Economics – Page 2 – Committee for Russian Economic Freedom

August 31, 2016September 9, 2018

Stadiums Versus Hospitals

Russian healthcare, just like state-funded Soviet healthcare before it, has never been characterized by either quality or accessibility. Despite rather large investments in the medical industry that both the federal and local budgets could afford during the period of high energy prices, the quality of medical care received by the population remains appallingly poor. There is a deficit of doctors, and their level of knowledge does not meet modern-day standards. There is a continuous deficit of effective drugs. Today, when oil revenues have plunged and there is no prospect of foreign investment, the question arises: At whose expense will the government be cutting back on spending? The authorities have quickly found a solution on the federal level by gradually reducing healthcare spending for over a year. Local authorities act in a similar way. Only, whereas in Putin’s opinion, the government cannot cut down on “national security” spending (or in other words, federal expenditures on the police and special forces used to suppress popular unrest), local authorities use budget funds that were supposed to be spent on health care and education, for example, to build sports facilities for the upcoming 2018 FIFA World Cup instead. Thus, in St. Petersburg, funds originally intended for the construction of schools, daycare centers and healthcare facilities are going to be used to complete the construction of the Zenit Arena stadium.

Georgi Poltavchenko, Putin’s colleague from the Leningrad KGB and current governor of St. Petersburg, called this redistribution of funds a “technical solution” instead of admitting that the country that is rapidly sliding into poverty simply cannot afford an expensive World Cup. It would seem that it should not be difficult for
Read More “Stadiums Versus Hospitals”

August 24, 2016April 15, 2019

SHOALING CREEK OF FDI

According to the recent statistics provided by the Russian Federal Statistics Service, foreign direct investments (FDI) in Russia have dropped in the first half of 2016 by 4.3% APR. In fact, shallowing of the investment inflow has continued for more than two years. Hunger for superprofits sharks of capitalism perceive the expropriation of Yukos in the mid-2000s as an isolated case, which does not affect the overall investment climate in the country. They continued actively flirting with the Putin’s regime, and only economic sanctions, entered by the Western governments in 2014 in response to the annexation of Crimea and support of separatists in Donbass, have forced transnational corporations to slow down its expansion on the Russian market.

Russia’s overall investment climate quickly turned from positive to negative. Russia was among the top three recipients of FDI with a record US$94 billion in 2013. This precipitously fell to only US$21 billion in 2014 and US$4.8 billion in 2015.

In 2014 just 178 new foreign investment projects worth US$13 billion were launched, compared to 396 projects worth US$23bn in 2011. Russia’s second biggest European investor (after Cyprus), the Netherlands, decreased its investment from US$5.7bn to US$1.23bn in 2014. Even though weak currency usually attracts foreign investors, as ruble weakened, FDI kept collapsing.

Ernst & Young sees the following issues negatively influencing the investment climate: inconsistent and selective law enforcement, non-transparent decision-making procedures, and corruption.

Historically, the main industries for FDI inflows in Russia have been wholesale and retail trade, banking, manufacturing, and the mining sector (mostly extraction of oil and gas). Surprisingly Read More “SHOALING CREEK OF FDI”

August 17, 2016September 9, 2018

A Mortgage from Putin

German Gref (right) and Vladimir Putin / Photo by rieltor-89.ru

Vladimir Putin rarely acts as an advertising agent, but the current economic crisis and the fear of political instability it provokes are forcing the president to recur to unorthodox methods of state support for key segments of business on which the regime’s financials are based. During his meeting with the head of Sberbank—Russia’s major bank, 51 percent of which is owned by the state—Putin suggested that Russian citizens should take out mortgages without waiting for interest rates to go down.

There could be many reasons for such promotional activity, the chief among them being a slowdown in nominal wage growth, an upturn in inflation since July, and a rise in the unemployment rate. These factors are already affecting the banking sector and could potentially lead to a balance-of-payments crisis, the holding back of wages and pensions, and other systemic problems. Analyzing Putin’s aforementioned statement, Russian economist Sergei Aleksashenko notes that while the numbers of mortgage loans have been increasing, their amounts have been steadily diminishing.

As of the summer of 2016, the growth of Russia’s mortgage market has been mostly caused by measures of state support, the repeal of which, according to the Russian Finance Ministry, will inevitably lead to an increase in mortgage rates and a lower demand for mortgage loans. Essentially, Sberbank is the only bank that shows decent mortgage figures, whereas such key players in the Russian banking sector as VTB24, Gazprombank and Rosselkhozbank, not to mention smaller banks, demonstrate an almost two-fold decrease in the volume of mortgage loans. Read More “A Mortgage from Putin”

August 10, 2016September 9, 2018

The Hard Labor Market

According to official data from the Russian Federal Statistics Service (Rosstat), Russia’s unemployment rate had been decreasing during the period from 2010 to 2014. Data from 2015 shows, however, that this trend has changed—the official unemployment rate demonstrated a minor but symptomatic increase of 0.5 percent and reached 5.8 percent. According to calculations of the Russian Ministry of Labor, in 2016, Russia’s unemployment rate could amount to 6 percent, and the situation is not expected to change significantly in 2017.

It is clear that in Russia official data concerning the population’s employment and unemployment rate can be considered only partially objective. The country’s shadow labor market where people are listed as either formally unemployed or employed for a minimal salary in one place while they are actually getting paid in cash somewhere else without declaring their income is just too big.

Rosstat claims that as of June 2016, the economically active population in Russia reached 76.9 million people (or 52 percent of the country’s overall population,) with 4.2 million of them being officially unemployed and another 30 million being employed in the shadow sector of the economy and not paying taxes, according to President Putin’s statement. In 2013, Deputy Prime Minister Olga Golodets declared that the “sectors that we can see and that are clear to us employ a total of 48 million. It is anyone’s guess where the others are employed, what they are busy with, and how”. Despite the president’s order to deal with this situation, it seems that no specific measures have yet been taken on the state level. Most likely, the government simply Read More “The Hard Labor Market”

August 3, 2016September 9, 2018

Barefoot Toward an Empire

The news of the suspension of production at the major Russian car manufacturer AvtoVAZ in Togliatti, on the Volga River, neither comes as a surprise nor dominates the front pages. Considering the current economic situation this is quite logical: AvtoVAZ is not the first car maker in Russia to recur to this option. The Ford Sollers plant in Vsevolozhsk, the Volkswagen plant in Kaluga, Peugeot, Citroen, Mitsubishi, and other automobile manufacturers have suspended production at one time or another. It is obvious that even Putin’s KGB friend Sergei Chemezov, the current CEO of the Rostec state corporation that controls more than 700 machine building and defense plants in the country, including AvtoVAZ, cannot force Russia’s drastically impoverished population to buy new cars. It is also clear that the problem lies not with AvtoVAZ itself—whose Lada cars are world-famous for their low price and their simplicity—but with the overall crisis in the Russian economy that is suffering because of low oil prices and Western economic sanctions imposed in response to the military aggression against Ukraine.

Despite the assurances by Putin’s press secretary in early 2015 that “the fall in sales will be followed by a rapid growth,” the situation so far is the opposite. According to the Russian Auto Dealers Association, the automobile market has lost 40 percent of its model range in the last two years—and that is not the limit. Even the once-popular and inexpensive Ford Focus dropped out of the top 25 models sold in Russia, and the top rankings are now held by the cheapest cars that are two decades behind the 2016 European economy-class vehicles in terms of quality and technology. Even the sales of these “naked” cars are Read More “Barefoot Toward an Empire”

July 26, 2016September 9, 2018

Hydroelectric Power in Service of Cooperative Ozero

Bratsk Hydroelectric Power Station / Photo by evrosib.ru

Hydroelectric power plants – gigantic dams across the country’s biggest rivers that supply cheap energy to entire Russian regions and their extremely energy-intensive industrial enterprises – used to be one of the key symbols of the Soviet Union’s industrial might. Up to this day, Russia’s hydroelectric power plants have been cumulatively providing around 20 percent of the country’s energy.

Out of more than 100 major hydroelectric power plants, with the total number of them in Russia reaching almost 200, most are owned by RusHydro PJSC that was founded as a public company by chief architect of the Russian privatization, Anatoli Chubais. However, the state still owns 67 percent of the company’s shares. Another three major hydroelectric power plants belong to En+ Group controlled by Oleg Deripaska who is also president of the world’s second largest aluminum company Rusal. Deripaska’s interest toward hydroelectric power industry is not surprising since aluminum production is a highly energy-consuming process, and Rusal uses most of the electricity generated by Deripaska’s hydroelectric plants. Deripaska’s Russian assets can be considered private only nominally. A classic Russian oligarch of the 1990s, Deripaska is well-known for a statement he made in his 2007 interview to the Financial Times: “If the state says we need to give it up, we’ll give it up. I don’t separate myself from the state. I have no other interests.” Since in recent years global demand for aluminum has been steadily decreasing, Deripaska has no plans to extend his energy assets. As to the situation with RusHydro, its future is less clear. What is obvious that it shows much more signs of corruption and lack of professionalism. Read More “Hydroelectric Power in Service of Cooperative Ozero”

July 13, 2016September 9, 2018

The Russian Orthodox Church during the Tsar (President) Putin’s era

The newly established authoritarian regime in Russia has chosen to make the promotion of spirituality that is being served up as an intrinsic part of Russian culture and self-identification of the Russian nation as one of its priorities. It is obvious however that the regime’s real purpose consists in using this simple method to force its nationalist and patriotic rhetoric onto the population by glorifying the county’s past successes and inspiring pride in the “centuries-long history of the Russian empire” which in its turn allows the regime to draw the population’s attention away from the authorities’ lack of competence in governing the country and to cover up the most flagrant corruption by top Russian officials.

Responsible for spirituality, the Russian Orthodox Church (ROC) is formally separated from state institutions that, according to the law, are supposed to be secular by nature. However, ROC enjoys a number of economic advantages that have been granted to the Church during the Putin’s era. Thus, for example, it is impossible to use standards methods to calculate its “market capitalization” because legally, ROC is divided into more than 30,000 different organizations and since the mid-1990s it has not been disclosing either its gross budget or expenses. According to certain estimates, ROC’s income possibly reaches 5.6 billion rubles (or around $87 million) a year, without including federal funds that are being allocated annually to ROC and structures close to it which amount to another 3.5 billion rubles (or about $54 million). This does not seem such a large sum for a Church with more than 50 million faithful, does it?

However, this is only a part of the Church’s budget that different sources or ROC representatives themselves disclose from time to time in their statements. Read More “The Russian Orthodox Church during the Tsar (President) Putin’s era”

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”