Putin’s (a)Social Budget

Pavel K. Baev has an interesting piece on Asia Times Online about Russia’s budget priorities:

The new budget therefore demanded clearer priorities than just small flat cuts in every department, and the structure of expenditures proves two propositions about Putin’s policy: that he is afraid of the growing discontent within the country and that he has no ideas on revitalizing the economy.

Much spin is put on the social orientation of the budget, but where Gontmakher argued for investing in the quality of human capital while channeling funds into education and healthcare, Putin has opted for various direct payments, including a 50% increase in pensions, aiming at disarming “irresponsible” protesters. It might appear that only cold-hearted economists could argue against helping impoverished pensioners, but in fact the costs of populist measures are very high as investments in infrastructure that create employment and build a foundation for post-crisis modernization are mercilessly cut.

One way to improve the parameters of the budget was to increasetaxation on the gas monopoly Gazprom, but the half-hearted proposalfrom the Finance Minister Aleksei Kudrin was firmly overruled by Putinafter a meeting with Gazprom chief executive Aleksei Miller. Thisspecial attention will not only push the budget deeper into the red, itwill necessitate a further 25% devaluation of the rouble even if oilprices remain above US$60 per barrel, and that will keep inflation inthe mid-teens.

The main source of covering the deficit is the accumulated financialreserves, which at present amount to $400 billion. That, however, willnot be enough, and Kudrin has acknowledged the need to resort toexternal borrowing that in 2010 could be limited to $18 billion andreach $60 billion by 2012.

These figures are quite moderate in themselves and the external debtreaching 15-17% of GDP is not a heavy burden, but there is alsocorporate debt, which Kudrin estimates as exceeding $400 billion. Muchof that debt is covered by state guarantees and they are expanding asthe government is indirectly involved in negotiations on restructuringloans that have brought such “champions” as aluminum giant Rusal to thebrink of bankruptcy.