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CIAO DATE: 08/06
International Affairs:
A Russian Journal
Russian Economy and World Affairs
Ye. Primakov*
Russia's economic performance in the past year has two dimensions. The first is "local" whereby the economic results are evaluated within the limits the year that has just ended. The other dimension is broader as the results are evaluated within the context of the transformations that began in Russia in the 1990s and have yet to be completed. The principal direction of these transformations is the transition to a free market economy and the integration of the Russian economy into the world economy. The main objective of these transformations is to raise the living standards of Russia's population by taking advantage of the world's scientific and technical achievements and to put the quality of life in Russia on a par with that in the post-industrial countries.
Analysis of the country's economic performance in 2004 within the "local" dimension shows quite satisfactory results. GDP grew by 6.8 percent. The country's gold and hard currency reserves increased further. Russia started paying off its foreign debt ahead of schedule. Unemployment declined. Household monetary incomes increased. The share of the population with incomes below the subsistence level fell by nearly 3 percent.
At the same time, consideration of the economic results of the year 2004 in the context of the general reformation of the Russian society points to a number of important circumstances.
First, in order to ensure a substantial improvement in living standards, Russia needs an accelerated rate of economic growth. This is an axiom that has been repeatedly demonstrated by international practice. Furthermore, considering the economic situation in Russia, this acceleration is simply vital. So the doubling of GDP within the next 10 years, a task formulated by President Putin, is not just an abstract slogan like many of those to which we used to pay lip service during the Soviet era. Today it is a dictate of the times. Meanwhile, the task put forward by the president has yet to become a fundamental guideline for the executive branch of government. For instance, addressing a recent Cabinet session, the finance minister asked a rhetorical question: Why does the United States not put forward the task of doubling its own GDP within the next decade? Isn't
this obvious: If our per capita GDP was at least one-third of that in the United States, doubling GDP within 10 years would not be such a pressing need.
Second, the past year was marked by a record growth rate of the world economy over the past decade - 4.8 percent. It is indicative that the highest economic growth rates were registered in the United States, China, and India. Their aggregate share in the world's GDP exceeded 41 percent. These figures show what a dynamic world we are endeavoring to fit into. Naturally, the rate of economic growth will be a key to the role that Russia will be playing in the world. In other words, it will be a key to whether Russia will preserve its status as a great state or will lose it.
Third, high economic growth rates should be ensured through progressive structural shifts in the Russian economy. Without its diversification and without making it more competitive, even with the maximum possible GDP growth rates the economy will not be stable. In this context, the well-being of the Russian economy, which was demonstrated in 2004, is rather conditional. To date, 50 percent of its GDP growth is ensured through export, mainly of raw materials. Furthermore, the "oil price factor" accounts for one-third of the growth. Meanwhile, according to forecasts by the World Economics and International Relations Institute (IMEMO), the year 2005 will see a certain measure of decline in world oil prices - down to approximately $30 per barrel. Even though this is not a huge reduction, it will be sensitive for the Russian economy, especially given that the majority of forecasts assume a reduction in world oil prices as a long-term trend.
There is yet another factor that needs to be taken into account here. Russia continues the practice of selective oil production in the most productive oil fields. There is good cause to say that the State has in effect lost control of the situation in this area and is no longer in a position to reverse the depletion of natural resources or the reduction in the number of oil well sites. Compared to 2003, the year 2004 witnessed a more than 18 percent decline in prospective drilling and a 4.3 percent drop in the number of new oil well sites being put into operation. Should this trend continue oil output in Russia is bound to fall.
The instability of Russia's economy is aggravated by the extremely slow structural changes. Despite the fact that industry accounts for not more than one-quarter of GDP, investment in the machine building and metal working sectors in 2004 was four times less than in the extractive sectors of industry. Meanwhile, growth of machine building imports in 2004 exceeded growth rates in the national machine building sector six-fold.
Do these correlations not show that market self-regulation cannot, in and of itself, change the structure of the Russian economy in the foreseeable future? In this context it is necessary for the State to provide effective incentive schemes to stimulate accelerated development in the manufacturing sectors of industry. This should include differentiated taxation and amortization rates. It would also be expedient to grant tax exemptions on corporate funds that are funneled into the investment sphere.
Speaking at a news conference on December 23, 2004, President Putin called for the unified social tax to be reduced for enterprises operating in the high-tech sectors of industry and for a better economic environment to be provided for R&D enterprises. The president reiterated his call several days later at a conference at Akademgorodok in Novosibirsk, where he highlighted the need to create special economic conditions for techno-parks. Translating this differentiated approach into reality will enable the State to effectively stimulate a re-funneling of capital from raw materials into high-tech sectors.
A differentiated economic approach is also important in the relations between the Federal Center and the country's regions. To date, there is no coherent regional policy designed - in the interest of creating a unified economic area, preserving Russia's territorial integrity, and strengthening its national security - to reduce, if not eliminate completely, the imbalances in the flow of investment and work force. To this end, it is necessary to use not only budgetary mechanisms but also effective tax, customs, tariffs, and price regulation schemes.
The insufficient competitiveness of Russia's industry is becoming more and more disturbing. The average age of its fixed assets exceeds 20 years. No State that is really concerned about its future can allow such a degree of obsolescence. Without radical and effective measures that can stop the disintegration of the country's scientific and technical capability, which began in the 1990s when science was abruptly put on a commercial footing, and without abandoning the ongoing attempts to commercialize fundamental science, it is impossible for Russia to make a breakthrough in the high- tech sectors of industry.
Next, the reduction in the proportion of people living below the subsistence level in 2004 occurred amid a growing income differentiation. The incomes of the richest 10 percent of the population exceed the incomes of the poorest 10 percent by 15 times. According to World Bank estimates, the gap is even higher - 20 times. Not a single developed country in the world has such a correlation. This jeopardizes Russia's socio-political stability.
All of the aforementioned shows that GDP growth alone is not enough to improve the social situation in the country. The social orientation of the country's economic development also requires what can be generally described as re-distribution measures. This includes a re-distribution of natural rent and the gradual abolition of a flat income tax.
A re-distribution of incomes in favor of the population at large should be closely linked to the State's antimonopoly policy. Without making it more vibrant and robust, it is impossible to make any social progress. The year 2004 showed that monopoly prices are being set for gasoline, rolled metal, and even bread. The Federal Antimonopoly Service is called upon to combat such practices, which generates super profits for the monopolies at the expense of the consumer. The situation might improve with the adoption of a new law on competition. But thus far the abuse of the dominant position on the market or collusion resulting in corporate price fixing incurs a fine of under $15,000. By contrast, analogous monopolist practices in the United States are punishable by fines running into hundreds of millions of dollars. In order to adopt a viable, effective competition law in Russia, it is crucial to overcome the serious resistance of the monopolies and their lobby groups in both the State Duma and the executive branch of government.
Fourth, demographers are unanimously predicting a sharp decline in Russia's population. According to the State Statistics Committee, within the next 10 years Russia's population will decline to 130 million. Labor will probably become the scarcest of resources.
This raises such an acute problem as the development of the country's resource-rich eastern parts. Meanwhile, the situation in Russia's sparsely populated Far East and Eastern Siberia is aggravated by an outflow of the local population. The problem can only be resolved through an accelerated development of socio-economic infrastructure in Russia's eastern regions. Only this can ensure an effective "re-distribution" of the country's population.
In this context, target-specific State sponsored measures, including tax, tariff, customs, and price preferences for these regions, take on a special importance. This can ensure a flow of investment and ultimately of labor resources. Nor should we forget about the moral and patriotic incentives, especially for young people: Not all of the old practices were bad.
Cooperation with the CIS countries, stimulating a funneling of labor into Russia's eastern regions, is called upon to play a substantial role here. Other measures, designed to develop socio-economic infrastructure in Russia's Far East, could include dosed, controlled immigration from neighboring countries. Of course this is an extremely complex and challenging problem, but the developed world effectively deals with immigration problems. We will also have to deal with them.
Without these measures, aimed to ensure a rapid development of Russia's eastern regions, they are bound to remain sparsely populated with a serious demographic imbalance existing in areas bordering China. This can pose a real threat to the country's integrity in the future.
The Unseemly Role of Pseudo-Reformers
So, an array of circumstances demands a serious adjustment of the country's economic course and a review of the existing approaches. It would be simplistic to put an equal sign between this requirement and the abandonment of macro economic regulation, an area where the government has achieved a certain measure of success. This, however, cannot be limited to keeping down inflation. Today it is necessary to focus on nationwide measures to restructure Russia's economy, facilitate the growth of investment in the non-raw materials sector, especially in small- and medium-sized business, and eliminate the barriers to free and fair competition.
One outstanding problem is innovative economic development, to which end it is necessary to renew fixed assets, create venture companies, and implement large scale State sponsored projects in the high-tech sectors of industry where we are still in a position to make breakthroughs.
To ensure such economic advancement, it is critical to break the resistance of the so-called liberals who often push through their economic line in defiance of the ideas proclaimed by the president as well as of the position of the incumbent prime minister that is quite in synch with these ideas.
The so-called liberals, just like their predecessors in the 1990s, are notorious for acting recklessly, on the spur of the moment. They are responsible for the lack of elementary foresight in proposing such reform programs, affecting the interests of the greater part of the population, as monetization of benefits and pension reform. Suffice it to say that when it was discussed in the State Duma, 1,300 amendments were made in the draft law on monetary compensations for welfare and social security benefits. Are we going to see the same degree of recklessness in the drafting of laws on public health, education, and housing and public utilities reforms? Are they going to be just as ill-considered and poorly thought out, ignoring the mood of a substantial part of our society? There is cause to believe that these concerns are not entirely groundless. Not surprisingly, the president proposed the creation of the Public Chamber, not least for preliminary consideration of draft laws before they are submitted to the State Duma, especially draft laws that affect broad public interests.
Today the so-called liberals, in continuing the course of their predecessors, are claiming a monopoly over the interpretation of Russia's economic interests. We have been repeatedly confronted with instances where proposals coming from entrepreneurial and business associations and the scientific and expert community are ignored. This was the case, e.g., with Chamber of Commerce and Industry proposals on State industrial policy that were made public in 2003. They became a subject of discussion at conferences and round tables in many parts of the country. We received comments from governors, businessmen, and scholars. But there was not a single comment from the Ministry of Economic Development and Trade. Ditto for many other proposals by other entrepreneurial organizations as well as the Russian Academy of Sciences.
The ideological credo of these pseudo-reformers is complete economic deregulation, stripping the State of all of its regulatory functions, so that there is not a vestige of such an instrument as indicative planning, which is widely recognized and relied upon in many other countries. But this is only one side of the matter. The other is that as a result of their efforts, not a single extra State - or rather, ministerial - function was transferred to the public or entrepreneurial level. Meanwhile, this was proclaimed all but the "core" of administrative reform. Can it therefore be said to be a success?
Finally, one distinguishing feature of the pseudo-reformers is their passivity in making an effective use of windfall export earnings as an important source of Russia's economic development. No one denies that the threat of inflation upsurge imposes constraints on the use of these windfall profits, which are being stashed away in the so-called stabilization fund. But can, e.g., the abolition of the customs duty on industrial equipment and spare parts imported into Russia really increase inflation? Budget losses in this case could be compensated from the "stabilization fund." Or can additional investment from this fund in vital road construction programs for the regions really aggravate inflation? Or investment in State programs designed to ensure breakthroughs in technical and technological spheres? Or in establishing a State venture foundation to support companies implementing innovation programs? Or investment in the system of professional cadre training that was completely destroyed in post-Soviet Russia? It is possible to do all of this and still preserve the "stabilization fund," but within reasonable limits.
Modern pseudo-reformers tend to cast the reform period in Russia as an ongoing, logical process comprised of several consecutive stages. Yet they pass over in silence the fact that V. V. Putin linked his presidency with the aspiration to get rid of the ugly aspects of the reforms that he inherited. This came through in his attempts to turn around the situation wherein oligarchic groups control the Russian economy, to end their merging with the ruling authorities, and to make sure that laws and obligations, not least the duty to pay taxes, apply to all. This is not simply a continuation of what was being done in the 1990s, but a basically new course - naturally, within the framework of a free market economy. I would even describe it as a counteroffensive with the aim of putting in place a civilized market economy.
The picture, however, would be incomplete without mentioning bureaucracy's attempts to use the president's commitment to rectifying the situation in the country in its own, self-serving interests. Yet not all actions by Russia's bureaucracy fit into this pattern. It is essential to draw a hard and fast line between the unlawful actions by corporations and their inalienable property rights. It should also be taken into account that the clumsy execution of basically correct measures poses the threat of a serious outflow of financial resources from Russia.
The involvement of corrupt state and government officials in all sorts of property redistribution schemes and games, the merging of a part of law enforcement agencies with the vested interests that they are supposed to fight, and the blatant use of illegitimate methods of governance as practiced by some state and government officials arouse serious discontent in the Russian society. Active steps to root out corruption are becoming a key to progress in Russia - in the economic, political, and social spheres.
The CCI is strongly committed to preclude a "tug of war" between the State and the business community as well as to facilitate partnership relations between them. The time when we simplistically thought that in a free market economy, the State is a tool of capitalists is history now. Having said this, it is important to note that the State in a free market environment must also not be a tool to be used against businessmen, who are becoming an organic and the most dynamic part of the Russian society. Establishment of partnership between the State and private business is a major prerequisite to the advancement of modern Russia. The principal objective of this partnership, the responsibility for whose stability is borne by both sides, is to do everything for the Russian people, raise their living standards, ensure a peaceful life worthy of man, and create conditions for their spiritual and intellectual development. At the same time we make it a point to emphasize the social responsibility of the business sector.
So, we are entering the year 2005 not only with a host of outstanding problems but also with substantial potentialities - thus far untapped - to resolve these problems. I believe that these potentialities will grow and expand as a result of measures to strengthen the vertical chain of command. The new setup, among other things effectively empowering the president to appoint heads of Federation components, eliminates several negative trends. Thus, some governors tried to shirk responsibility before the federal center by arguing that they were "elected by the people." Meanwhile, the federal center was in a position to replace such "people's choices" only if they faced criminal charges. The situation will now be rectified.
At the same time the new procedure will now place federal officials in the regions (and there are more than 300,000 of them country-wide) under the control of Federation components and their heads. Incidentally, these federal officials include representatives of law enforcement agencies, called upon to combat terrorism, who will now be under dual control. If someone thinks that the scrapping of popular elections for governors is a retreat from democracy, they should be asked this question: Is it a sign of democracy that a popularly elected governor can stay out of his region for months in a row and actually live abroad? Or can we describe as a breakthrough into civil society a situation wherein money and administrative resources have a decisive impact on the outcome of elections? Meanwhile, this is in fact what has been happening until now.
The idea that members of the Federation Council should be subject to election, which will give the regions representation in the Federal Assembly, is also praiseworthy.
Some new proposals have been made concerning the organization of the party system in Russia. Thus, it is proposed that State Duma elections be held only by voting on party lists. Given that a political party will now have to garner at least 7 percent of the electoral vote to make it into the State Duma, which is dominated by just one party, the absence of other factions in parliament can effectively eliminate all constructive discussion and lead to the barrack-room style identity of thought. Incidentally, factions even within the CPSU were only suspended temporarily, by the 10th CPSU Congress. It was the Stalin regime that formally abolished factionalism.
The International Situation
International terrorism still posed a serious danger for the international community as a whole. The U.S. invasion of Iraq, carried out in circumvention of the UN Security Council, was not supported either by Russia or China or France or Germany or the EU. On the whole, the U.S. operation in Iraq impaired the international efforts to liquidate al Qaeda's main base - in Afghanistan. As a result, al Qaeda started building a new base - in Iraq.
The operation further confirmed that international terrorism thrives in the context of "communicating vessels." This context should also be applied to evaluating the current situation in Chechnya. Russia thwarted the creation of yet another international terrorist base, in Chechnya, not only without outside assistance (like the assistance that the United States was provided in Afghanistan), but even despite the course pursued by a number of countries which often added up to actual support for the militants. This is the main thing. The action taken by the Chechens themselves, backed up by federal forces, effectively isolated the militants, eliminating many of their leaders.
This, however, does not reduce the pressing need to counter terrorism in a robust and proactive manner: Witness the Beslan hostage drama. In this context the strengthening of Russia's security and other special services is still a highly topical task. Society is anxiously waiting for the results of the investigation into the Beslan events that is being conducted by a special parliamentary commission.
Despite the obvious failure of the U.S. unilateral policy in Iraq, when Washington had to ask other States as well as the UN for assistance, the threat of unilateral U.S. decisions to use military force is still very much alive. George W. Bush's victory in the presidential election showed that the sentiments of the majority of the U.S. public are not at all an obstacle to the U.S. administration's attempts to impose its will on other States.
The recent events in Moldova, Georgia, and Ukraine have not only a national, internal dimension but also affect Russia's positions in the post-Soviet area as a whole. These events, as well as the evolution of the situation in Abkhazia, should all the more put us on the alert in so far as they highlighted, among other things, the shortfalls of Russia's policy in the CIS countries and the weaknesses of our analytical apparatus. Unfortunately, multivariate political analysis, including recommendation of an optimal course of action for each possible scenario, is oftentimes replaced with trendy PR games. This is serious cause for concern.
The events in Ukraine showed that trans-Atlantic disagreements that emerged in the wake of the U.S. operation in Iraq must not be exaggerated, let alone banked upon. The EU's strong support for Ukraine's opposition forces, which have now become the ruling establishment, was to a very large extent predetermined by its intention to use Ukraine as a field for staging a rapprochement with the George W. Bush administration. Does this once again require a new enemy stereotype - i.e., Russia?
Not surprisingly, the West intensified its criticism of Russia and its president. The steps to strengthen the Russian State and protect Russia's national interest sometimes are coming in for sweeping criticism. It is indicative that these critical attacks are targeted against the basic direction of these steps, not the methods of their implementation, some of which have drawn justified criticism within Russia itself.
Still, the international situation can on the whole be evaluated as quite positive for Russia. The principal indication to this effect is the ongoing evolution of a multi-polar world order and a strengthening of trends counterbalancing the efforts to create a unipolar world order. This comes through in, among other things, the consolidation not only of Russia but also of China, India, and Europe as independent centers, as well as in the obvious failures of the attempts to denigrate the role of the UN in the present-day world.
This also manifests itself in the U.S. interest to have Russia as a partner in maintaining international stability. In relying on this objective interest, Russia is acquiring broad room for maneuver. There is no doubt that this field will be used in the course of the upcoming Russian-U.S. summit meetings.
I would especially like to stress that despite the difficulties that it confronted within the CIS, Russia's foreign policy in 2004 has been successfully implemented in at least two respects. President Putin's line has strengthened, thus helping prevent the reemergence of anti-Americanism in Russia's policy, even with the immutability of its principled position on the U.S. military operation in Iraq, although in the future this will to a very large extent be contingent on the United States itself. This course was instrumental in maintaining international cooperation in combating terrorism, stopping nuclear proliferation, and dealing with regional conflicts.
What is especially important in this context is the new opportunity for resolving the Middle East conflict that has evolved as a kind of breeding grounds for international terror. At any rate, the glimmer of hope that has emerged in the Middle East could be effectively used with the intermediary efforts of the Middle East Quartet - Russia, the United States, the EU, and the UN Security Council.
Endnotes
Note *: Ye. Primakov, academician; 1996-1998, foreign minister of the Russian Federation; 1998-1999, chairman of the RF Government; 1999-2001, deputy of the State Duma (the Motherland-All Russia bloc); since 2001, president of the Russian Chamber of Commerce and Industry (CCI). Back