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Finally, in late 2006, the issue of the RF Bank (or Corporation) for Develop ment, which should start functioning by the end of 2007, was submitted to the Government for consideration. According to G. Gref, the formation of the institu tions of development in Russia should be completed with the creation of this estab lishment. In the opinion of many participants in the discussion, such an institution, provided that it is completely materialized, would essentially substitute the govern ment, and could begin playing the role of a parallel budget. This development would be rather dangerous, because the State must spend its resources in accor dance with a uniform and transparent procedure. The emergence of alternative budgets, though capable of performing the short term tasks of spurring up in vestment, practically always results in diminishing its efficiency and, ultimately, in stagnation (or even a crisis).

The administrative and political (and not commercial) nature of this institution originates from the fact that the Bank for Development, by its organizational and legal form, is deemed to be a not for profit organization, which is not oriented to the extraction of profit. Thus, it is suggested that this bank should subsidize indi vidual projects (or even sectors). However, the possibility of making productive and responsible decisions is therefore open to question. This institution should orien tate itself, instead of profitless projects (or instead of being literally subsidized), to the projects with a long payback period, which are not attractive to ordinary banks.

Even if the abovesaid criterion is adopted, the selection of projects, as well as the very prospects of such an institution, would give rise to many questions.

Apart from creating special institutions of development, the Government was actively engaged in studying the prospects for the development of individual branches of industry, believed to be of priority importance for the development of national economy. The debate was concentrated on the issues of development of the motor and aviation industries, new technologies, etc. The Government has ap proved the program for the development of nanotechnologies, the program Na tional Technological Base for the years 2007 11, and other similar programs.

Thus, the tendency toward using the traditional dirigiste approaches to economic policy was manifesting itself more and more openly. However, it should be admit ted that this tendency has so far been limited to the political and organizational RUSSIAN ECONOMY IN trends and outlooks and administrative (the consolidation of assets) spheres without significantly in fluencing the realm of budgeting.

The formation of the institutions of development is a policy which can be quite understandable in a State with high revenues. However, this policy has two very significant limitations.

First, financial decisions, being the simplest and most apparent ones, can de flect attention from the necessity to solve other (and, perhaps, deeper rooted) problems of consolidating economic growth. In recent time, such limitations of modern growth as the lack of high performance equipment, the rising competi tion with imports, the backward structure of exports and, most importantly, the deficit of skilled labor force, have become increasingly apparent. These issues are much more important than the support for individual sectors and enterprises, and they require foremost attention on the part of the authorities.

Secondly, there exists the issue of whether it can be in principle possible to solve the problems of post industrial growth by bearing on the institutions which, for the most part, have been devised at the previous stage of the socio economic development of both this country and the world. Are the institutions of development authentically modern, that is, do they adequately match the challenges of the post industrial epoch Only time will give answer. So far, we can only note that under certain circumstances, the use of traditional institutions for performing the new tasks of modernization is possible in principle. However, this can always be achieved at a price which can be too high in a medium term perspective. To bear upon the old institutions means promoting the rigidity of the social system and de creasing its adaptability necessary for adequately responding to the new rapidly changing challenges. All the history of Russia in the 20th century, be it the crisis of capitalist modernization at the beginning of the century or the crisis of the Soviet system, bears witness to this.

Some issues of investment activity Under conditions of transition to the investment growth model it is crucial to demonstrate the States attitude to private investors, including foreign ones. Any assessments with regard to this issue cannot be unequivocal and straightforward. It by no means always happens so that everything which seems advisable or, on the contrary, undesirable in accordance with the logic of developed market democra cies should inevitably produce an unambiguously positive or negative result. To a certain extent, the high profitability of investments compensates for the unconven tionality of the attitude toward the investors, and therefore the activity of foreign business could be relatively energetic in situations which can be characterized as unfavorable when judged by the standards of developed democracies. This is es pecially true with respect of foreign capital which feels itself relatively more politi cally protected than domestic business.

Usually, the presence of attractive assets, combined with the predictability of the actions of the authorities, creates sufficiently favorable conditions for the in vestment activity of businesses, including foreign ones. This effect is becoming Section The Socio Political Background especially pronounced against the background of the continuing decline of Rus sias ratings in terms of of state administration efficiency, corruption, compatibility, etc and the simultaneous improvement of its international credit ratings.

Last year, one of the major indicators of the relations between the Russian au thorities and foreign investors was the course of events regarding the project Sak halin 2, which was being developed under a production sharing agreement (PSA). From the point of view of the events of the past three years, nothing new has happened: the State in the person of Gazprom has taken the development of a promising oil deposit under its control by buying out the controlling block of shares from private investors. In other words, the Sibneft model, rather than the Yukos one, was used, which was positive from the point of view of internal policy logic and even was not harmful to the investors. However, this model is favorable only by the logic of relations between the State and domestic businesses. But whether this model can satisfy foreign investors will be seen only in the year 2007.

For now, it is possible to make a preliminary assumption that the situation with Sakhalin 2 is unlikely to produce any significant negative impact on the activity of foreign business in the part of direct investment. Firstly, the actions of the au thorities in this case were quite predictable and relatively restrained (the foreigners were granted their compensation). Secondly, the activity of foreign capital is gradually shifting from the fuel and energy sector to the sectors which the Govern ment is not planning to place under its control; this trend clearly answers the inter ests of the national economys development. Thirdly, the questionable efficiency of the production sharing agreements concluded in the mid 1990s was always suffi ciently clear.

At one time, the PSAs were seen as a mechanism for attracting foreign capital into those sectors which, in a country with an unfavorable investment climate (both politically and economically), required considerable investments. The inefficiency of the tax system required that the tax regimes granted to the projects urgently in need of large investments should be individualized, while the serious political risks necessitated the withdrawal of these investments from national jurisdiction. That was how the PSA projects of the mid 1990s came into being: special tax regimes were established for them and the resolution of disputes concerning these projects was placed under the jurisdiction of the Stockholm Court.

After the achievement of political stabilization and a considerable improve ment of the tax system, the production sharing agreements, in fact, became sense less. At the same time, the serious systemic problems of the PSA regime had fully revealed themselves.

Firstly, in conditions of weak state authority the PSA regime, with its implica tions of haggling for an individual tax treatment, gives rise to corruption. Secondly, the regime provokes a conflict of interests between the tiers of state power in the adopted PSA model, what is profitable for subjects of the Federation turns out to be detrimental to the federal budget. Thirdly, the adopted model stimulates the inves tor to blow up the costs, because they are subtracted before the production is shared (moreover, the agreements initially did not even set the upper margin of RUSSIAN ECONOMY IN trends and outlooks costs to be subtracted). As a result, the PSA regime of the mid 1990s type could only make the authorities, whose position had become much stronger, feel serious doubts as to its feasibility.

However, the comprehension of the dubious nature of the PSA regime only adds to the basic impossibility of practicing this model even in conditions of an un derdeveloped democracy. The regime can actually become possible only in two cases: either when state authority is extremely feeble, and a special treatment could be bought, or in conditions of an authoritarian rule, when it is sufficient to obtain (or buy) patronage of the highest ranking person. Under conditions of any relatively mature democratic system such a situation would be practically impos sible.

When summarizing the results of the discussion on the issues of the stimula tion of economic growth, it is necessary to make one general note. Despite all the importance of the specific issues of ensuring economic growth which were on the agenda of last years discussion, institutional and structural reforms will remain of principal importance in the foreseeable future. They, actually, should top the list of the first priority measures designed to consolidate economic growth and to en dow it with a stable and authentic dynamic. At present, this would be especially im portant because the readily accessible factors of growth are nearly exhausted (the idle facilities, the unused labor resources), and in the medium term perspective it is the new investments that will become the main source of growth.

The areas where efforts must be intensified are as follows: the protection of property rights (which is the aim of administrative and judicial reforms), reform of natural monopolies, reform of the public health care service, the transformation of the pension system, and reform of the housing and utilities sector. The develop ment and implementation of reform in these areas of socio economic policy is a much more difficult intellectual task than the creation of the institutions of devel opment. The institutional reforms of the institutions of power (related to state ad ministration and the judicial system), and of the institutions of development of hu man capital (education, public health care, the pension system) are concerned with the realities of the post industrial epoch. Their state of the art high performance models are to be devised anew because they cannot bear upon the accumulated experience of functioning under conditions of industrial systems. But no institutions of development would be capable of producing a stable long term effect, unless a thorough institutional renovation of these sectors is carried out.

1.1.3. Financial stability and the Stabilization Fund In 2006, the financial stability of the country, on the one hand, was formally strengthening: there was a significant growth of resources accumulated in the Sta bilization Fund, and of the gold and foreign currency reserves of the Central Bank.

On the other hand, the level of budget expenditure, in real terms, was also rising, which increased the vulnerability of the Russian economy to the market fluctuation of oil prices. Last year, the oil and gas deficit of the federal budget (calculated as a difference between the revenues not depending on oil and gas and the expen Section The Socio Political Background ditures) amounted to more than 5 % of GDP. This resulted from the decrease of taxes and the growth of budget expenditures. In fact, the financing of this deficit is carried out at the expense of the revenues depending on the export of fuel and en ergy resources and also on borrowing and the proceeds from privatization.

Any further weakening of budgeting policy in favor of growth in wages, current expenditures and tax reduction is unlikely to become a source of economic growth acceleration. These expenditures could result in a dangerous strengthening of the rouble exchange rate in real terms and could contribute to the worsening of the structure of the Russian economy, especially against the background of a slow down in structural reforms. In fact, the case in point is the danger for the country to be caught once again in this structural trap, into which the USSR once had been led to by the thoughtless policy of boosting its budget expenditures in the 1970s, which resulted in the disintegration of the country when oil prices collapsed.

The necessity to be cautious in budgeting policy becomes especially urgent if one rememberes that over the past 35 years the price of oil has been fluctuating in the range from 8 to 96 USD per barrel (in the 2003 dollars). Also, it should be taken into account that no responsible expert would be able to plot a more or less reliable trend, thus making it possible to forecast the dynamic of oil prices.

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