Russia’s Problems: Why Neoliberal Policy Is Unacceptable Today

The economic decline in Russia in 2013 was caused by internal rather than external reasons. In this context the need to counter neoliberal policy in Russia is becoming particularly urgent. Russia may be threatened with serious negative consequences if the difference between liberal ideas and neoliberal principles is not clearly defined and neoliberal policy is not opposed.

In his address to the Federal Assembly President Vladimir Putin painted an objective picture of today’s Russia. Indicatively, he laid emphasis on the fairly complicated current situation and suggested a package of measures to overcome the problems. Putin made a very important conclusion: the economic decline in Russia in 2013 was caused by internal rather than external reasons. In this context the need to counter neoliberal policy in Russia is becoming particularly urgent.

First of all, it is important to point out that there is a tremendous difference between neoliberal policy, especially in the economy, and the genuinely liberal demands to make courts independent, put an end to officials’ anything-goes attitude, counter corruption and election fraud and make all people – from top to bottom – equal before the law. The public at large and different political parties advance and support these ideas. However, Russia may be threatened with serious negative consequences if the difference between liberal ideas and neoliberal principles is not clearly defined and neoliberal policy is not opposed.

The main idea of Russian neoliberals is the state’s withdrawal from the economy. Our neoliberals not only proceed from the omnitude of Western economic theories even without considering their evolution, but, first and foremost, ignore the needs and development level of market relations in Russia. Founder of neoliberalism Austrian scholar Friedrich Hayek said that economic freedom is the main precondition for fast and balanced economic growth, while free competition is designed to ensure the development of new products and technology. In theory this statement evokes no doubt. But can the market mechanism ensure growth and well-balanced economic development without state involvement in modern Russia? Is the current low level of competition sufficient for technological progress? Certainly, not. This does not mean that the state will dominate the economy forever but it is essential in certain historical periods, and I think we are currently going through exactly such a period.

On top of everything else, our neoliberals have failed to take into consideration the lessons of the 2008 and 2009 economic crisis. Meanwhile, the United States and European Union countries increased the influence of the state on the economy during the downturn, and this trend is still continuing today.

According to another neoliberal principle, free interaction of economic forces rather than state planning ensures social justice. However, this principle failed in capitalist countries where the state introduced a progressive tax scale to redistribute wealth in favor of low-income households. Russia will never match Western living standards without the state’s indicative (but not directive) planning of economic growth.

No doubt, Russia is behind the West in this respect. There is also a huge gap in incomes in this country. According to the Global Wealth Report 2013 published by Credit Suisse Group, 110 Russian billionaires control 35% of all assets. Experts of this international financial corporation came to the following conclusion: “At the time of transition there were hopes that Russia would convert to a highly skilled, high income economy with strong social protection programs inherited from Soviet Union days. This is almost a parody of what happened in practice.”

Needless to say, our neoliberals have nothing against higher living standards but they do not accept the need for a broad maneuver in economic policy with a view to laying more emphasis on social objectives. The expansion of private ownership to healthcare, education and research does not facilitate this, either. Neoliberals view their denationalization as a priority of Russia’s development policy.

Russian neoliberals have their own views on relations between the individual and society. They reject the idea that freedom and democracy are compatible with certain self-imposed limitations in favor of public interests. Naturally, these limitations should be determined legally in each case.

How did these factors influence the situation that took shape in Russia in 2013?

Contradictions in economic policy were revolving around an important choice between incentives for economic growth and financial consolidation. Needless to say, these two strategies are not mutually exclusive but it is essential to find the optimal balance between them in economic policy and practice. This is particularly important now that Russia’s economic growth rate has dropped sharply and it has made little real progress in overcoming the lag in labor productivity and innovative development.

One of the more down-to-earth Russian economists Andrei Klepach wrote: “Russia’s economic policy, especially in the past few years, has been distinguished by the dominance of the financial approach based on accounting over development policy. Support is primarily given to the banking sector rather than the real economy.” Incidentally, Klepach is one of the few government members (Deputy Minister of Economic Development) who openly express their opinion and usually disagree with neoliberals. Many just acknowledge the deteriorating situation and do not move forward any further.

I appreciate the efforts – sometimes inconsistent but substantial – to prevent the Russian economy from sliding down to the neoliberal format in 2013. I am far from defending everything that was done in Russia’s economic policy in 2013. The official line is hardly infallible and sometimes lacks resolute action. That said, I fully support the efforts to prevent the neoliberals’ triumph in our economy.

Advocating the state’s sudden and immediate withdrawal from the economy, our neoliberals have decided to conduct a new large-scale privatization of public property. They insist that most of the country’s major assets should be privatized and not only because of the need to increase budget revenues but also because of their poor performance. But let’s be clear: instead of focusing on the real need to address serious problems in the work of public companies and make them more open, neoliberals suggest their total and quick privatization. Importantly, prior to privatization they want to withdraw them from the process of production concentration and centralization. At the government meeting on October 25, 2012 the new prime minister said it was “absolutely wrong for the state represented by the subordinate structures to acquire core and non-core assets.” Many experts rightly considered all this as a limitation on public companies’ investment programs. The government had to partially renounce the policy of completely curbing these activities in 2013.

Meanwhile, by virtue of circumstances large companies that are usually state-run have more opportunities for investment and are called upon to play the main role in promoting economic growth. I’m primarily referring to megaprojects that can and should foster economic growth. Naturally, private companies should also receive due support but it is obvious that megaprojects cannot be carried out without large public companies.

This does not mean that it is possible to launch megaprojects without a thorough preliminary analysis of their all-round importance and return on investment. A stake on big business should not result in weakened support for small companies, first and foremost those that are involved in innovative development, production of components and consumer goods while helping to achieve the government’s employment policy objectives. But lack of free competition leaves no grounds to hope that small- and medium-sized companies rather than big business will become the driver of serious economic growth in Russia.

The following fact illustrates the confrontation with neoliberals on limitless privatization. Initially the government planned to privatize Rosneft, RusHydro, Zarubezhneft, Sovcomflot, VTB, Rosagroleasing, and Rosselkhozbank by 2016, and the United Grain Company by 2014. However, on June 27, 2013 the government adopted a different decision. It contained amendments that virtually excluded privatization. This decision was not initiated from within.

Russian neoliberals claim that the focus on economic growth is bound to provoke a new wave of inflation in the economy. They ignore the fact that inflation in Russia has non-monetary roots. First and foremost, inflation is caused by monopolization that is typical of Russia’s entire economic structure. As a rule, neoliberals emphasize monopolism of natural monopolies without paying due attention to the oligarchic monopolism of private business that leads to the growth of prices on food and other consumer goods. That is one of the direct causes of inflation in Russia.

Rapid growth of public utility rates has also become one of the key factors in spurring inflation and overheads and has diminished our manufacturers’ ability to compete. High utility fees are constantly growing, hitting the pockets of consumers, especially pensioners and low-income households. They also represent a serious obstacle to economic growth. In the meantime neoliberals wanted the state to renounce its policy of fixing utility costs and leave this function to the market. Countering this idea, the president decided to adjust utility costs growth to the rate of inflation.

Obviously, the issue of utility rates is far from simple. The efforts to slow down their constant growth should be combined with the formation of conditions for modernizing the monopolies’ capital equipment. In some cases, especially as regards oil and gas companies and the Russian Railways, it is also necessary to encourage their horizontal and vertical development.

Quantitative easing is important for promoting economic growth. It is called upon to invigorate all business by providing affordable loans, including long-term ones. Neoliberals often talk about the need to improve the business environment but this is how their position was expressed at the Gaidar Forum in Moscow in January 2013: “The reduction of interest rates is a counterproductive measure that will lead to an imbalance and accumulation of new risks in different economic segments rather than accelerate economic growth.”

Presidential Aide Andrei Belousov spoke out in favor of lowering interest rates. His question was far from being rhetorical: “Why did we have 7% interest rates before the economic crisis and now we have an average of 11% on loans issued for over a year?” He emphasized that high interest rates substantially impede investment activities in Russia.

During the crisis neoliberals further toughened their position on investment, especially on the funds produced by high global oil and gas prices. Even when the price of oil exceeded $100 per barrel they insisted that all government super-profits should be kept in the reserve fund or foreign bonds rather than invested in the economy. However, they will soon see an end to this policy. Putin suggested that part of the National Wealth Fund should be invested in major infrastructure projects, notably, the reconstruction of the Trans-Siberian and Baikal-Amur Railways, the building of the Central Ring Road in the Moscow Region and comprehensive development of the Far East and Eastern Siberia, which is particularly important.

It is clear that we should revive the large-scale project on the construction of a high-speed rail line between Moscow and Kazan, which was also proposed by the president. For all of its risks, this project is comparable to the reconstruction of the Trans-Siberian Railway. Its new logistics and high speed may fundamentally change the way of life in Russia’s central regions.

But do we have any other sources for financing economic growth apart from the Reserve Fund and the National Wealth Fund? We have large reserves that are not properly used because of poor management. Here are just a few examples.

Budget execution is extremely uneven throughout a year. Usually a mere 10%-11% of the annual plan on federal targeted programs is funded in the first quarter. By the middle of the year the relevant figure is 25% and only by the end of the year it reaches 95% and more. Thus, budget funds remain frozen in the first six months of the year and companies responsible for implementing these programs have to take out expensive bank loans.

Cadastral registration of real estate leaves much to be desired. According to the Federal Tax Service, the State Cadaster does not have entries on the owners of about 40% of properties. Economists maintain that regional budgets receive 45 billion rubles less than they are due every year for this reason alone.

The scale of incomplete construction continues to grow, illustrating poor management of investment projects. The budget is losing huge sums because of the widespread practice of signing fake completion of work reports (particularly on construction, installation and repairs).

Many employers still pay their workers under the counter. These workers do not pay income taxes. Regional budgets are the hardest hit by this failure.

This list of problems is far from complete. Russian owners take their assets abroad and then return part of them via offshore jurisdictions. As a result of this scheme (only one among many) the federal budget sustains considerable direct losses.

In his address to the Federal Assembly in 2013 the president quoted the following figures: In 2012, $111 billion worth of Russian goods passed through offshores and partial offshores – that’s 20% of our exports. Half of the $50 billion of Russian investments abroad also went to offshores. The president said nothing was done to remedy this over the past year although there are specific proposals. It is suggested that companies registered abroad should not be allowed to apply for government support, including VEB loans and state guarantees. They should not be granted public contracts, either. A number of Russian companies have already announced their decision to leave offshores but this is not the end of the line. Agencies owned by Russian companies remain offshore as local legal entities.

Incomplete tax payments remain a serious problem. On October 11, 2013 Putin submitted to the State Duma amendments to the Criminal Procedure Code that return to investigators the right to initiate proceedings on tax offences. They had this right in the past but it was transferred to the Tax Service in 2011. The amendments that return the old procedure were resisted by the Russian business community, which has its own interests. The issue is still under discussion. Maybe participants in this discussion will find a formula that will not give law-enforcement bodies absolute power in the prosecution of tax offences. The Tax Service must be actively involved in this matter.

However, sensible efforts to protect the rights of business should not be confused with the position of neoliberals, who pushed through the decision to reduce the punishment for tax evasion to fines in 2011. Far from decreasing the number of tax offences, this decision allowed them to avoid fines and the budget received a fraction of charged tax revenues.

Tough restrictions on budget spending are one of the main rules imposed by neoliberals. Needless to say, it is very important to be economical with funds and spend them where they are needed the most, especially on social programs. It is also essential to monitor budget expenses. However, the neoliberals’ strategy is to cut budget expenditure by every conceivable means. Thus, they advocate reducing spending on the defense industry. I will not dwell on the military and political aspects of this policy that completely ignores the tense global situation. Current events and the need to play a befitting role in anti-crisis and anti-terrorist measures are compelling Russia not to remain passive in defense buildup. Otherwise it will lose its status of a global power.

I would like to emphasize that such demands are made by people who ignore the organic technological links between defense and civilian industries. In Russia these links are particularly important because the defense industry holds tremendous intellectual potential. Its development should become one of the major sources of economic growth.

This does not mean militarization of the economy and return to the times when the defense expenditure seriously limited the production of essential goods and services. Today the picture is entirely different. In effect, neoliberals are ignoring the need to restore the industries that were destroyed in the 1990s, primarily mechanical engineering.

Neoliberals often explain their rejection of re-industrialization by the need for Russia to enter the post-industrial stage. Meanwhile, today the transition to post-industrial development by no means implies renunciation of traditional industries that create many jobs. Naturally, these industries must be fitted out with modern equipment and the employment issue should be resolved on this basis. We often mention low unemployment as one of our achievements. Meanwhile, advanced countries have higher unemployment primarily because of innovative development and the introduction of modern technology that reduces the number of workers in production. Therefore, it is important for Russia to have low unemployment in conditions of re-industrialization. The Ministry of Education and Science could help by focusing on retraining people who have been made redundant and restoring vocational and technical education.

Post-industrial society is not limited to hi-tech and services. To cover the domestic demand, the United States is now restoring production lines that were relocated to developing countries in the past. I agree with the conclusion made by Federation Council Speaker Valentina Matviyenko: “A country that claims leadership and ensures its security cannot specialize on merely two or three high-tech industries. Therefore, our major challenge is to occupy a befitting place in the new technological format while simultaneously focusing on reviving old industries within a new innovative framework.” The need for re-industrialization is also prompted by the continuously growing share of trade in the GDP. This fact reflects consumer growth that is largely met by imports rather than domestic goods.

What were the main results of resistance to neoliberal ideas in the Russian economy in 2013?

There are some red lines that were not crossed last year despite the active efforts of neoliberals. Russia did not renounce public property on industrial companies that are vital for its security and normal functioning of the economy.

It did not give up on addressing social objectives stated in the president’s May 2012 executive orders although not everything is going well in this sphere. In his address to the Federal Assembly last year, Putin emphasized the need not only to increase the federal budget funding of healthcare and education but also to reform them as well as the housing and utilities sector. He pointed out that previous reforms were not carried out properly: “Either things are being done in a way that elicits a negative reaction among the public, or nothing is done at all. Clearly, we will fail to achieve our stated goals with this kind of work.”

The general conclusion is that in 2013 the government did not concentrate on measures that are required for economic growth. This is what Presidential Aide Andrei Belousov said on December 17, 2013: “A package of measures to speed up economic growth was adopted but we have not seen accelerated economic growth so far. What is going on?” He believes that the Presidium of the Presidential Council for Economic Modernization is one of the venues that could determine why earlier measures to promote economic growth and remedy the situation were ineffective and what should be done to correct this.

Will we reach a turning point in 2014? I must say that life has compelled a number of leaders with neoliberal views to give up some of their initial ideas. On the eve of 2014 Vedomosti carried an article by Finance Minister Anton Siluanov. He made a number of points. First, the reduction of government expenses can only aggravate the crisis. Second, “to achieve stability of its finances, the government should combine mid- and long-term measures that ensure sustainable development. It is important to restore economic growth rates in the short term. For this reason if fiscal consolidation is carried out it should not be very active.” If the Ministry of Finance switches to this position, there will be grounds for optimism.

There is one more important non-economic achievement of 2013. The idea of democratizing our society by imposing restrictions on state governance did not materialize. The need to switch a number of government functions to the public is obvious but this should not weaken government agencies. Otherwise democratization in Russia will be bogged down and lead to chaos.

Far from contradicting the ideas voiced by Putin in his annual address to the Federal Assembly, this statement reinforces them. One of these ideas is to conduct a broad public debate on making grassroots initiatives part of government policy and charging society with monitoring their implementation.

A proposal to hold a frank discussion on interethnic relations is of special importance. “This one issue addresses many of our problems: challenges relating to socio-economic and regional development, corruption, shortcomings in the work of public institutions, and failures in education and culture policies, which often produce a distorted understanding of the true causes of interethnic tensions,” Putin said. Ethnic conflicts are provoked by “people from certain southern Russian regions, corrupt law enforcement officials who cover for ethnic mafias, the so-called Russian nationalists who are ready to turn any common tragedy into an excuse for vandalism and bloody rampage,” he went on.

I would like to say a few words on a different subject: Russia’s foreign policy in the past year. Obviously, we made a major achievement by suggesting a way out of a very dangerous situation when President Barack Obama announced the inevitability of an armed strike at Syria. If it had taken place, its consequences would not have been limited to regional destabilization and the growth of terrorism all over the world. I think it is important to be straight and say that in this case the United Nations would have ceased to exist. At best its functions would have been limited to social issues. The Security Council permanent members, including Russia and China, have the right to veto the use of armed force except in cases of self-defense against outside aggression. In all other cases the UN Charter allows the use of force only by decision of the Security Council. The United States was getting ready for armed interference in
Syrian affairs, completely ignoring the Security Council. Russia suggested destroying Syrian chemical weapons and taking political measures to help Syria overcome its internal crisis. This Russian initiative prevented the real threat of a U.S. military strike against a sovereign state.

Russia’s second diplomatic achievement is no less important. I am referring to its major role in talks with Iran on its renunciation of actions that could result in the acquisition of nuclear weapons. That said, these serious results in resolving two urgent international problems have not yet led to radical changes for the better in bilateral relations between Russia and the United States and international policy. There are direct and indirect signs that there is still much room for improvement.

Nevertheless, in 2013 Russia has substantially enhanced its role of a great power that promotes stability in the world.

I must say a few words about the economic measures that Russia undertook to help Ukraine overcome a very dangerous crisis. Russia reduced the price of its gas supplies to Ukraine by one third, allocated $15 billion for the purchase of Ukrainian bonds and signed bilateral agreements on developing cooperation in industry, especially in aircraft construction, the nuclear and space industries. I think it was absolutely right to withdraw the following requirement: Ukraine should either become an associated EU member or join the Customs Union. We should not have such dilemmas in relations between our two countries, as the Russian and Ukrainian presidents demonstrated during their talks on December 17, 2013. This does not mean that we renounce our views on what is happening in Ukraine. The United States and its European allies have organized and rendered unprecedented support for the efforts to overthrow the current government that having made some mistakes still legally represents power in Ukraine.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.