Activity – Page 3 – Committee for Russian Economic Freedom

July 6, 2016September 9, 2018

A Lesson in Political Science: On Merging Black Cashboxes into the Kremlin’s Common Cash Funds

In political science, the term “democratic transition” is used to describe a transition period in the history of a country that has recently gotten rid of a totalitarian regime and is “in transit” toward the formation of democratic institutions, that is a regime that is neither totalitarian nor yet democratic. There probably should be another term to describe the reverse process from half-established democracy to a dictatorship. This is the totalitarian transition we are witnessing in today’s Russia, and the authorities have not yet tightened screws enough to prevent the information about different aspects of this process from reaching the population. Thus, the much-publicized arrest of former leader of the Union of Right Forces opposition political party and Kirov Region governor Nikita Belykh brought to light a sensitive topic of “black cashboxes” controlled by government structures.

What exactly is a “black cashbox” of a Russian governor? First, it is worth noting that according to official estimates, 40 percent of monetary assets in Russia are circulating in the shadow sector of the economy. Unofficially, this number is much higher. According to Russia’s Central Bank, in 2015, the volume of cash in open circulation reached 400 billion rubles. It has to be said, however, that in 2014, it amounted to 1.8 trillion rubles. Russia is a recognized leader in illicit financial flows. A report released by Global Financial Integrity (GFI) examines Russia alongside India, Brazil, Mexico and Philippines. More than 40 percent Read More “A Lesson in Political Science: On Merging Black Cashboxes into the Kremlin’s Common Cash Funds”

June 28, 2016September 9, 2018

Greedy Insurers and Bloodthirsty Collectors

Like many other sectors of the economy, Russia’s insurance market is going through bad times: the extent of insurance is declining, and, even according to the most optimistic forecasts, the nominal growth in insurance contributions in 2016 will not exceed 5 percent, which will be easily lost to inflation. This is hardly surprising, given the decline in car sales, decline in loans issued to the population (which results in the fall of revenues from life insurance,) and the general decline in business activity.

Given this context, the issue of lowering insurance compensations is coming on the agenda. In order to do this, insurance companies are resorting to analysis by “their own” experts who undervalue damages; deliberate slowness with insurance payments, especially with regard to health insurance and life insurance on trips abroad; as well as traditional Russian formalism that demands every document to be printed on a letterhead and to bear a seal. Car owners almost always have to argue with their insurance companies about the amount of compensation for the physical damage to their car, and hire an independent expert to evaluate the cost of repair. Such a situation would be unthinkable in a civilized market: for instance, in the US any repair to an insured vehicle damaged in a car accident would be reimbursed to a maximum estimate, and the only thing the insured has to worry about is whether his or her insurance limits cover the medical costs of the injured party. But even with the exaggerated costs of healthcare in the US, insurance payments in most cases are enough to cover all the costs of the injured.

Apart from manipulations with insurance payments, insurers are increasingly resorting to recourse and subrogation–that is, demanding compensation of their expenses from the guilty party. Read More “Greedy Insurers and Bloodthirsty Collectors”

June 23, 2016September 9, 2018

Putin, Roldugin, Shamalov, Patrushev and the Rest of Homeowners

Apartment building in Moscow / Photo by apb1.ru

The widely known problems in Russia’s housing and communal services sector are not new. The entire sector is slowly but steadily deteriorating. This is no surprise since the average age of the Russian housing stock exceeds 40 years. Several tragedies happened over the last year. A residential building partially collapsed in Mezhdurechensk; household gas explosions occurred in Omsk, Perm, Yaroslavl and Volgograd; a bridge collapsed in Vladivostok; cars regularly get stuck in potholes as pavement collapses. Well-known Russian blogger Ilya Varlamov has repeatedly supplied evidence of dire housing conditions of ordinary Russians.

The federal authorities do not at all seem concerned about this situation. In 2016, federal allocations for the repair and replacement of utility lines as well as for the upgrading of the housing stock will amount to around 75 billion rubles or about half of the obviously ill-gotten $2 billion belonging to Putin’s close friend violinist Roldugin. There are plans to further cut federal spending on the housing and communal services sector in 2017 to more than half its 2016 amount.

In fact, why should Russia’s budget be spent on housing around 85 percent of which is privately owned? On the other hand, despite the mass privatization of apartments in the 1990s, public spaces and communal services of most apartment buildings such as entrance halls, courtyards, stairs, gas, electrical and plumbing have not been privatized and remain the responsibility of municipalities. The budget situation on the local level is obviously much worse than on the federal one. Read More “Putin, Roldugin, Shamalov, Patrushev and the Rest of Homeowners”

June 16, 2016September 9, 2018

Putin’s Regime Thumbs its Nose

Russian Prime Minister Dmitri Medvedev during a visit to Crimea. Photo by A. Pupysheva / kafanews.ru — Russian Prime Minister Dmitri Medvedev during a visit to Crimea. Photo by A. Pupysheva / kafanews.com

On May 23, during a visit to Crimea, Russian Prime Minister Dmitri Medvedev made a fool of himself with a cynical and provocative phrase that quickly became one of the most popular hits on Russian Internet. Answering the question from an elderly lady about why pensions are not being raised, Medvedev, without so much as a thought, retorted: “There’s simply no money. If we find the money, we will raise pensions. You hold on here, I wish you all the best, good spirits and good health.” But the money is lacking not only for pensioners: all those who had for years depended on the needle of “Putinomics” are experiencing problems.

Russia’s largest car manufacturer, AvtoVAZ, is once again finding itself in a difficult situation: beginning on June 6, its workers were transferred from a four-day to a three-day week; layoffs of between 5,000 and 8,000 people are expected. According to AvtoVAZ’s report, the company’s debt arrears of more than 45 days after the first quarter of 2016 has reached 25.3 billion rubles—3.8 times greater than during the same period of 2015. The company’s total debt to suppliers and contractors during the same period amounted to 66.5 billion rubles (including arrears of 25.3 billion.) After the first quarter of 2016, the company’s net loss has increased 48 times, reaching 8.6 billion rubles. To cover its losses, AvtoVAZ will ask its French partner, Renault-Nissan, for a loan of 20 billion rubles. If it is unable to pay that loan back, AvtoVAZ will have to pay with its shares and assets. Read More “Putin’s Regime Thumbs its Nose”

June 8, 2016September 9, 2018

Foreign Trade: An Unlearned Lesson

In 2013, Russia’s external turnover reached its highest level in modern history, amounting to the hefty $864.6 billion. Oil prices that from 2011 to 2014 constantly exceeded $100 per barrel had no small share in this. Thanks to this situation, such notions as budget deficit and state debt have become part of the history (albeit recent) of the 1990s that is being actively rewritten on Putin’s initiative.

Satisfied and content, Russian citizens – not everyone, but certainly the majority – came to believe that their financial stability was secure and demanded that the Kremlin come up with something more entertaining than the long-familiar reality TV shows, such as Dom 2 and Let Them Talk. Having tamed Siberian tigers and flown with Siberian white cranes, Putin responded to popular yearning for something better than TV fencing by treating his loyal people with the Sochi Olympics, and then the annexation of Crimea and the war in Donbass.

However, Russia’s foreign partners did not particularly like such reality shows and responded to them by introducing economic sanctions. Furthermore, the historic cycle of high oil prices came to an end, and in the summer of 2014 oil prices plummeted. That same year, Russia’s external trade decreased by around 7 percent, and in 2015, the country’s foreign trade dropped by 33 percent year-on-year from 2014. Statistical data for the first quarter of 2016 shows that this decrease will continue, since foreign trade is falling by more than 25 percent compared to last year. Consequently, in less than three years, the drop reached 65 percent.

The export and import patterns Read More “Foreign Trade: An Unlearned Lesson”

June 2, 2016September 9, 2018

Innovative Type of Doping or Firing Bulava Missiles at Armata Tanks

In the modern world, minerals, land and other natural resources are gradually losing their value while knowledge and technologies are steadily gaining in importance. There are many examples that prove this point such as the Uber app that put the company that had created it at the top of the 2015 list of companies with the highest rates of market capitalization growth, leaving far behind both Russia’s “national treasure” Gazprom and the Kremlin’s “pride” Rosneft. Elon Musk launches reusable spacecrafts, and even Roman Abramovich invests money in the advanced US and Israeli apps Via and BlindSpot.

It is no surprise though that the same cannot be found Russia. Domestic manufacturers have almost nothing to boast about on high-tech markets, except for tight oil pipeline valves the potential demand for which is far from being obvious. The state-owned corporation Rusnano that was established in 2007 specifically for the purpose of boosting the development of high technologies, has been deeply unprofitable since the very beginning.

Dedicated patriots who are “getting up from their knees” could object to the previous statement, and reinforce their argument by mentioning certain achievements in the development of military equipment. Russia’s innovative Armata tank, the Su-35 fighter, the Bulava missile and other “Iskanders” are staples of Russian state-run TV channels, especially in the context of the militarist frenzy that hit the country after the annexation of Crimea, support for pro-Russian separatists in Donbass and bombing raids in Syria. Read More “Innovative Type of Doping or Firing Bulava Missiles at Armata Tanks”

May 25, 2016September 9, 2018

The Privatization of Bashneft: An Exercise in Futility

Photo by Bashneft — Photo by Oil Company “Bashneft”

The Kremlin finally decided to approve the privatization of Russia’s major oil company Bashneft that had belonged to privately-owned AFK Sistema until its shares have recently been literally robbed while its owner Vladimir Yevtushenkov was being held under house arrest. Bashneft shares that used to belong to Yevtushenkov have been returned to the state, and the government now hopes that the sale of Bashneft will bring the much-needed money to replenish the Russian budget. However, the way the Russian authorities are preparing the sale of this valuable oil asset makes one think of yet another shady transaction.

On May 16, President Putin excluded 50 percent plus one share of Bashneft from the list of strategically important companies thus paving the way for the sale of the state’s majority stake. Today, the Russian Federation owns 60.16 percent of Bashneft’s voting shares (or 50.08 percent of its authorized capital). The regional government of the Republic of Bashkortostan, which is a federal subject of the Russian Federation, owns an additional 25.79 percent of the company’s voting shares (or 25 percent of its authorized capital).

The first question that comes to mind: What exactly is being sold? The Russian Federation is currently considering whether to sell a stake of 25, 50 or 75 percent together with the stake of the Republic of Bashkortostan. The regional government of Bashkortostan, however, does not support the idea of selling its stake in the company. The republic expects to at least keep the blocking stake (25 percent plus one share) in Read More “The Privatization of Bashneft: An Exercise in Futility”

May 19, 2016September 9, 2018

Useless Services

The production of what goods and services accounts for the largest share of Russia’s gross domestic product (GDP)? That is a simple economic question. Amateurs would be wrong as usual in claiming that the right answer to this question is oil and gas. In the modern market economy – and in the last 20 years, Russia has been classified as a market economy unlike, for example, North Korea – the largest share of GDP is attributed to various services. Banking and transportation services, healthcare and education, lawyers and auditors, Internet and cell phone services together account for 55 percent of Russia’s GDP. Just for comparison, in the United States, the same services account for as much as 80 percent of the country’s GDP. The rule is simple: The more developed a country is and the higher the living standards of its population are, the larger the share of the service sector in its economy is.

Legal and auditing services without which private business cannot exist or develop occupy a special place in the variety of services. Businessmen use the results of independent legal analysis and audit to reduce risks and avoid losses. Read More “Useless Services”

May 11, 2016September 9, 2018

Kremlin Imitators: Putin, Medvedev, and Kudrin Who Joined Them

Alexey Kudrin and Dmitry Medvedev / Photo by postsovet.ru

It appears that the Russian authorities have once again turned to their favorite pastime of successfully imitating reforms. After two years of fighting first in Ukraine and then in Syria, Vladimir Putin decided to address the crisis in the country. The elections are close at hand, while the economic situation in the country has been steadily deteriorating for the last two years, and the population is being increasingly affected by it. The quasi-patriotic rhetoric and the “Krym nash” (Crimea is ours) slogan cannot save the government’s poll standings from slumping anymore. Putin decided he needed a program and appointed his loyal colleague and former Finance Minister Kudrin his main “reformer”. However, in 16 years in power, Putin has never successfully implemented any major structural reform. Thus, this new seemingly liberal initiative will be nothing more than yet another step in the process of appropriation of state resources and unsystematic campaigning.

It is obvious that there can be no successful structural reforms in Russian under the Putin regime if only because reformers have no real authority regardless of the informal status granted to them by Putin. Created in 2012, the Economic Council under the Russian President has until now stayed dormant. Putin’s St Petersburg friend, Alexei Kudrin Read More “Kremlin Imitators: Putin, Medvedev, and Kudrin Who Joined Them”

May 4, 2016September 9, 2018

Endangered Species of Business

Vladimir Putin. Photo by Alexey Druzhinin / "RIA Novosti" — Vladimir Putin. Photo by Alexey Druzhinin / “RIA Novosti”

During a recent meeting on the improvement of the government procurement system, Prime Minister Medvedev declared that it was imperative to involve small and medium-size businesses in this process. One month later, the Ministry of Economic Development came up with draft legislative amendments that are supposed to facilitate the conditions for participation in the process of government procurement for small-size enterprises by dispensing them from the required provision of collateral. It is as yet unclear whether this measure will be effective, since specialists already point to the insufficient and inaccurate character of the proposed changes.

Concern for small and medium-size businesses is one of the favorite topics for both Medvedev and Putin. However, despite the annoyingly regular promises of support, small companies continue to experience difficulties.

The share of small and medium-size enterprises in the country’s GDP is a key indicator of Russia’s economic health. According to official estimates, in Russia it amounts to 20 percent. According to entrepreneurs themselves, however, it only reaches 3 percent. In comparison, in the United States, the share of small businesses in the country’s GDP amounts to around 60 percent, and in some European countries it reaches 80 percent.

In 2014, more than half of all small enterprises recorded a decrease in financial stability, and more than half of entrepreneurs declared that business conditions had deteriorated. Over the past year the tendency has not changed, Read More “Endangered Species of Business”