The high price of oil ensured higher revenue than was projected. But, unlike in previous years, the Finance Ministry is spending government money in compliance with the schedule without delay or underfinancing. But this is only true about the total, not about specific expenditure items.
The Russian federal budget performance was very good in the first quarter. The high price of oil allowed the government to stop worrying about the deficit. Only in February, shortly before the elections, did the budget deficit rise to 5.2% of GDP, when the many tax breaks granted to businesses cut federal revenues by 20%. However, in January and March, the federal budget had a surplus, which helped reduce the overall three-month deficit to 0.9% of GDP. This small deficit will hopefully be eliminated soon.
The high price of oil ensured higher revenue than was projected. But, unlike in previous years, the Finance Ministry is spending government money in compliance with the schedule without delay or underfinancing. But this is only true about the total, not about specific expenditure items.
The performance on the spending side of the budget has been very uneven: some of the items have been overfinanced while others were drastically underfinanced. One of the flagrant examples is the disbursement of 85% of annual funding for “youth policy and children’s health enhancement” in three months, with the average spending level of 24%, while the “collection, processing, storage and safety of donated blood and components” received only a quarter of stipulated government financing.
The massive funding disbursed in winter and early spring did not go into children’s health enhancement, but was channeled for pre-election activities of pro-Kremlin youth movements such as Nashi and others. As for the outrages of underfinancing donated blood programs, it has caused a deficit across the country and is little short of daily murder of helpless patients.
With the modernization policy being gradually abandoned, the government has accumulated 5.6 trillion rubles in unused funds, which means the government is increasing the country’s internal debt only to keep that money idle in a thrift box.
The pre-election appreciation of the ruble in fact cost the budget over a quarter trillion rubles. The ruble will moderately weaken soon.
The Finance Ministry’s adherence to transparency principles, which became particularly pronounced after Alexei Kudrin’s resignation, gives hope that this imbalance will be eventually straightened out, and that budget spending will be executed evenly and consistently and in a civilized manner.
The most alarming trend in the first-quarter results is the outflow of private capital, which has reached a record $35 billion since the fourth quarter of 2011, the worst figure since the late 2008-early 2009 crisis.
Capital flees from corruption – which has become essentially the underlying principle of Russian governance – extortion, unprotected property and lawless actions of monopolies. Another reason why private investors withdraw money is the consistent disparagement of modernization projects, with the term “modernization” itself becoming something of a bad word of late. Their money finds no application in Russia, and flows elsewhere after a few idle passes, to where it can be used effectively.
There is another important reason, which can be easily identified if one looks at the per month capital outflow figures – politics. In August 2010, the outflow of capital was $4 billion, up from $900 million in July. September saw an even sharper rise to $13.5 billion; this level has been more or less maintained to this day.
The surge was businesses’ response to the Medvedev-Putin swap, which was a move straight out of the Yeltsin playbook. The liberal public lost hope for reform; and business leaders usually have liberal views, if only due to their occupation.
Capital reacts to the gloomy socio-political prospects as well as economic prospects of Russia’s corrupt system of governance, although it does not yet appear to be on the verge of collapse. It is also worth noting that, according to analysts, about 15% of outgoing capital gets invested in property, which suggests not only the flight of money but the flight of its owners as well.
Money is the lifeblood of an economy. Financially Russia resembles a body, whose arteries have been severed and will remain so until the government starts acting like society’s brain and hands, rather than a machine that converts the Soviet inheritance (including people) into the personal wealth of bureaucrats.
