What happens when objective, tried and true economic management rules are being replaced by pointing fingers and hunting “the greedy one”? Director of FBK Grant Thornton Strategic Analysis Institute, Doctor of Economics Igor Nikolaev shared with Invest Foresight some flaws in state regulation of business processes, citing seemingly unrelated examples such as the de-dollarization of the National Wealth Fund, targeted state support during the pandemic and the housing relocation program.
Our whole life is a fight. With poverty
— Prime Minister Mikhail Mishustin criticized many Russians who apparently have jobs available but do not want to work while also complaining about poverty. He said this during his annual report to the State Duma. Is this really the root of poverty in Russia, if the Prime Minister says so?
— Let me clarify — he said they don’t go to work. It is difficult to agree that this circumstance is the sole cause of poverty. Why have such ideas and criticisms suddenly emerged anyway? I’d say, this happens because our country, for the first time perhaps in its post-Soviet history, announced a fight against poverty. The President mentioned the plan in his Address to the Federal Assembly in 2003.
— An entire generation has grown up.
— Yes, in 2020, we moved the target of alleviating (not eliminating altogether but only alleviating) and reducing the poverty rate by half from 2024 to 2030. So, the president may have talked about eliminating poverty in 2003 but today, the goal is to simply reduce it. And not dramatically either, and at least by 2030. It’s easy to count the number of years. My question is: aren’t 27 years a bit too long? With all this constant talking of economic success and claims that everything is awesome, why isn’t the problem solved? That’s where all these ‘explanations’ come from. “People are to blame. We have done everything; we have created the best conditions for you, but you just won’t work.”
I noticed similar attitude in statements by First Deputy Prime Minister Andrei Belousov who, almost in unison with Mikhail Mishustin, said that the most important thing is to make sure social aid is targeted. Apparently, the poverty problem can be solved — provided that the money reaches those who are truly poor. I completely disagree with such a narrow vision. In fact, the whole outcome of similar policies in the past confirms that Russia has not been able to eliminate poverty using this approach. We all know how the way it worked out.
We have heard similar statements from other government officials. For example, at SPIEF, Minister of Labor and Social Protection Anton Kotyakov said that 80% of poor people in Russia are families with children. The solution may seem obvious: let’s only help families with children. Well, last year, during the pandemic, families did receive their help. But have we really made any progress?
Here is another argument against distributing aid only among specific groups and calling it targeted aid: this aid comes at the expense of social contributions. Their share in the total income has hit the record: as of 2020, this share equaled almost 21% and in Q1 2021, it reached 21.7%. The government seems to be building up support for, say, families with children. But things haven’t budged an inch. This means it may have been the wrong place to start.
So, what exactly is wrong here? Here is what I think. First of all, we should remember that the major part of the real income is not social benefits but wages. Wages account for 60% and more of a family budget. This includes income from business activity and private property as well as other sources of income. The revenue of private businesses in Russia has been in decline in the past years. While making up 15.4% of the total income of the population back in 2000, the private business revenues make up only 5.2% in 2020. It appears to me the government does not understand the meaning of one well-known saying: you could distribute fish or (which is better) you could distribute fishing rods.
Stuck between national projects and retailers’ greed
— Substantively, Russia’s national projects, the 2012 May Executive Orders and the Program 2020 (which was a big deal, although not for long, during Dmitry Medvedev’s term) largely resonate with the 2003 Address to the Federal Assembly. Which of these plans have been fulfilled?
— Of course, we must acknowledge the fact that significant funds have been invested in the national projects. However, there has been a lot of doublespeak — for example, regarding the issue of wages in various industries. Remember the directive that increased wages of medical workers and scientists significantly above the average wage in a region? In many cases, employers simply rehired people to work half the hours for half of these higher wages.
Certain positive results (I don’t want to call them success) in fulfilling national projects have been achieved, of course. The number of poor people has gone down, without doubt, since 2000 when there were 42 million people below the poverty threshold. In 2020, there were 17.8 million. At the same time, there has been hardly any progress in the past ten years. In 2010, the Russian population with incomes below the subsistence rate totaled 17.7 million. In 2020, it was 17.8 million. We are just simply treading in place. The period when oil prices soared, of course, helped us speed up the economic growth and slightly fix up our living standards. But lately, we have seen clear signs of stagnation, to put it mildly. Since 2014, the real income has been consistently in decline. It has dropped by more than 10% in the past six years and by another 3.6% over Q1 2021 alone. So, there are certain results in overcoming poverty, but the overall picture is far from encouraging, especially given the dynamics of the past decade.
— There is poverty, and on the other side of the coin there is greediness. Mikhail Mishustin, when commenting on surges in wholesale and retail prices of buckwheat and sunflower oil, used a disparaging word to rebuke the wholesale and retail market sellers.
— I think it is wrong to reprimand businesses because in the recent extremely politicized discussions we have been forgetting that making money is the immanent goal of any business. If there is no such goal, business will simply go down. Business is not a charity. Yes, it is necessary to prevent arbitrary pricing policies, but again, these are the questions for the state, its institutional system and law enforcement, not for businesses. A relevant tax and competitive policy must be built in order to prevent companies — both producers and retailers — from holding monopoly power. And what do we have? Every year, the Federal Anti-Monopoly Service publishes reports, including about protecting competition in Russia, that say directly that there are serious problems in this area. Moreover, state agencies make a significant contribution to the existence of these problems. So why blaming “greedy” business? Why don’t you look a little closer to home?
Yuan better than dollar for the National Wealth Fund?
— What is remarkable about Anton Siluanov’s notorious statement about the de-dollarization of the National Wealth Fund? Could it result in the ban on the free circulation of dollar?
— This is a reasonable concern, but I don’t think that it would be a problem in the foreseeable future and lead to, say, a direct ban on the dollar. But it is noteworthy that even not a long ago, if somebody came up with such an idea, everyone would say that is was nonsense, of course there would be no ban on the dollar. We can’t say that now. We have entered a path that really can end in such a ban. However, not anytime soon.
— Does politics force the economy? It’s not the first time this happens in our country…
— The Finance Minister mentioned political risks, first of all. Of course, it is not viable to change the dollar equivalent in the National Wealth Fund, first of all, for the Russian economy. Last year, the exchange rate of the dollar against the ruble rose by 19%. You see, if you have this currency, you can earn almost 20% just because of this. One can only dream of that. But even this is not the key argument here. Regardless of whether we like the dollar or not, we need to take a pragmatic approach. The dollar is still the main international reserve currency, and we are beginning to leave its domain. It is the main reserve currency not because it is issued by the US Federal Reserve System that has the ability to print the green bills in infinite numbers. The dollar is the titular currency of one of the two largest economies in the world (definitely the most efficient economy at the moment). This is why the dollar is the dollar. If we consider this from the political point of view, not economic, it would be a simply irrational move, cutting off the nose to spite the face, so to say. If this decision is made, then the question will be what will replace the dollar? The dollar takes up 35% of assets in the National Wealth Fund; which, according to these plans, will be cut down to zero.
— A bold decision.
— Indeed. What are we doing? We increase the share of euros and boost the share of yuans. So the National Wealth Fund will look as follows: 40% will be taken by the euro; 30% by the yuan, 20% by gold, 5% by the pound sterling, and 5% by Japanese yens. And here how it used to be: 35% was in dollars, 35% in euros, 15% in yuans, 10% in the pound sterling and 5% in yens. So, we keep talking about sanctions, counter-sanctions and all other possible risks, so given all that it would be logical to abandon the dollar. Okay, imagine we did it. But we see the European Union intensifying sanctions against Russia as well. So what should our next step be? Withdrawing the euro from our funds? In case such trend emerges, focusing on the yuan in our financial priorities will lead to risks that no one can imagine so far, if only because the exchange rate of the Chinese yuan is not entirely market-based and is strictly regulated by the government.
When politics gets in the way of the economy
— What do you think of the St. Petersburg Economic Forum, which has just come to a close? What issues do you think are missing on its agenda? Was this event a little bit too ‘glamorous’?
— What is lacking there is a frank conversation. Participants gave their assessment to the state of the Russian economy and its prospects, but what I would like to hear is a more unbiased analysis. We keep on hearing that we have successfully gone through the coronavirus pandemic as if it is already over. But then we should point out the causes — and they are rooted in the structural features of the national economy. We can see that civilized countries — which, unlike Russia, have their tourism, catering, and hotel industries developed (and these are sectors that have been the hardest-hit by pandemic restrictions and prohibitions) — have naturally observed a decline in all economic indicators. In our country, these sectors are not as developed and we have had a lesser drop.
Another issue that could have been discussed at SPIEF 2021 is why real personal disposable incomes in ОECD countries have increased by 2.7% over the pandemic year, while Russia had them falling by 3.3% during the same period. This is what people consider important rather than the fact that the economic decline has been less drastic than you expected, according to your calculations. And why have Western Europe and the United States chosen comprehensive efforts to support their citizens, while in Russia support has been provided mostly to families with children, while citizens’ income have kept on declining?
— Mr. Nikolaev, this question is for you as a Moscow resident rather than an economist. Can the much-discussed housing relocation project, which is actively entering its practical stage and involves large-scale urban relocation, be somehow adjusted? As we know, residents of the Russian capital rightfully complain that the city government intends to tear down their residential buildings, including those that are still in decent condition. Meanwhile, we can see plenty of substandard housing just outside Moscow that desperately requires actual renovation efforts. How can you explain such discrepancy?
— It probably can be adjusted, but the decisions have been taken and schedules approved; now we have to assume whether these efforts can be practically implemented. Housing relocation plans can be altered by the course of events.At the moment, we cannot ignore the current situation with prices for construction materials, particularly for cement and metalware. We already had such sort of experience, when a rehousing program initiated in Moscow by then-mayor Yury Luzhkov, which implied relocation of citizens from the Khrushchev era apartment buildings, was constantly postponed and never completed in full by 2010 as planned, due to the global financial crisis of 2008-2009. By the way, not all residential buildings in the program have reached the final stage and were later included in the new housing relocation program. Therefore, global economic factors can significantly affect the course and nature of this program. In terms of the efforts planned in Moscow, they can probably be compared to the ‘great resettlement’, with over 189,000 residents expected to relocate from a total of 1,082 apartment buildings during the initial stage of the program scheduled for 2020—2024.
As to the discrepancy, there are examples of urban planning in Moscow as compared to other Russian regions, with the exception of a couple of successful ones. The fundamental cause of such a striking contrast that has been consistently observed for decades is the problem of inter-budgetary relations. As long as the capital and the federal center continue to pump out finances, nothing is going to change. We need a greater decentralization of governance. As regards fiscal policy, there should not be any system that allows accumulating all finances (some 60-70% of all revenues) in the federal center, and then a certain part of them are forwarded back to regions as transfers to somehow level out differences in fiscal capacity across the country. This is not right. Moreover, money is returned to the regions unequally, and not always on the basis of objective factors. This is another example of politics getting in the way of the economy.
By Alexei Golyakov