July 1st, 2013

Economic efficiency Putin’s way

14 billion dollars from Russia’s national welfare fund will be spent on transport infrastructure, – announced Vladimir Putin at St. Petersburg International Economic Forum. Among other projects, the government will support construction of a new high speed railway from Moscow to Kazan.

Vladimir Yakunin, a good friend of the President and the CEO of Russian Railways

Russian Railways, a state-owned monopoly, estimates the total costs of the high-speed railway to Kazan in 30 billion dollars. Though the company hasn’t yet started the feasibility study for the project, Vladimir Putin already knows that the project will be economically viable. However, simple calculations demonstrate that it will take around 250 years to return all the money invested in this railway. No surprise, since high-speed trains demand heavy subsidies from governments everywhere. The economics of this fancy transport raises questions even in densely populated rich countries such as Germany and Japan. In Russia there are plenty of areas where government spending could demonstrate higher return. Vladislav Inozemtsev of the Centre for Post-Industrial Studies demonstrates that a fraction of investments in high-speed railways will be enough to cover most of the country with a new much needed network of local airports.

Nevertheless, the railway project is a very good investment for Mr. Putin. The current large construction projects, such as Olympic Games 2014, APEC summit 2012, Universiade 2013 and several others are either completed or close to completion. Construction companies are striving for new government money. By a coincidence, most major contractors are owned by Vladimir Putin’s close friends and allies.

The government spending on infrastructure is a straightforward way to foster economic growth. The effect could be long-lasting if new infrastructure improves the overall economic conditions. Alas, Putin-style stimuli have only a one-time effect. Huge Olympic arenas won’t be used after the Olympic Games are over. The world’s largest cable-stayed bridge connects Vladivostok with the Russky island, where nobody lives. The government pays in gold for infrastructure which doesn’t have much functionality, but serves as a symbol of Putin’s rein.

FT

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