Russia has all but approved next year's budget, the country's main financial document. However, the biggest debates around state money lie ahead. They will not focus on the budget, but on surplus hard currency from the Stabilization Fund.
The budget was compiled and made it through parliament with surprising unanimity and speed, which is somewhat unusual. For example, the projected inflation level in the 2005 budget is 7.5-8.5%. This is clearly an unrealistic figure. One only has to look at this year's results: Inflation was supposed to be between 8% and 10%, but the year-end figure is 11.5%. The difference evidently cannot be reduced the next year. However, this issue was not really debated in the Duma, which adopted what it was given.
A specific feature of the 2005 budget is a significant increase in defense spending (by 27.7% compared with this year), and in spending on national security and law-enforcement activities (by 26%). According to some opposition deputies, this money will be wasted unless reforms are carried out in those spheres. Nevertheless, this issue was not debated for long in the Duma. Without any problems, the 2005 budget was approved by deputies in its fourth and final reading and then submitted to the Federation Council. Sergei Mironov, the upper chamber's speaker, was quick to say that, in his opinion, "the Federation Council will support the budget at a special session on December 10."
Naturally, the absolute majority of the party of power, United Russia, could explain the unanimity of the people's deputies. However, when it comes to distributing funds for specific regions and programs, collective unanimity usually falls apart. So, the picture is not all that typical.
The unprecedented lenience of the elected deputies is reminiscent of the calm before the storm. Preparations are underway for a more significant episode relating to the country's finances: the distribution of funds accrued in the Stabilization Fund. According to the Finance Ministry, the Stabilization Fund will stand at 574.4 billion rubles (about $20 billion) by January 1, 2005, and will increase to 720 billion rubles by January 1, 2006.
The Stabilization Fund was established in January 2004. It receives budget revenues when the price of oil exceeds $20 per barrel. Under the law, 500 billion rubles form an untouchable contingency reserve to insure the Russian economy against a steep fall in oil prices. But the fate of the surplus money is unclear, though there have been many suggestions.
A month ago, Andrei Illarionov, the president's economic adviser, said point-blank that this money could only be used for projects outside the country, in particular, the early repayment of Russia's foreign debts. Many government officials, including Finance Minister Alexei Kudrin and representatives of the Central Bank and the Economic Development and Trade Ministry, liked the idea. However, the October fall in economic growth rates seems to have put the scheme on the backburner.
While the Russian authorities analyzed the situation, new difficulties emerged. The country's economic growth in November was the lowest for the past two years - a mere 4.5%. Moscow Narodny Bank, a British subsidiary of the Central Bank of Russia, was the first to make this figure public. The industrial growth situation was even worse. According to the Moscow Narodny Bank's assessments, for the first time in the past few years, industrial growth indicators dropped to the level registered after the 1998 default. Russia's industrial sphere has not seen such a serious situation for the last 73 months. The bank concluded the situation was constantly growing worse: its monthly business activity index has fallen for five straight months. In November, it was already below 50 points, which is considered the borderline between growth and decline. As a result, even Brunswick UBS cut projected GDP growth in Russia for this year from 7.5% to 6.5%, and for 2005 - from 6% to 5%. Analysts believe the main reason for this setback in the economy is a slowdown in investment growth.
The Russian authorities could, of course, ignore the forecasts coming from the West. Analysts from the Economic Development and Trade Ministry have produced different figures. And they should know. However, jittery investors have to be convinced, especially given that foreign investors have grown used to trusting monthly reports from Moscow Narodny Bank because it is the Central Bank's subsidiary. Meanwhile, international rating agencies might give Russia an unwelcome Christmas present by lowering Russia's ratings. Even the Economic Development and Trade Ministry has little cheer for the authorities. According to its estimates, investment in Russia will increase by only 10.5% on the year-end results (instead of the projected 11.5%).
Consequently, the Russian authorities will have to make urgent corrections to economic policy. They at least have to make a semblance of promoting investment. When addressing a conference on social issues, Prime Minister Mikhail Fradkov issued a particular warning to regional governors that they should not cut investment programs using the replacement of benefits in-kind with cash payments as an excuse.
The government now has to increase investor confidence in the Russian market. This task was even included in a medium-term economic development program until 2008. To all appearances, an ambitious investment future awaits the Stabilization Fund surplus. This is exactly what Duma deputies want to hear, as they are each lobbying dozens, if not hundreds, of projects.
Economic Development and Trade Minister German Gref has already announced in the Duma that Stabilization Fund money should be spent on government-guaranteed investment projects. Andrei Klepach, who heads the ministry's macroeconomic forecasting department, has proposed the foundation of an ad hoc Strategic Investment Venture Fund within the budget to take any surplus money.
The Finance Ministry intends, from 2006, to raise the oil price ceiling from $20 to $21-21.5 per barrel. The twenty dollar ceiling will remain valid for exporters, while the surplus, $1 or $1.5, will regularly replenish the fund, which promises to yield approximately 60 billion rubles a year.
Mr. Klepach believes the extra money should only finance projects that promise a major macroeconomic effect, with annual hard currency profit rates "significantly exceeding 7%." This is already a disputable issue. Who can say today which project will produce the greatest effect? No one can; hence the many suggestions about how to use the money. Mr. Gref sees projects related to infrastructure and state partnership with private enterprise as the top priority, whereas Mr. Klepach believes the oil industry needs huge capital investment.
Mr. Kudrin agrees with both, to an extent. "It would be wrong to invest Stabilization Fund money in commercial projects," he said recently. "This money should be used for government-guaranteed infrastructure projects, which cannot recoup within a year or even five years, but will help improve the economic situation as a whole. These may be road or airport construction projects." However, the minister is categorically against investing in pipelines, as they can easily attract market investors.
Given that the authorities cannot agree, the matter is open to debate. Commercial projects may even have a chance. If one thing is certain, it is that deputies will continue fighting it out for the state funds.
