered to be a priority, and can hardly be objected to, either. But it is not enough just to build a new infrastructure – it will have to be exploited. The upkeep of the high speed highway between Moscow and RUSSIAN ECONOMY IN trends and outlooks St. Petersburg is expensive. And there exist no estimates of the long term conse quences of the budgeting decisions that have been made so far.
The investments in public health care projects will involve the allotment of substantial resources to the purchases of high tech equipment. Once installed, this equipment will require more expenditures on purchases of spare parts and techno logical materials. No funding is earmarked for such purposes in the project. The available information provides no grounds for an assumption that someone has, indeed, calculated the financial outcome of the parent capital project in terms of Russia’s budget at least for the next 10 years. It is planned that credits will be granted for 8 years, to be spent on the construction of state of the art livestock breeding complexes, and the State is going to subsidize the interest rate (2/3 of the rate of refinancing established by the RF Central Bank). The project is for the pe riod of 3 years. The credit facilities are for 8 years. Its seems that no long term budgeting consequences have been calculated, either.
Such decisions determine the prospects of budgeting policy for many years to come. Regretfully, some people do not understand this.
The signal to the economy is clear. The orientation to restricting the share of public expenditure in GDP is a thing of the past. Today’s agenda is to develop new programs of budget allocations. To resist the trend of growing public expenditure as a percentage of GDP, it will take a political will and consistent efforts. In 2005 – 2007 the authorities demonstrated that their reserves had been exhausted. Hence the consequences for tax policy.