Prime Minister Medvedev: absence of significant developments in the economy irritates everyone

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.  

The matter of trust in Russia

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.

Small business in Russia – who is to blame and what is to be done

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 entrepreneurship in dire straits

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.

Who benefits from the Great Game in Central Asia

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.

Russian Government’s foreign debt reduced to USD 49.8 billion

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.

Gazprom has gas to last a 100 years

Russian business daily RBK quoted Gazprom’s Head of Geological Department Andrey Tretyakov, who stated that Gazprom’s gas reserves are sufficient for the company to continue producing gas for another 100 years. During his participation at the Adam Smith Institute conference „Oil and Gas in the Russian Arctic“, Tretyakov added that Gazprom will have to deal with the challenges posed by the development of shale gas extraction and the utilization of gas hydrates. President of the Oil and Gas Industry Association, Mr. Gennady Shmal, stated that the liquified natural gas (LNG) will be of major importance to Russia in the future.

Gazprom’s CEO Alexey Miller stated last week that the Russian gas monopolist plans to match its 2011 exports in 2013, as the current market conditions are favorable. Gazprom’s exports decreased in 2012 against the backdrop of reduced consumption in Europe, but the company retained its market share of 55 percent in the total European Union imports. International Energy Agency (IEA) confirms this, stating that Russia will remain the largest supplier of gas to Europe in the medium term. However, IEA experts forecast that Russia will lose its position of the largest gas extraction country to the United States by 2035. According to IEA’s estimates, Russia and the United States will extract approximately 784 billion and 821 billion cubic meters of gas in 2035, respectively. China is expected to increase its gas extraction fivefold in the same period and become the third largest producer of gas in the world.

According to the Petroleum Resources Management System (PRMS) standards, Gazprom’s proven and probable gas reserves are estimated at 28.7 billion tons of fuel equivalent, valued at USD 269.6 billion. In 2012, Gazprom extracted 488 cubic meters of gas. Gazprom has a share capital of approximately USD 3.76 billion, divided into 23,67 billion shares with a nominal value of USD 0.16. The Russian Government controls more than 50 percent of the company.

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