Real Causes of the Recession are Being Kept from Putin

The government should spend money on building new highways in and between large cities, developing aviation infrastructure, rescuing forests around Moscow that are being destroyed by timber beetles (anyone flying to Moscow can see the horrifying large gray patches), and saving the Altai woods from a lichen onslaught. It is worth spending money on better equipment in education and healthcare, and making massive investments in our human capital in these sectors to enable teachers to use modern methods and doctors to make timely and correct diagnoses.

I don’t know how Russian officials explain to President Vladimir Putin why GDP grew by a mere 1.2% in the second quarter of this year. They are probably pulling the wool over his eyes again, citing unfavorable external conditions and a deep crisis that has shaken the entire capitalist economy to its core. Look at Germany or France, not to mention Spain or Greece, where there is zero economic growth. I don’t know if there is someone in Putin’s circle who can tell him this is all untrue – that the emperor has no clothes (by which I’m referring to the growth rates of the Russian economy).

Data of the Federal State Statistics Service show that the economy was growing by the second quarter of last year, but many things have changed since then. If we take the fourth quarter of last year as our starting point, it appears that the domestic economy was in decline for two quarters. The decline was a mere 0.1%-0.3% in annual terms for each quarter, but in international terms this condition is called recession.

Talk of unfavorable external conditions is simply untrue, as oil prices – Russia’s major export item – have gradually risen to $108 per barrel. Oil and oil products account for over half of all Russia’s exports. We have not reduced them at all. Yes, steel and coal producers are having a very hard time. Prices for their products have dropped sharply, but this has a limited effect on the domestic economy – metallurgy (including ore production) accounts for 8%-9% of both GDP and Russian exports.

But apart from the lies coming from the ministers, the president is told a lot of bedtime stories about the reasons for the economic slowdown and how to address it. I understand that our ministers are not Oxford graduates, but nor are they illiterate. All economic textbooks and publications of the IMF (which, of course, Russia does not take orders from) tell us that we should counter falling demand resulting from unfavorable external conditions (if our ministers are to be believed) by easing monetary and particularly fiscal policy. This would make it easier for companies to get loans and increase government spending, thus boosting demand. However, at all the meetings with the president, our ministers have been chanting that monetary policy should not be eased and budget expenditures should not be increased. Of course, they do not offer any arguments to buttress their position. This is why you often hear statements by some minister or his deputy that in the next quarter investment is bound to grow and the economy will return to life. Since our government is devoid of political competition, they don’t have to discuss their proposals with anyone, and their only goal is to convince the president that they are right.

I sincerely believe that if the ministers’ diagnosis of falling demand is correct, increased government spending would help the domestic economy (this was proposed in Concept 2020, which is collecting dust on the shelf). Our current national debt, about 10% of GDP, does not pose any threat to macroeconomic stability. Moreover, if it were to grow to 200% of GDP in the next five to seven years, this would only strengthen the Russian financial market and financial system. Needless to say, new spending should not go to projects that are irrelevant to our economic future, such as the Sochi Olympics, a new armament program or the high speed Moscow-Kazan Railway, because such spending is already reflected in the current GDP and will not promote economic growth.

The government should spend money on building new highways in and between large cities, developing aviation infrastructure, rescuing forests around Moscow that are being destroyed by timber beetles (anyone flying to Moscow can see the horrifying large gray patches), and saving the Altai woods from a lichen onslaught. It is worth spending money on better equipment in education and healthcare, and making massive investments in our human capital in these sectors to enable teachers to use modern methods and doctors to make timely and correct diagnoses.

I bet Russian ministers know all this and could quote many examples of such investment if you woke them up in the middle of the night. Why don’t they say so when facing our formidable president? The answer is simple – they know only too well that nepotism and embezzlement in all budget programs is out of control and that public-private partnerships become slush funds for people whose names are well known.

Russian ministers also know well that Russia’s economic slowdown is directly related to the decline in private investment, without which the economy cannot grow by definition. Private investment is not growing because business people have no trust whatsoever in Russia’s courts and legal system. They can see that the second verdict handed down to Khodorkovsky and Lebedev and Navalny’s sentence in the Kirovles case are politically motivated. They know that tomorrow local officials can get the courts to designate any economic activity as criminal if they find someone’s business tempting or objectionable.

Russia’s ministers cannot speak plainly to Putin about the causes of the disease or the necessary treatment: a complete institutional overhaul. They are afraid they will lose their posts if they bring bad news. So, they continue lying to the president about the reasons for the economic slowdown and about the measures that we must take (or the miracle we are supposed to hope for) to reverse this trend.

In the meantime, the economy continues its downward spiral.

This article was originally publidhed in Vedomosti newspaper

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