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Russia's economy before and after elections
Material posted: Publication date: 27-05-2011

The closer the elections to Parliament and presidential elections, the hotter seem to be caused by the approaching elections, the political debate in the media, the more often one can hear speculation on the direction of the Russian market and the Russian economy depending on who is elected President for the next term. Whether President Putin or Medvedev will remain, or suddenly there will be a third, for example, nominated in the leaders of "Right cause" Prokhorov billionaire? And in each of these cases will develop internal economic situation?

To speculate about the future of the Russian economy, it is necessary to clearly understand what it represents in economic terms Russia today. To do this, let's do a brief excursion into the past.

In 1991, following the collapse of the Eastern Bloc and the COMECON market, ceased to exist bankrupt in all respects (economic, political, ideological and managerial) of the USSR. All fragments of the once great power as a result of the collapse of the established economic ties were immediately in a critical dependence on exports to the markets of developed countries. Only there it was possible to find a stable solvent demand and freely-convertible currency, is vital for both producers and governments in a context where domestic markets of the newly independent States experienced a collapse, and their currency devalued rapidly and lost the trust of the people (this is what is happening with Belarus and the Belarusian ruble).

Among all exports of the most competitive product in the current economic situation was predictable raw materials, which developed countries have imposed guaranteed growing effective demand. The growth of the relative share of the primary sector, on the background of the collapse in domestic demand in other industries, gave rise in the first half of 1990-ies the type of economy that is based on has survived to the present time. The distinctive features of this economy is the commodity exports as the economic Foundation, and the national currency for foreign currency, as a measure and guarantee the purchasing power of the national currency.

The principle of operation of this economy is extremely simple: in the country from the sale of the raw material fed currency, its buying for the emission of rubles, which, in turn, being distributed on the domestic market of natural and fiscal means, ensure that it is effective demand. This effective demand, in turn, stimulates growth in other industries, oriented mostly to the domestic market.

Every ruble monetary base in the current economic model by more than 100% backed by foreign exchange reserves of the Central Bank. The sovereign emission, i.e. emission under the liabilities denominated in the national currency, is fundamentally not. That is, perhaps, the most important and fundamental distinctive feature of the existing Russian economic model, the notorious "commodity dependence" is only a consequence.

All profits of the business, without which no work logic of capitalism and the capitalist economic model, in a more or less stable economy, comes from various forms of monetary emission. No more profits to take, because if we assume that profits are taken solely from the pockets of the consumer, it leads to periodic crises of overproduction and a deflationary collapse related to the exhaustion of consumer demand as the redistribution of money from consumers to creators of added value. In the days of the gold standard such collapses happen regularly – like the classic collapse was the notorious Great Depression – and it is for this reason the gold standard, and in General, from any form of guaranteed money refused global capitalism, finally turning to the calculations represents Fiat money[1] in world trade.

However, in the realities of the Russian economic model, in which the sovereign issue is not fundamentally, all profits of the Russian business and the profitability both of individual producers and market part of the economy as a whole, is in direct dependence on the Central Bank set the exchange rate, and the volume of export currency proceeds. Russian exports has historically raw materials.

The result is that the profitability of Russian manufacturers depends on three factors: offers liquidity in the global financial market, the tyranny of global speculators in commodity markets and the tyranny of the Bank of Russia in the question of establishment of national currency. In such circumstances, even those who are working purely on the domestic market, were forced to bear an implicit exchange rate risk.

In a normal capitalist economy in which liquidity is supported by the Central Bank in the interests of the economy and maximize employment, to the increasing complexity of the value chain the profitability of the chain as a whole must grow, because it is increasing the total value added in the model and stimulates the economy to innovate and increase productivity. A capitalist economy can function properly only if from raw material profitable to produce more and more complex products. In Russia, however, has been developed and maintained this economic model, in which from raw materials to the domestic market to make production unprofitable, as all value added in the economy is already predetermined volume of commodity rents obtained from exports. That is why oil companies invest in refining in Russia, but prefer to drive raw materials for export, and so even if domestic fuel prices closer to European. The only limit to growth of prices in this situation is to import and with the current economic model soon in the border areas imported gasoline will stop rising prices at gas stations.

The paradox of the situation is that when the Government and the Central Bank trying to deal with "fundamental unprofitability" (and created) the Russian economy monetary methods of dumping, i.e. through excessive emission of rubles on raw materials rents, artificially lowering the exchange rate, they only aggravate the situation. Because of these issue, unrelated to the commitments of money, inflation accelerates, causing an increase in lending rates and oppressing the manufacturer is much stronger than it oppressed the strong ruble.

We often hear that the weak ruble is beneficial for domestic manufacturers, but it is extremely one-sided stamp of economic thought, especially in the existing Russian realities. Ask this question: which is better, dollar for 30 rubles at the rate on the loan is 20% per annum and the loan period is not more than 3 years, or a dollar to 20 rubles at the rate on the loan is 6% and the loan term up to 10 years? For industries with high processing depth, investing in innovation with a large time horizon, almost certainly more profitable second option. And for some cottage industry, I can assure you no credit at all profitable the first. So what type of industry the country needs to ensure its competitiveness? And in whose interests argue those who say that to give impetus to economic growth Russia needs another devaluation that inflation will pay the people? They think in the interests of the companies, which operations are in USD, but taxes and wages are paid in rubles, but it is mainly commodity exporters. Commodity companies are interested in reducing in dollar terms, rouble-denominated costs, and the one who offers once again to Fund their devaluation, offers to withdraw from population effective demand, and give it back to them in profits without any particular hope of this profit will be reinvested back into the economy. In oriented on domestic demand to the manufacturer, and not help him. And the blow time is applied country by the ruling elite for the past 20 years.

Not a strong ruble depresses today in Russia the production – he is "strong" if it is too low for PPS 30-40%? Created in the interests of extractive corporations and government officials interested in the "distribution" of the budget, the economic model of oppressing the Russian manufacturer. She is on hand raw material exporters, raw living on rents, and officials, converting a portion of natural resource rents that fall in the budget, rent-seeking "administrative". This neo-feudal state capitalism, in which the main economic activity revolves around the sale of raw materials and status, by their very nature have to oppress, and oppress everything that is not connected with raw materials and status. Everything that is not connected with raw status in this socio-economic model is futile in any long term.

What is Russia today? Russia is not a sovereign state because it does not possess the essential attributes of sovereign statehood: a sovereign currency and sovereign monetary policy. Moreover, unlike the EU, delegated their sovereignty to a common centre, which supports the liquidity of the Eurozone economy as a whole, and if necessary, acts in the interests of individual members, Russia refused from fiscal sovereignty in principle. Not in someone's favor, interestingly enough, in principle. In favor of mythical "all-powerful global market", which, according to the beliefs of liberal fundamentalism, his "Almighty hand" should regulate the economy the best, by definition, follows. However, when it is "best", yet contradict that very specific private interests, this "self-regulation" help in "manual mode" the Prosecutor's office, "doctors" and other administrative means.

What role does the unregulated market, really? In the West, he does, in fact, a very simple thing: it enriches the already rich. "Money – money". Investments always go the already trodden road. On a large amount of capital savings on the scale of production and greater rental income. In Russian conditions, the highest income is obtained in the extractive industries and the development of the budget. It turns out that in Russia liberal fundamentalism and neo-feudal statism[2] paradoxically merge into a single "doctrine" of priority the need to ensure macroeconomic stability in the interests of extractive corporations and the beneficiaries of the distribution of the budget. Moreover, this stability is maintained completely open for input and output of capital, gosudarstvennoi and most importantly, non-sovereign (i.e. colonial in its essence) economy.

However, this stability can really only exist until the next serious and long-term decline in the global commodity market. The prospect of that fall, which looms in the minds of the dominant elite, and accordingly, the fear that motivates the elite to strive for the modernization of the economy, which the dominant elite understands only as diversification of exports of some of RUSSIA inc., – because the country is perceived not as a sovereign state, but rather, as a Corporation, trading on the global market with foreign currency. However, the primacy of tenure of their rule and conditions for further enrichment by the exploitation of mineral resources and status repels the elite from any really serious steps in the direction of change in the economic structure, because such a change inevitably must be reflected in the structure of the elite.

The limit of the existing economic model, however, has indeed been. First time in the history of post-Soviet Russia there was a situation when the growth of prices on raw materials are accompanied by the continuing outflow of capital from the country[3].

Out of the country ran not only the money of corrupt officials, who fear a major overhaul on the results of future elections current "vertical of power". From the country began to run money from the middle class, not so much scared of the inevitable future decline of the economy, many progressive inadequacy of the higher echelons of the Russian government.

From the highest echelons of the Russian authorities sound confident statements and forecasts that inflation in the country in 2011 will be below 10%, while only since the beginning of the year food prices for some items rose by more than 20%, and the price of gasoline would have increased to the price level Scandinavian countries, if their growth is not stopped by administrative measures, creating petrol crisis. It is stated that the stabilization Fund by the end of the year will be doubled, at the expense of what fall will be raised welfare payments. This is two sides of the same coin: social benefits will go the same emission, which will carry out for the purchase of a given commodity taxes foreign currency earnings. And in spite of evidence that these measures will trigger a new round of inflation, it is argued that inflation will remain under control. It is claimed that the Government seeks to diversify the economy, and these statements are accompanied by a dramatic growth since the beginning of the year in social security taxes, which are taxes on labor. Most of these measures suffer producing sectors of the economy. It is claimed that the government wants to promote competition, but domestic prices for energy and fuel, considered from a European principle of "equal profitability", have no relation to internal supply and demand. They are overpriced, and are the result of covered up the Government monopoly dictates. It is stated that the country aims to become an innovative economy, and what we have created SKOLKOVO. But anyone even slightly sane person, who understands that for the commercialization of innovation requires a strong manufacturing base, providing the demand for them, it is obvious that the SKOLKOVO existing today in Russia (which is virtually impossible the development of a competitive modern industry) is a project for heating the universe, like all Russian education, by the way. In the best case, from SKOLKOVO, the country will get royalties, and all the added value together with the brains and innovation go abroad where actually going to be implemented innovations. It's just another source of raw - materials export in addition to oil, gas and metals, Russia starts export of mining raw materials, to processing of Russian economy within the developed and artificially maintain socio-economic models are also incapable, as she is incapable of processing raw materials from the bowels.

It is obvious that something needs to change, but it is also clear that before the elections, nothing will not change, not to "rock the boat". Before the election, barring any serious troubles in the global market, will be the same as stagflation, which is now at rather high rates on ruble deposits, stable exchange rates and an anemic stock market. The question is, what will be next?

In a situation of total economic dependence on global commodity markets and foreign credit, will be just what will present the Economics of global markets and foreign credit. From the fed's decisions and behavior of speculators on the London and Chicago stock exchanges in Russia depends much more than the words and decisions of top officials. This is true and due to the extremely low efficiency of the state apparatus – it is known that only about 10% of orders of the President to somehow turn the proverbial "vertical".

Will there be taken some steps to change this harmful addiction? Hardly.

If someone in the higher echelons of the Russian authorities were unwilling to take such steps, he would have taken them today, fortunately, such steps did not imply the reduction of social obligations of the state, and not only socially safe ahead of elections, but a big improvement would be welcomed by the people. These steps are simple:

- the ratification in full of the UN Convention on combating corruption and curbing corruption arbitrariness of the officials;

- curb monopolies, in particular, the rejection of the principle of "equal profitability" with the European market for fuel and energy companies, which is particularly hypocritical given the fact that the ruble is often installed directly in their interests;

- translation of internal fuel prices in a competitive market, when price is due to only solvent demand of consumers;

- development of the market of rouble government bonds;

- translation of monetary emission on the rails of the sovereign, when the Central Bank begins to act not in the interests of officials from the government and exporters, and in the interests of the economy as a whole, and the money issue is carried out under the provision of national assets, and not debts of the foreign States;

- reducing the tax burden on labour and on the actual manufacturer that will lead in the future not to fall, but instead to increase tax revenues, with the release of a significant portion of revenues from the shadows and increase tax base. Temporarily the budget shortfall could be offset by rise of excise duties on tobacco and alcohol, which in Russia are almost the lowest in the world, but to the Government, it seems, before the election is more important than creating new jobs, and the lack of social discontent from consumers of tobacco and alcohol.

If today there are no real steps to change the situation in the economy for the better is not undertaken, why they will be undertaken after the elections? After the election can only be made socially unpopular steps to restore the profitability of the existing retrograde socio-economic model through reduction of social obligations of the state. Only in this way and can prolong the existence of this model in conditions when the prices for raw materials will not continue to rise relative to the prices of consumer goods and equipment.

Whoever came to power after the elections, he will need to either change the model or to preserve it for the next presidential term. Given that the Russian elite is United in its determination to remain at the helm of uncontrolled power, and all the contradictions between what can be called the party of Medvedev-Chubais-the Institute of contemporary development and the party of Putin-Kudrin-higher school of Economics, boil down, really, to phraseology (the first often use the word "democracy", the second is the phrase "welfare state"), it can be assumed that an attempt will be made to conservation model.

Thus, soon after the elections to Russia's looming three possible scenarios, which are themselves directly dependent on the decisions that will be taken in the leading financial centers of the world.

Scenario # 1: global stagflation.

This scenario is realized, if the U.S. monetary authorities after issuing of the second program to stimulate the economy, known as QE2, will launch next QE3. The dollar in this scenario will be predictable to fall against a basket of currencies of other developed countries, to industrial raw materials, and especially to precious metals. Gross export revenues of Russia in this scenario will increase in nominal terms, under the budget it will print the roubles which part will be allowed to increase social commitments, part – stolen. Then this emission will bleed into real estate bubbles and in final demand, which will stimulate growth in the service sector both in value and as share in GDP.

The ruble will be slow to strengthen. Despite the fact that the rouble loan will to stagnate, lending will be more profitable in a falling dollar at low rates. Will persist quite high inflation - higher than industry growth. Also will the inflow of speculative capital and the inflation of a new bubble Russian natural resource assets.

Thus, in this scenario we will go back during the "energy superpower" 2006-2008, and in duhallow economy, where the commodity sector is growing in a falling dollar, and all other industry is in terms of stagflation, i.e., rising at face value. However, the inflation will devalue this growth more than 100%, except in those cases where this growth will be stimulated by government subsidies.

It is not excluded that at the global policy level, this scenario will be accompanied by a "reformatting" of the so-called greater Middle East, and Russia together with its environment will be a zone of relative political stability. It will be an additional positive factor for the inflow of speculative capital to the Russian market, and direct investments in commodities and in the banking sector. The share of foreign capital in these sectors will grow.

This is another "raspberry" sooner or later, of course, will end. What will be the dollar's purchasing power after all the experiments of the US monetary authorities, if they continue, it is hard to say - but with great certainty it can be argued that the relative price of oil on the way out of the crisis will not exceed $ 30 pre-crisis (2007). The end of "raspberry" again will return the Russian socio-economic system in the conditions of 2009 year and will put it before the need for change - only technological backwardness will be more, the demographic situation is worse, and the quality of labor resources lower than today. However, until this moment the country can live as it lives today and lived until the second half of 2008.

Scenario # 2: the second wave.

This scenario is realized, if the U.S. monetary authorities after issuing of the second program to stimulate the economy no longer will support the American demand emissions will tighten monetary policy and will reduce the Federal budget deficit. In this case, the entire periphery of the global economy could face massive repatriation of foreign capital, commodity prices will collapse in the peripheral countries of the EU will worsen the debt problems and falling demand.

In this scenario, Russia will suffer doubly: from the outflow of capital, which will take the nature of stampede, and falling demand for their exports. Accordingly, foreign currency revenues not only will be able to maintain the stability of the ruble within the current socio-economic model, it is no longer enough even to maintain the stability of currency circulation and the monetary base in sufficient volume. In this situation either the Government and the Bank of Russia will have in the face of extremely unfavorable external market conditions, restructure the existing socio-economic model, which today could be carried out rather smoothly or to accept the fact that inflation would grow to be very high, and the welfare of citizens by results of the collapse may be reduced significantly.

What itself will represent Russia at the entrance of such a scrape, if it happens, hard to say. Depending on Government action, it may come as a country with a more or less healthy economy, the monetary system which relies sufficiently on domestic demand, the country in which it is profitable to produce, and created favorable conditions for attracting direct investment, or Russia will become the Eurasian analogue of the great Zimbabwe.

Scenario # 3: slow compression.

This scenario is realized, if the U.S. monetary authorities after issuing of the second program to stimulate the economy will not continue to support the American demand by further expansion of the monetary base and to take serious steps to reduce budget deficit, monetary policy will remain soft. The monetary base in the United States will cease to grow, respectively, will disappear preconditions for the further inflation of prices for raw materials and precious metals. In a situation where the US real estate market for some time will remain problematic, American Bank loan will not be restored, despite the low rates, or will be, but very weakly.

This scenario now seems the most likely, and he will be accompanied by a lengthy and rather smooth correction of commodity prices that allows for the preservation of the existing Russian socio-economic model in the hope to wait out bad conditions. Such preservation will be accompanied by:

Maintaining the profitability of the commodity sector at an attractive level, due to the moderate fall in the exchange rate of the ruble.

  1. The fall in domestic demand in real terms of direct and indirect cuts in social spending budget.
  2. Cosmetic attempts to diversify exports through the creation of local zones to attract foreign direct investment, industrial parks with special tax and legal regime. In cases where such diversification will be successful, it will serve as a justification of the modernization rhetoric that is likely to continue and the next presidential term.

Come across this attempt at preservation of the external circumstances of force majeure in the form of an acceleration of the decline of world markets, or it proves successful during the next presidential term – time will tell. And the success only postpone the existing problems in the future, exacerbating them.

Summarizing all three scenarios, it becomes clear that under the existing socio-economic model it does not matter who will become President of Russia next year. Its rate will be 90% dependent on the situation on the global market, expressing the interests of a major Russian commodity business and most powerful bureaucracies in distributing the budget. To change the status quo, needs a leader who is not afraid to recognize not just the exhaustion of the existing socio-economic model is already done, to its credit, President Medvedev. Need a leader who can openly and honestly identify specific mechanisms of its implementation and preservation that need to change; in particular its beneficiaries, in whose interests this model operated for many years; is able to base its internal policies on wider society, not the narrow elite and the corporate group. The leader, on the one hand, non-systemic, on the other hand, is quite sensitive and understanding current socio-economic system to be able to start to reform it, without provoking a strong social and political upheaval. Such a leader among the most famous in Russia today, political figures is not observed and is not observed motivation in Russian society to nominate such a figure. Therefore, while external environment allows the internal Russian domestic policy and the corresponding economic policy will remain unchanged.


[1] Fiat money (from Latin. fiat — decree, stating, "so be it") — money, legal tender, face value of which is determined, provided and guaranteed by the state through its authority and power

[2] Statism (gosudarstvennosti) (from FR. État — state), the worldview and ideology, absolute role of the state in society and promotes maximum subordinate the interests of individuals and groups the interests of the state

[3] estimated the Central Bank, in the first quarter of 2011 , the outflowof capitalfrom Russia amounted to 21.3 billion dollars. Another 7.8 billion "ran away", according to preliminary estimates, fromcountriesinApril. And this is with oil prices above 100 dollars per barrel!

 

 

Dmitry Golubovsky, Alexei Viazovsky

 

Source: http://www.kalita-finance.ru/about/news/media-novosti/ekonomika-rossii.html


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