Vladimir Potapov

P

etrodollars keep flowing into Russia. The country’s gold and foreign currency reserves have already exceeded $107 billion. Simultaneously, the Stabilization Fund is maintaining high rates ($1.8 to $1.9 billion a month) of accumulating resources. This Fund has been established specifically for backing up social obligations of the State in case of oil prices’ downfall. Having reached $14 billion these insurance reserves seem to be excessive taking into account the still-unmet investment needs of the Russian economy. And this is causing much criticism by independent experts.
In the opinion of economist Alexander Shokhin, the budget-forming ideology directed toward proficit has already exhausted itself. Its results are obvious: the relative stability of microeconomic indexes, control over inflation, etc. However, authorities failed to develop a mechanism of drawing additional resources into the economy in order to make them a factor of economic growth.
Such an attempt is being undertaken now: the Ministry of Finance has submitted to the Government a proposal on using resources of the Stabilization Fund. As Minister Alexei Kudrin explained, this document should become a basis for normative acts that will ensure the establishment of a new mechanism.
The Ministry is proposing to set for the nearest three or four years an effective basic (not subject to spending) volume of the Stabilization Fund’s resources at 500 billion rubles (the current U.S. dollar exchange rate is $1 to 28.8 rubles) and after that to consider it a share of the country’s GDP. In Kudrin’s words, if a basic volume of the Fund’s resources in rubles is not indexed, then, it will be falling down with respect to GDP. Currently these resources amount to about 3.1% of GDP and, as the Minister believes, this could be taken as a minimal index for the future as well.
It is also proposed to start using them mostly to repay Russia’s foreign debts beginning from 2006. In experts’ opinion, this is the most efficient way of spending accumulated funds. At present, Russia is paying off annually a 7% interest on its foreign debts and it is very difficult to find investments with such a profitability level so as to make up for these payments.
It is assumed that Russia’s non-market debt will be liquidated in the first place. "The non-market debt is the Paris Club", notes Alexei Kudrin reminding that at present, the Russian Finance Ministry is engaged in consultations with member of the Paris Club of creditors on restructuring the Russian debt so as to turn it into market instruments as well as on its partial early repayment.
In case of repaying the "expensive" debt of $10 billion in the period till its full liquidation, the saving would amount to between $3 and $4 billion. "Undoubtedly, this is a well-founded practice and, as a whole, it is trustworthy", says Kudrin.
In the opinion of the Finance Ministry, it would be riskier to use resources of the Stabilization Fund for financing structural reforms as well as for increasing subsidies, for example, to the housing and communal services sector. These investments often fail to bring planned results and, as a rule, it takes a lot of time to get a return on them. "The Fund’s resources might run out and we would not have time to get needed results", warns the Minister.
In 2005 a portion of the Stabilization Fund’s resources will be used to liquidate the deficit at Russia’s Pension Fund. The Minister calls this step "a temporary insignificant retreat", which, in his opinion, will not have any notable impact on microeconomic indicators. But, on the whole, he does not support such a practice. Independent experts are criticizing this decision as well. If the Pension Fund’s deficit exists, then, it means that the system of taxation and social allocations is not perfect and it would make more sense to solve this problem some other way. As Alexander Shokhin says, no one should pretend that forced expenses are financed with the help of "some surplus budget funds".
It is appropriate to remind that the Pension Fund’s deficit has taken place after the sharp reduction of the uniform social tax and, in the opinion of senior officials at the Finance Ministry, it will persist for some time till the general growth of wages will not happen as a result of reducing tax burden. "In real terms wages are increasing 9% a year" and, accordingly, other kinds of tax payments will grow. "In 3 to 4 years they will surpass losses from the reduction of the uniform social tax", believes Alexei Kudrin.
In order to turn free financial resources into a factor of economic growth, Kudrin proposes to start, from the beginning of 2006, allocating from the federal budget no less than 60 billion rubles annually to finance investment projects. "This amount will be available since the "minimal calculated price" of oil will be increased from current $20 a barrel to $21 a barrel starting from 2006 (at present, if it gets higher than $20 a barrel, all additional state earnings go to the Stabilization Fund)", explains the Minister of Finance. Another source of funds for investments will be provided through saving on interest payments in case of early liquidation of the State’s foreign debts by resources of the Stabilization Fund.
Experts differ in their opinion on the necessity of the State’s direct participation in the investment process. Doubts result from the negative experience of the State’s investments in previous years and insufficient development of relevant institutions. Nevertheless, supporters of the idea have turned out winners. Among them are the Ministry of Industry and the Ministry of Economy, which believe that the project financing is quite justified, if a proper management is arranged. These Ministries should work out the procedure of forming an investment fund in the state budget and, later, of selecting projects as well as of spending funds. Alexei Kudrin stresses that it will be done through an international expertise, independent appraisals, tenders and by independent managers to be hired, not by state bureaucrats.
The head of the Russian Finance Ministry is convinced that putting free state funds in investment projects will not harm the country’s favorable macroeconomic conditions because these investments are called for by the economy.