Vladimir Potapov

H

igh oil prices played a trick on the Russian elite that wasted 15 years debating how “to live within means”. As it turns out, the time has come now to learn how “to live with means”: the Government still has not made up its mind as to where to invest petrodollars that are flooding the country. The federal budget has accumulated about $50 billion in free financial resources. Just six years ago the total budget was approximately equal to this amount.
However, some economists believe that the problem is nothing but the one being concocted. The matter is that a share of these funds is being kept in the Stabilization Fund that has been established as a safety net in case of a slump in oil prices. It is true that the Fund’s assets are growing but they are not that big yet so as to cushion a downfall successfully enough.
On their part, the Cabinet members are trying to counter the opinion that free funds are being "taken away" from the economy and that by doing this the federal authorities themselves are "clipping wings" of the economic growth. As they put it, at present, the actual demand for money in Russia is low and this is the consequence of but not the reason for the slow economic growth.
Up to what level can the Stabilization Fund’s resources increase? If prices for oil remain high, then, by 2010 its assets may reach $88 billion, thinks Alexei Savatyugin, the head of the fiscal policy department at Russia’s Finance Ministry.
However, the Government is going not only to accumulate free "surplus" money. It is also attempting to use these funds as effectively as possible. There are three viewpoints in this respect, which are being offered to the public. One of them is based on the assertion that they should be set aside to cover current social expenditures, such as pensions and money indemnity payments to the population. This approach is being promoted by Minister of Health and Social Development Mikhail Zurabov. The Minister is intent on implementing a package of unpopular reforms, while trying to reduce the impact of the multi-billion deficit that results from replacing due benefits with cash compensations as well as from the growth of pension payments as the social tax is being simultaneously reduced.
Minister of Economic Development and Trade German Gref holds a different view. He is proposing to direct accumulated funds to financing large investment projects. Gref is supported by Minister of Education and Science Andrei Fursenko, who says that "it makes no sense to eat away the Stabilization Fund’s resources; the Fund’s assets should be used for setting new directions in the economy".
Finally, Finance Minister Alexei Kudrin and the President’s economic advisor Andrei Illarionov believe that the most reasonable option is to use these funds for repaying Russia’s foreign debt. Arguing with his permanent opponent German Gref, Andrei Illarionov says that effective investment projects, if there are any, "can be successfully financed by the private sector". At present, cost of investment credits is often lower than rates of interest that Russia pays to liquidate its foreign debt, he says.
It seems that the position taken by Kudrin and Illarionov has prevailed. The Government is inclined to spend the Stabilization Fund’s assets on managing the country’s foreign debt. For this purpose it plans to allocate 167 billion rubles ($5.9 billion) in 2005. To an extent, Minister Zurabov’s insistence is also taken into account: 75 billion rubles ($2.6 billion) are to be provided for covering the Pension Fund’s deficit.
There is some leaked information on the talks with the Paris Club of Creditors, which Russia owes $46.5 billion, over $35 billion of this amount being due to countries of the European zone. As is known, Germany’s recent securitization of $6 billion from Russia’s total amount of the debt to the Paris pool has put Moscow in a rather awkward position, since a debtor nation can in no way influence this process. By contrast, Russia’s recent proposals imply both an advance partial repayment of the debt and additional securitization, i.e. a debtor-initiated replacement of some of its debt with securities freely circulating on capital markets. The securitization of its liabilities would let Russia redeem the debt back to an extent possible.
Thus, the only thing left is to figure out what will be more effective – to keep servicing the debt or repay it ahead of schedule – with various dynamics of interest rates and rates of exchange. The petrodollar "rain" that is pouring over Russia now permits to start this game, believes Nikolai Kashcheev from VneshtorgBank.
The repayment of state debts ahead of schedule has precedents. The most striking example is the case with Norway, which got rid of its debts precisely because of skillfully using superprofits from extracting hydrocarbons.
Such plans of the Russian Government have been welcomed by Rodrigo de Rato, the managing director of the International Monetary Fund, who visited Moscow last November. "We support the prudent budget policy having been conducted by Russian authorities in recent years, especially the saving of superprofits from oil sales", he said. In the opinion of de Rato, prices for oil will remain at the sufficiently high level. "We use the operating price of just under $40 a barrel in our calculations", he pointed out noting that this forecast by the IMF will remain in force for the nearest two years.
However, in the words of de Rato, Russia should try to achieve a better balance in its economy by stimulating the non-oil sector. He also welcomed the country’s intention to use proceeds from the oil export to liquidate the debt.
"We think that the strategy is the right one: to use gains from higher-than-expected prices to reduce the debt and to manage these receipts on the mid-term basis within the Stabilization Fund. Taking into account a stronger inflationary pressure at the present stage of Russia’s economic cycle we do not advise it to use any significant share of the Fund’s resources for momentary expenditures. If a decision to partially use them for investment projects is taken anyway, then, as we believe, funds should go to spheres, where they will contribute to the potential growth of Russia’s economy", said Rodrigo de Rato.
When meeting with the IMF managing director, Russia’s President Vladimir Putin confirmed that the country could meet ahead of time its debt obligations to the IMF and the Paris Club. "As far as the Paris Club is concerned, our intentions could have been much more extensive than in our relations with the International Monetary Fund", the President noted. He also stressed that these intentions are dictated by the desire to cut down the State’s expenditures connected with servicing its debt, i.e. to reduce interest payments.