United Russia Proposes a Bill to Seize Property Belonging to Residents of Countries That Introduced Sanctions Against Russia
On October 15, the online edition of „Profile“ magazine published an interview with United Russia’s State Duma representative Evgeniy Fedorov, author of the bill proposing to nationalize foreign assets in Russia in response to the international sanctions targeting its state officials and businessmen. Once nationalized, the assets would be sold to compensate for any damage that the Russian state officials and businessmen might have suffered. Fedorov was at odds to explain how exactly would the government choose the foreign assets to be nationalized: he merely stated that the bill represents a „mirror reflection“ of the western sanctions against Russia and its citizens. Fedorov sees the western sanctions as a violation of the sanctity of private property: „The United States of America and its allies have practically declared that the people in Russia are of a lower class and have no right to private property. Our bill responds accordingly: we are just like you, and if you think that the people in Russia have no right to private property, that means your citizens don’t have this right, either.“
Fedorov called the right to private property „sacred“, to which the interviewer asked how could someone with such a position put forward a bill that proposes to seize private assets. However, Fedorov saw no problem here and continued to assert that the bill would actually strengthen the institution of private property, as it would make foreign governments think twice before freezing Russian assets abroad. Fedorov seems to propose to randomly choose which foreign assets in Russia will be nationalized in response to freezing of Russian assets in the West. When asked to describe what happens in a hypothetical case when U.S. authorities freeze the property of a certain Russian citizen, he said that a Russian court will decide which U.S. assets in Russia will be seized. “Which of the U.S. citizens will end up being lucky or unlucky – this is for the court to decide,” Fedorov stated. Consequently, while the freezing of Russian assets in the West represent a consequence of their owner’s support for the Putin’s regime, the seizure of foreign assets in Russia might end up resembling a sort of a lottery. The interviewer was puzzled by this explanation, but Fedorov remained unfazed: he believes that a Russian court will be able to identify a foreign investor in Russia most deserving to have its assets seized in return for western sanctions. Economic climate is of no concern to Fedorov, either. As a matter of fact, he believes that his bill provides an incentive for foreign investors to invest in third countries through Russia, thus becoming eligible for compensation from the pool of foreign assets in Russia should their investments in those countries become jeopardized.
In addition, Fedorov thinks that foreign investments are not that important for the Russian economy. “As a matter of fact,” he says, “foreign investments come from our money, only transferred through the dollar and the euro”. Instead, Fedorov says, the Russian Central Bank should look to its U.S. counterpart and pump more rubles into the domestic economy, which would lead to a 15-20 percent growth. Fedorov is right when he says that Russia would benefit from an all-out mutual seizure of assets, as there are more western investments in Russia than Russian assets in the West. He estimates the “Anglo-Saxon” FDI stock in Russia at USD 700 billion. The interviewer doubted if such a scenario could be called beneficial for Russia, as it will lead to complete isolation and loss of all economic ties. Fedorov’s response is noteworthy: “With whom? With 10 percent of the world, while the remaining 90 percent will applaud Russia and follow its example. It is them [America and England] that will become isolated.“
Evgeniy Fedorov was elected to the State Duma four times (1993-1996 and since 2003) and is the President of the Parliamentary Committee for Economic Policies and Entrepreneurship. He is known for numerous allegations against the Russian artists, businessmen and the media that he considers to be a part of a “fifth column”. Not surprisingly, he isn’t too interested in the difference between freezing and seizing, just as he doesn’t recognize that the sanctions are a consequence of Russia’s military involvement in Crimea and Eastern Ukraine. Apparently, he truly believes that the bill proposing arbitrary seizure of U.S. investors’ assets in Russia will at the same time serve as an incentive for them to invest in third countries through Russia.
However, Fedorov is right about one thing, and that is the Russian Central Bank policy: in 2014, it increased its reference rates by approximately 50 percent, hoping to stem inflation and prevent the capital outflow. Experts from the Center for Macroeconomic Analysis and Short-term Forecasting found that increasing the Central Bank’s base rate did neither and only acted as a further drag on the economy.
In an essay for Slon.ru, former State Duma Representative Aleksei Mikhailov writes about sharply rising military spending foreseen by the Russian 2015 budget. According to the proposed budget for the next year, Russia’s defense spending should reach 4.2 percent of the GDP, a sharp increase from 3.4 percent of the GDP in 2014 and only 1.5 percent of the GDP in 2010. If the proposed budget passes, military spending will take up 21.2 percent of the total central government expenditures for 2015.
Consequently, Mikhailov writes, other budgetary expenditures will have to be cut. Budgets for education, healthcare and sport will be noticeably reduced, with healthcare suffering the most. According to Mikhailov, the World Bank ranked Russia as 9th on the list of countries with highest military spending in relation to GDP, higher than any other nuclear power, including the United States with defense spending of 3.9 percent of GDP. If it passes the 2015 budget as planned, Russia will enter the top 5 countries in the world in terms of defense spending as a percentage of the total central budget. The author notes that Russia’s increased military spending is unlikely to surpass the respective budgets of the two top defense spenders, the United States and China, in absolute terms. As a matter of fact, even if Russia decided to spend its entire central budget on defense, it would still fall short of the U.S. military spending. In order to match the Chinese military budget, Russia would have to spend as much as 8 percent of the GDP on defense. At the same time, Russia’s defense budget dwarfs that of its neighbors – it spends 36 times as much on defense as Ukraine does. Consequently, Mikhailov concludes, the sharp increase in Russia’s military spending is most probably motivated by internal factors.
Mikhailov claims that the recent herding of the Russian defense industry into state-owned monopolies damaged its competitiveness, which led the former Defense Minister Serdyukov to consider foreign suppliers. When Serdyukov was removed in 2012 under allegations of embezzlement, some speculated that it was a consequence of his unwillingness to continue equipping the Russian army with local production regardless of its quality. At the same time, the Russian Government sees the defense industry as one of the few remaining possible generators of economic growth and wants to ensure that the respective budget is spent locally. However, Mikhailov writes, such a strategy is likely to play into the hands of the chosen few, as the secretive military contracts in a competition-free environment represent an ideal opportunity for the suppliers to inflate prices. He concludes by noting that the USSR’s military budget in 1990 amounted to 19 percent of the country’s GDP, and it still didn’t help the economy from running into the ground.
In his recent interview to the radio-station Echo Moskvy, renowned Russian economist Sergei Guriev, known as the Rector of the Moscow’s New Economic School (www.nes.ru), explained his reasons for leaving the country after the Russian Investigative Committee launched an investigation that might lead to a third indictment of the Russian businessman Mikhail Khodorkovsky. Guriev was a member of an independent expert group tasked by the former President Dmitry Medvedev to examine the last case against Mikhail Khodorkovsky, who was convicted for embezzlement and money laundering that took place while he served as the CEO of a Russian oil giant Yukos. Since the independent group of experts found in 2011 that the indictment and the sentence in the second trial of Mikhail Khodorkovsky are groundless, Russian authorities searched the premises of three out of six Russian members of the group (Guriev became the fourth one). After the Russian Investigative Committee questioned Guriev in February and April, the court issued a search warrant and seized his personal e-mail correspondence on suspicion that the members of the expert group received financing from Yukos’ ex-officials and were thus motivated to issue an opinion supporting Khodorkovsky’s innocence.
In his interview with Echo Moskvy, Guriev simply stated that he wants to avoid any risk of losing freedom and being separated from the family (his family lives in France). He added that he has no issues with the current Russian President Vladimir Putin or the former President and current Prime Minister Medvedev, but that he prefers to live in a country where his personal safety is not threatened. While he is bound by the order of non-disclosure, Guriev explained that he felt disturbed by the attitude of the Russian Investigative Committee, which seemed to indicate that Gurivev might become a suspect. Guriev said that one of the investigators mockingly remarked that he fared much better than Andrei Sakharov – the “father” of the Russian hydrogen bomb and a Nobel peace prize laureate who was exiled from Moscow in 1980 for his dissident views and advocacy for human rights. In addition, during his last departure from Russia, Guriev realized that his movements were under special scrutiny. As the investigators increased the pressure, Guriev decided it would be safer for him to stay out of the country. Asked about his plans to eventually return to Russia, Guriev stated that he doesn’t see how his personal freedom could be guaranteed under current conditions. He finds it difficult to believe that the case against Khodorkovsky will be dismissed (Guriev didn’t specify whether he was referring to the possibility of reversal and remand of the second indictment or the discontinuation of current investigation, apparently undertaken in preparation for a third case against Khodorkovsky) and that he would be released, which would eliminate the risk of possible charges against Guriev. Although Guriev asked not to be included in the list of candidates for the Supervisory Board of Sberbank, where he served since 2009, he was re-elected to the position immediately after his departure from the country, having gathered the largest number of votes among all other candidates; interestingly enough, the Russian Central Bank, Sberbank’s largest shareholder, voted for Guriev to be included in Sberbank’s Supervisory Board.
While some other members of the expert committee that issued a dissenting opinion regarding the Yukos case were exposed to more pressure than Guriev, he sees no reason for panic, as this is a peculiar case and other economists usually don’t experience such inconveniences. One of the reasons he quit his position at the New Economic School is that he doesn’t want to expose the school or his former colleagues to any risks stemming from the investigation.
Russian daily Gazeta.ru reported on Prime Minister Medvedev’s press conference in Sochi, where he talked about the Government’s results after a year in office. While certain macroeconomic indicators might be interpreted as a sign of stability – the budget deficit close to zero, low level of Government debt, low unemployment, – the state of the Russian economy is “lukewarm”, as Medvedev put it: there’s nothing good or bad going on.
Dmitry Medvedev considers the economic slowdown to be the main challenge not only to the Government, but to the society as a whole. He stated that while the central government revenues and the salaries in the country are increasing, there are no substantial developments in the economy, which irritates everyone. Medvedev had his honest moments in the past and was up to that standard when he stated that the positive macroeconomic trends in the previous year were not so much a result of the Government’s work, but a consequence of the recent positive economic cycle.
On the other hand, the Government seems to have done quite a lot in the previous year: it implemented 111 presidential orders (out of 152 to be effected by the end of 2013), issued 3,906 of its own decrees, forwarded 269 bills to the Parliament (of which 113 passed the vote and are already signed by the President) and came up with a plan of activities until 2018, as well as the projection of long-term social and economic development by 2030.
Medvedev continued to quote positive developments, stating that approximately 400 large production facilities in Russia were modernized during the last year, with aggregate investments amounting to 500 billion rubles (USD 15.92 billion). Stimulus measures for the oil and gas sector should bring 45 trillion rubles (USD 1.43 trillion) in additional revenues by 2030. One of the major concerns for the Government, the situation in the mortgage market, still shows no signs of significant improvement: last year, the Russian banks approved 691,000 housing loans with a total value of one trillion rubles (USD 31.84 billion) and an average interest rate of 12.8 percent. In accordance with the presidential decree, the Government should strive to raise the volume of housing loans to 815,000 in 2018 and lower the interest rate to 2.2 percent above the Central Bank’s discount rate (currently at 8.25 percent).
Medvedev commented on the privatization revenues that the Government generated during the last year, saying that they were lower than expected, but are no longer seen as something “exotic”. The Government collected 217 billion rubles (USD 6.91 billion) from privatization in the last year and plans to generate 427 billion rubles (USD 13.59 billion) for the whole 2013. However, the Ministry of Finance expects that the privatization revenues will not exceed 60 billion rubles (USD 1.91 billion) in this year.
The struggle between the two opposite approaches to managing the central government budget continues as well. The President of the Russian Federation Vladimir Putin tasked the Government with taking all the necessary steps to speed up the annual GDP growth to 5-6 percent, but the Ministry of Finance expects that the Russian GDP will grow by less than half of that figure, approximately 2.4 percent. Such a discrepancy practically demands of the Government to boost investments from the central budget, which is the position shared by the Ministry of Economy. However, the Ministry of Finance is against financing large unprofitable projects in times of economic uncertainty. The decision on which approach to take is currently with the President, who promised to „put an end to this discussion“. The pension reform is another point of disagreement between the Government and the President. At the beginning of May, President Putin complained that the Government still hasn’t come up with a transparent formula regarding individual capitalized savings. However, during his recent “direct line” with the public, Putin stated that regardless of his discontent with some of the Government’s decisions, it should be allowed more time to demonstrate its capacity.
Other interesting achievements of his Government that Medvedev mentioned were the construction of 70 new hospitals and clinics across the country, the reduction of waiting lists for nursery schools by 20 percent and the reduction of the number of convicts in Russian prisons from 818,000 in 2010 to 695,594 in April this year.
Russian business daily Vedomosti.ru published findings from the „Eurobarometer in Russia“ report prepared by The Russian Presidential Academy of National Economy and Public Administration (http://ranepa.com/), as well as the World Values Survey association (http://www.worldvaluessurvey.org/) study on the level of interpersonal trust in Russia. According to the reports, this indicator is on average 1.5-2 times lower than in Western Europe and the United States.
The level of general interpersonal trust seems to be the lowest in Russian cities with a population exceeding 1 million. For instance, less than 1 percent of the surveyed in Moscow believe that people in general can be trusted – the lowest percentage in all of Russia. Three quarters of the surveyed across the country feel distrust and wariness towards strangers. In some relatively isolated communities, such as industrial small towns formed during the Soviet era, the level of distrust towards unfamiliar persons reaches a full 100 percent.
However, the situation is quite different when it comes to interpersonal relationships with familiar people – family and friends. With the level of institutional confidence being notoriously low, Russians rely on their private social circles more than anything else. For instance, 44 percent of the surveyed stated that they would prefer borrowing money from family or friends in case of need rather than from the bank (16 percent stated the opposite). An average Russian citizen is able to raise 75,000 rubles (USD 2,390) from relatives and friends within three days. The percentage of those preferring to borrow from family and friends roughly corresponds to the percentage of those willing to lend money to a fellow in need: 42 percent of the surveyed stated that they regularly lend money to their friends and/or cousins, and they feel confident that they’ll get their money back.
According to the studies, Russians tend to have a wide network of acquaintances, contacting with as many as 25-30 people on a regular basis. The most sociable 25 percent of the population regularly interact with between 40-60 people. Only 15 percent of the unfortunate ones maintain regular relationships with less than 10 people and are forced to rely on government institutions to a larger extent. It seems that necessity is the primary motivator behind the reliance on government institutions – individuals with a wider social circle tend to trust the institutions less than the less sociable ones. The studies conclude that the level of abstract trust (towards institutions and strangers) in Russia is very low, forcing the people to rely on family and friends both in their private and business relationships.
Russian weekly magazine „Russian Reporter“ published an interview with the Head of the Supervisory Board for the Russian entrepreneurs’ association „Russian Foundation“ (http://en.opora.ru/) Sergei Borisov, who contrasted the Russian Government’s imprudent measures with its desire to put Russia among the top 20 countries for doing business. The debate regarding the Government’s attitude towards small and medium business in Russia was spurred by the recent increase of mandatory social contributions that put as many as an estimated 300,000 small companies and entrepreneurs out of business since the beginning of 2013.
Sergei Borisov is against the tax system that in effect filters out smaller businesses and individual entrepreneurs unable to pay the minimum social contributions prescribed by law. While there are forces within the Russian Government that are prepared to fight for every tax ruble – for instance, the Ministry of Labor recently requested to make social contribution tax evasion a felony – Sergei Borisov would like to relieve businesses with a monthly turnover of less than 100,000 rubles from paying any social contributions during their first year. The Russian Tax Administration claimed that 65 percent of the companies that closed their business after the increase of the mandatory social contributions weren’t operational anyway, but Borisov finds the figure arbitrary and believes that the President should punish the responsible officials who acted with gross negligence and ruined many businesses across the country. Borisov claims that there were instances when individual entrepreneurs were forced to pay contributions even though they were on maternity leave or serving in the army. As a result, after the Government increased the minimum social contributions for small businesses, approximately 100,000 new individuals applied for welfare benefits. Borisov wonders where does the Government intend to find the money to patch this new hole and warns that Russia might be approaching another recession soon.
While the Russian Government seems to look down on entrepreneurs who are unable to meet the minimum social contribution payments, existence of micro-businesses is essential to many small, remote settlements. Borisov stated that the Russian Government provides approximately EUR 575 million for the support of small businesses annually, while France, with a population of less than half of Russia’s, allocates EUR 30 billion for the same purpose. The Government should also introduce minimum outsourcing requirements for companies participating in Government tenders, requiring them to place 20 percent of the estimated order value with small businesses. Instead, the Government seems to be much more concerned with big businesses, which is not surprising given its dependency on oil revenues and ostensible desire for modernization and innovation, which can only come from big companies with sufficient R&D budgets. Borisov argues that such attitude affects both the business and the political climate in Russia negatively. Government’s negligent approach towards the small business has already angered many entrepreneurs. However, Borisov argues against small business going into politics, as it would make itself too vulnerable in the environment with inadequate law enforcement and judicial capacities. In his own words, “I wouldn’t recommend anyone getting into that fight”. Borisov also hopes that the new Head of the Russian Central Bank will reconsider its strict monetary policy to make loans more accessible to the small businesses. He believes that the prosperity of Russian entrepreneurs is essential for changing the mentality of the population for the better.
Borisov’s interview is accompanied with statistics sourced from the “Russian Foundation” polls, showing a somewhat brighter picture compared to the previously quoted Global Entrepreneurship Monitor Report for 2012 (see previous blog post). According to the polls, 13 percent of the surveyed stated that they plan to open their own business. This figure is the highest in Ulyanovsk (21 percent), and the lowest in Volgograd (a mere 1 percent). 1.8 million small and medium sized businesses in Russia employ 11.48 million people, and 3.8 million individual entrepreneurs add 5.3 million jobs to the figure. The share of small businesses in the country’s GDP is estimated at between 20-25 percent.
Russian business daily Vedomosti.ru published an editorial on the unwillingness of Russian citizens to open their own businesses. The editorial was motivated by the Global Entrepreneurship Monitor report for 2012, which indicated that a mere 2.2 percent of the Russian adult population plans to open a new business. This is the lowest percentage among all surveyed countries and the lowest indicator for Russia itself since 2006. When the existing business owners in Russia are taken into account, the percentage of those wanting to open new business rises to 3.8 percent, compared to the average respective percentage for the BRICS countries and Eastern Europe of 21 and 24 percent, respectively. Furthermore, 93 percent of Russians are not even considering the possibility of opening new business, while 83 percent claimed they never attempted to do so. Almost 50 percent of the owners who shut down their business in 2012 stated they don’t want to be entrepreneurs any more.
The Russian Ministry of Economic Development claims that the figures do not take into account those entrepreneurs who prefer to stay below the radar and are not visible in the official statistics or polls. Authors find this explanation unsatisfactory, as the existence of such businesses would demonstrate pretty much the same thing as their absence – that the conditions for doing legal business in Russia are inadequate. Even the Business Ombudsman Boris Titov, appointed by President Putin in 2012, does not dispute this. One of the most disturbing consequences of government regulation became evident in 2013, when approximately 300,000 individual entrepreneurs closed their businesses after a twofold increase of mandatory social contributions for workers.
Not surprisingly, the Global Entrepreneurship Monitor report found that the government policy towards business is the primary obstacle for the development of entrepreneurship: the absence of transparent regulations and logic, vague legal framework and its weak enforcement, and corruption. This is unlikely to change as long as the government forms its business policies in accordance with the requirements of monopolies and large businesses managed by oligarchs. In addition, small private businesses find it difficult to access funding at reasonable rates and complain about the inadequate physical infrastructure. Ombudsman Titov agrees that the corporate lending rates and the energy utility costs in Russia are the highest among the BRICS countries. Some might find it surprising that the tax burden in Russia, estimated at more than 40 percent of a total company’s turnover, is among the highest within the BRICS group of countries.
Authors ironically remarked that Russia might achieve President Putin’s goal of entering the top 20 countries on the World Bank’s Doing Business list by 2020 with no one left to do business.
Russian daily Gazeta.ru published an op-ed by Vladimir Milov, president of the Russian political party „Democratic Choice“, in which he criticizes the Russian government’s liberal policy towards immigration from Central Asia. According to Milov, regardless of individual politicians calling for the introduction of a visa regime between Russia and the Central Asian countries, the Russian Government continues with its loose immigration policy towards these countries. Russia’s generous relationship towards Central Asia is founded on two premises: first, Russia already invested too much political capital into the idea of economic integration with Central Asia; second, it is believed that the Russian economy would suffer if the country decided to cut the immigration of cheap labor force from the Central Asian countries.
However, Milov argues that such immigration actually hurts the Russian economy as it turns the balance of payments in favor of central Asian countries. Money transfers from the immigrants working in Russia to their home countries are higher than the Russian exports to those respective countries – for example, private money transfers from Russia to Uzbekistan in 2011 amounted to USD 4.3 billion, while Russia exported USD 2.3 billion of goods to the same country. In Tajikistan, private transfers from Russia constitute 47 percent of its GDP. Similar relationship is observed between Russia and other Central Asian countries, which seems to support Milov’s argument.
Milov goes on to state that the political and economic orientation towards Central Asia makes no sense for Russia. Russian exports to Central Asia (just below USD 20 billion in 2012) represent only 3.7 percent of the total Russian exports (USD 525 billion), and it is hard to believe that these countries will become top export markets for Russia in the near future, as the average monthly salaries in the region range from USD 100 in Tajikistan to USD 500 in Uzbekistan. The idea of building a bridge between Europe and the Pacific region through Central Asia is redundant, as Russia has direct access to the Pacific and shares almost eight thousand kilometers of border with China and Mongolia.
Furthermore, Milov argues that by indirectly subsidizing the economies of Central Asian countries through loose immigration and work requirements for their citizens, Russia supports autocratic and corrupt regimes that are doing very little to enhance the standard of living in their respective countries. The only thing Russia gets in return for its loose immigration policy is their dubious political loyalty, which could turn out to be of little worth should these regimes be overthrown. Milov is also concerned about the appearance of radical Islamist movements in some Central Asian countries. Besides, Milov claims that Russia is losing the battle for economic and political influence in Central Asia to China, which is making the countries in the region financially dependent by providing them with substantial loans. Thus, Milov argues, while Russia provides open borders and geopolitical subsidies, it is China that commands economic influence and enjoys access to resources in Central Asia.
Relying on the data from the Russian Ministry of Finance, business daily RBK reported that the Russian Government’s foreign debt decreased by 1.9 percent since the beginning of 2013, to USD 49.8 billion. Government debt owed under the euro-denominated bonds was reduced by 1.8 percent, to USD 34.27 billion, while indebtedness to the international financial institutions decreased by 7.3 percent, to USD 1.88 billion. Another major item in the structure of Russia’s foreign debt are guarantees denominated in foreign currencies with a total outstanding value of USD 11.3 billion. According to the Russian Central Bank, Russia’s total foreign debt increased by 17.2 percent in 2012, to USD 631.78 billion.
In 2012, the Russian central government operated a budget of USD 418.03 billion, or approximately 21.2 percent of Russia’s GDP, with a zero deficit.