Putin, the economy and sovereignty

Note kindly translated by Anne-Marie de Grazia

President Vladimir Putin gave on Thursday, December 3 his State of Russia address before the equivalent of our « state bodies. » [1]. This speech had been much awaited, particularly because of the international situation, and Vladimir Putin’s sentences about the situation in the Middle East and on Turkey were duly noted. The direct implication of Turkey and of its leaders in the oil traffics supporting DAESH stood out.

But the economic dimension of this speech was no less important, even if it has been less commented upon. It calls for several remarks. Vladimir Putin reminded us of the Russian government’s engagement in the process of the mutation of the economy, with the aim of reducing progressively the weight of the commodities sector. But he also put this economic strategy within the framework of a strategic priority: the one of limiting as much as possible the vulnerabilities of Russia. This means that economy is not, is not any longer, an end in itself. This turn has not been remarked upon clearly enough, nor even understood. Moreover, one must add that Vladimir Putin has clearly drawn up a list of priorities for the actions of the Russian government. And the order of these priorities is not without importance.

 

  1. Necessity to proceed with the restructuration of the economy

The first point evoked by the President concerns the nature of the Russian economy. He describes it in the following terms: «…First, competitive manufacturing is still concentrated mostly in the commodities and mining sector. We’ll only be able to achieve our ambitious goals in security and social development, to create modern jobs and improve the living standards of millions of our people if we change the structure of our economy.” The change he is alluding to concerns the development within the Russian economy of a modern manufacturing basis. The Russian President adds that there exist industrial, agricultural and agro-industrial enterprises in Russia that are modern and profitable, but that there are not enough of them. He adds: « Our goal is to have the number of these kinds of companies grow fast in all sectors. ». In order to reach this goal, he points out the importance of programs of substitution to imports, and of supporting exports.

Moreover, and this point which is evoked in another part of Putin’s speech must be understood as an application of this first priority, Vladimir Putin expressed the desire that Russia become the first exporter of food stuffs without GMOs. We understand from this that the Russian President’s goal is not simply the modernization of the economic fabric and a lesser dependency on fossil fuels. In fact, Vladimir Putin aims at establishing a new place for Russia in the global division of labor. He intends Russia to affirm itself as an exporter of “necessary” goods, be they goods with high-tech components (called of “high added value”) or of commodities one can’t do without. This is for him a necessity for strategic reasons. If Russia wants to exert weight in a world that has become multipolar, it can do so not only by military or diplomatic means. It must also develop other instruments of power, and economic power, whether directly or indirectly, is one of these.

This is proof indeed that economic development must be defined outside the straightforward framework of economy (and of finance) in a vision which is eminently political. This re-politicization of the economy constitutes the most important message, but also the one that has been most ignored, in Vladimir Putin’s speech. This approach is perfectly coherent with the importance of the concept of sovereignty, from which it is in fact proceeding.

But the question of the financing of this growth arises, and Putin remains silent on this point. It is evident, and it has already been noted by the manager of the World Bank for Russia, Mrs Birgit Hansl[2] that the strong depreciation of the Ruble has largely contributed in imparting a strong competitiveness to existing companies. This is perfectly in line with the October 2015 version of the report of World Economic Outlook of the International Monetary Fund [3]. In fact, one may ask oneself if the Russian government has not deliberately used the weapon of a depreciation of the Ruble in order to favour structural change in an economy up to now all too dependent on international finance, as well as on the price of commodities.

But it is very clear that this cannot suffice. Russian companies have already registered high productivity gains since the beginning the second semester of 2014. These productivity gains explain the rise in investments in some branches of industry, as noted by Mrs Hansl. Nevertheless, investment (essentially productive investment) is presently insufficient for reaching the goal of an important increase in the number of competitive enterprises in Russia.

This brings up both the question of the currency policies conducted by the Central Bank, and of its relays in relation to the rest of the banking sector. In this regard, the attitude of the big Russian private banks remains very timid. Only banks having a public or para-public status (such as Sberbank or Gazprombank) seem to be willing to invest in innovating Russian companies.

Chart 1

A - aGR1

Source : Central Bank of Russia

 

As far as interest rates are concerned, the decrease in nominal rates, when the inflation remains at a high level, induces negative real rates. This should normally profit Russian companies. Yet, one observes that the private banks prefer to speculate on the financial markets, which of course evokes the question of coordinated financial and industrial policies in Russia.

The constitution of such a coordinated, or “planified” policy, in the sense that French economy was planified during the 1950s and 1960s, meets with the resistance of the authorities of the Central Bank of Russia, but also of the power of the governors. Russia being a federal state, it cannot transpose in its economic policy the methods and institutions of unitary states such a France. The permanent negotiations between federal authorities and regional authorities is an inescapable dimension of implementing economic as well as social policies.

It remains however that the obstacle of financing seems to be today the crucial point in the application of a voluntarist policy of development. This appears clearly when one reads the Glazyev[4] report, which was presented to the Council of National Security of Russia. We must stress here that Putin cites as a reason for this structural mutation to be undergone by the Russian economy a goal of security. This picks up on part of the logic in the reasoning followed by Serguey Glazyev. But one must also notice that Putin does not make any pronouncement, at least not in this speech, on the methods which Serguey Glazyev would wish to see implemented. We can well see here that these exists a real problem of political choice for the Russian government.

 

  1. The necessity to support branches in temporary difficulties and economically vulnerable households

Points two and three in the list of priorities put up by Vladimir Putin concern the branches of industry encountering difficulties in the short-term, as well as households which are in a situation of economic vulnerability. These two points are actually linked. Retail sales have widely decreased and average salary has contracted since January 2014. This has lead to important decreases in activity in construction (essentially in housing construction) but also in the automobile industry and in light industries.

Chart 2

A - aaVentes au détail GR

Vladimir Putin evokes about this programs of subventions which will be financed by funds especially made available by the government. A similar process had been used at the time of world crisis of 2008-2010, but these financial aids had been utterly long at reaching enterprises in need. This brings up the problem of the quality of the execution of public policies in Russia. President Putin repeatedly expressed himself on this point. Evidently, the Russian government is aware that things remain sorely perfectible in this regard. Progress has been registered since 2010. But the contacts I have been able to have, following this speech, with managers of Russian companies show clearly that there is both a real hope and real worries. Relating to construction, a sector which is additionally affected by the sanctions taken by Russia against Turkey (many Turkish companies operate in the construction sector), it seems that the government has decided to launch a program of public investment particularly concerning railroad infrastructures.

In the domain of welfare, Putin indicates that «…it is imperative to support low-income households and socially vulnerable groups of citizens ». This will not surprise anyone, and the analysis of the 2016 budget shows that the expenses of the « social block » have been largely maintained. Putin also recognizes the “increased responsibilities” of the government towards persons in the present situation, and this essentially in three sectors, demography, education and health. He is indicating the necessity to double-up efforts in these fields. The fact that the social question appears in second position on the list of priorities established by the President is important. But here again, the discourse is of very little precision and does not contain specific declarations about precise programs. As it happens, we have seen that the overall standard of living has decreased over the past year. Moreover, a financial support to low-income households would have an indirect effect to increase demand for goods produced in Russia. We know that households whose income is situated above average consume proportionately more imported goods. From this point of view, there is a link between social policies and economic policies.

It appears that the Russian government wants to maintain its discretionary power of increasing some pensions. But the important point will be to know if a turn towards a « Social State » is going to be taken in the months to come. In fact, elements of this “Social State” already exist in Russia. The government, interacting with large companies, made the choice of using part-time work, instead of unemployment benefits as a way of guaranteeing income. In fact, the unemployment rate, despite the crisis, has remained very low, between 5.4% and 5.5% (it is at 10,4% in France). This usage of the reduction of work time (and therefore of salary) and of part time employment (with 26 to 28 h workweeks in June in the companies most affected by the drop in demand) allows a company to rapidly increase its volume of production when the demand become sizeable again. This is actually what is happening now in some branches (such as electrical equipment) where production is increasing notably. But these practices remain managed by the companies and are not accompanied by programs of professional training. Yet if the project of the transformation of the economy with a reduction of the share of services and a rise in industrial employment is to be carried to its term, the problem of professional training will evidently arise.

 

 

  1. The question of the budget

The fourth point on the priorities list established by Vladimir Putin concerns the budget of Russia. He declares on this subject: « Fourth, it is imperative to achieve a balanced budget. This, of course, is not an end in itself, but a critical prerequisite for macroeconomic stability and our financial independence.»

If the mention of « macroeconomic stability » was to be expected in this context, the one of financial independence confirms that all of the processes, economic as well as financial, are perceived by Vladimir Putin, and most certainly by a large share of the Russian political elite, through the prism of political independence, meaning, of sovereignty. This confirms what one has been able to say about the first priority.

In the same paragraph, Vladimir Putin insists on the fact that the Russian budget for 2016 will have to be redacted with a 3% deficit of GDP. This indicates that the notion of a «balanced budget » is indeed not a problem of principle. Russia is accepting indeed a budgetary unbalance, in consideration of the economic as well as political circumstances prevailing today. One can even expect, if circumstances should make it mandatory, that this deficit will be increased or, in the contrary, diminished. There is therefore no fetishizing of a « limit » as far as the deficit is concerned. It must be remarked that, taking into account the high inflation rate (9% for 2016), Russia could indulge in a budgetary deficit largely superior to the 3% indicated. Indeed, public debt, like the deficit, are nominal values (that is, expressed in « current prices »). However, even if one considers that in real terms the GDP should progress by 1% in 2016, nominal GDP (with an inflation of 9%) will hover around 10.1% above its nominal value for 2015. This implies that the debt expressed in percentage of GDP (and the numerator as well as the denominator being here nominal values) will continue to decrease.

This raises the problem of the attitude of Russian authorities in face of the public debt. The question of financial independence comes up only insofar as non-resident operators can buy this debt. But this is relevant of the domain of rulings, and the market of public debt could perfectly well be restricted to residents. Moreover, the low level of public debt in Russia (less than 10% of GDP) brings up the problem of the circulation instruments in a possible interbank market. This market so far does not exist. Which forces the Central Bank to use various convoluted channels when it wants to influence the liquidities of commercial banks. Moreover, this very low level of debt is blocking the evolution of the Ruble from becoming a reserve currency on the regional scale. One can therefore think that, paradoxically, the level of public debt is too low at present for normal financial circulation. An increase in public deficit up to 6%-8%, over a period of 3 to 5 years, could turn out to be logical, especially within the framework of the transformation of the structure of the economy which is, as we have noted, the first of Vladimir Putin’s priorities.

But we must also take into account the psychological dimension attached to the question of public debt and deficit. The financial crisis of 1998 was indeed provoked by debt gone out of all control, associated to a profound crisis of Russian fiscality. This crisis constituted a founding trauma for the Russian political elite. We must note here that on the question of tax resources and budgetary procedures Vladimir Putin is most precise, indicating that precise procedures must be followed (he speaks of « priorities ») and he denounces vigorously a variety of conducts leading to various kinds of tax evasion. The question of tax resources is clearly for him an essential one, not only for economic reasons but also because it touches on the sovereignty of the State.

Moreover, even if the direct link between public deficit and inflation is problematic, and certainly extremely weak, the behavior of households and of companies could change if they were to learn that the government is indulging in a strongly unbalanced budget. From this point of view, it is not wrong to consider that budget deficit is a factor weighing on macroeconomic balance, provided one makes it clear that one is dealing with psychological mechanisms.

This is preventing, and will in the close future prevent the Russian government to have full liberty to conceive an economic policy fully coherent with its political goals. One can regret this but it must be acknowledged. But there is a tension which is well perceptible in this speech, a tension leading to the notion of “budgetary priorities” which it is necessary to define well.

 

  1. The relations between the government and the business world

This point is the last in the list of priorities announced by Vladimir Putin. We know that he is giving great importance to this theme. The latter takes on a political dimension if one considers that the “business world” too must undergo deep changes with the emergence of a social group of innovating entrepreneurs adding themselves to the entrepreneurs already existing. Here, Putin is satisfying himself with reaffirming what he has been saying for a year now. He is insisting once more on the freedom which these entrepreneurs need to enjoy: « I believe free enterprise to be the most important aspect of economic and social well-being. Entrepreneurial freedom is something we need to expand to respond to all attempts to impose restrictions on us. ».

This declaration is important, but those who might have the impression that Vladimir Putin is repeating Macron risk making a big mistake. The second sentence indicates indeed that entrepreneurial freedom is necessary to Russia because of the regime of sanctions. So that one might think that a deeply liberal Vladimir Putin could be seeking to justify a paean to entrepreneurs for short term reasons. But in reality, and numerous other parts of the speech are proof of this, Vladimir Putin is an « agnostic » as far as liberalism is concerned. Assuredly, he is one of the Russian leaders who has best evaluated the dead-ends of the old Soviet system. Which explains his engagement for an economy which can be considered as “open.” But he has also measured the weaknesses of « capitalists » in Russia. It is moreover symptomatic that he is speaking of entrepreneurs, not of capitalists. The first term, besides the fact that it is less loaded politically than the second, designates the one who « undertakes » and not the one who is the owner. And it is symptomatic that Putin, together with, and following, other leaders of Russia, is putting the stress on the capacity to innovate and to undertake.

This implies, most evidently, that the enterprises be « free, » meaning, that they be created freely and be able to develop freely. In the context of Russia, when one is aware of the habits of the administration, and more precisely of the administrations of Russia, this is an important point. These administrations, be they regional or federal, tend to spontaneously overreach their domains of competence. Whence the tangles of competences, denounced by Vladimir Putin. Who states, in another part of his speech, that a market needs rules, but that they must also be clearly defined, and their application must be clearly delimited. We are coming back here to one of the historical banes of Russia, namely the quality of public administrations (or their absence thereof). The problem is less with those heading these administrations, where one can often find extremely competent persons, than with the average public servant. And we are reminded of the Russian proverb: “there is a Napoleon on every hill.” It describes well the appropriation of power by local civil servants, often for financial reasons – it is true that they are often poorly paid – but also for motives of pure power.

This is a redoubtable problem, for from the quality of local administrations depends the application of policies, however good these may be. In fact, if Vladimir Putin is certainly right to call for more freedom for entrepreneurial possibilities, and to bring back to mind that the government firmly supports the Federal Corporation for the Development of Small and Medium Enterprises, he does not mention what constitutes the heart of the problem: a deep administrative reform. One can understand his caution. The rationalization of administrations immediately calls up the problem of the articulation between federal power and regional powers. He has proposed, concerning the budget, in point four of his list of priorities, that the various tax administrations be merged into one. This is tantamount to re-establishing the principle of the unicity of the tax administration, a principle which does not come naturally in a federal country. One can understand that he is content calling for substantial improvements in the work of the administrations, but that he is backing off, at least for the time being, before the immensity of the task which a true administrative reform, unifying the various administrations, would represent. Very clearly, this reform will have to happen. It will imply a reduction in the power of regional authorities, which will lose their power over local administrations, at least to the extent of their being delegated branches of the federal administrations.

But such a reform will demand a rethinking, and probably a re-founding, of Russian style federalism, and regional executives who will be separate from legislative assemblies. If the latter can be democratized, then the governors can be named by the federal administration and one will find oneself in the situation of France, where public servants designated by the government, the prefects, implement executive power, in a dialogue with the presidents of the General Councils (of each département) or the presidents of the regions, who are elected officials. On this point, the question of the completion of the construction of the Russian modern state, a question which arose with the abolition of serfdom in the 1860s, is still unsolved.

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We can evaluate today the economic importance and the necessity, if Russia wants to endow itself with efficient instruments for the application of ambitious economic policies which it has set itself as political goals. (phrase incomplète dans l’original)

 

 

This speech, despite the uncertainties it contains, but also by the very existence of these uncertainties, is an important speech. It shows well that, for Vladimir Putin, the essential question is the one of the sovereignty of Russia and that this question determines the economic, social and monetary choices. This speech indeed confirms that, in Vladimir Putin’s Russia, politics is at the helm.

This speech also confirms Vladimir Putin as a pragmatist in the economic and social domains. It is just as wrong to see in him a « liberal, » than a “Statist.” But his will to submit everything to a political decision, to make the sovereignty of Russia into the founding principle of his politics, pulls him more in the direction of the “Statist” than of the “liberal.” If he believes in the necessity of rules and norms, it is just as clear that said rules and norms have to be apprehended from what he conceives to be the primary interest of Russia: the defence of sovereignty.

This speech confirms finally that he is, like all the rulers of Russia (and of the UdSSR) before him, confronted with the problem of the construction of the state through the problem of the rationalisation of public administrations. This is certainly the greatest challenge standing before him.

 

Notes

[1] An english translation of this speech can be found on the site of the Russian Presidency : http://en.kremlin.ru/events/president/transcripts/messages/50864

[2] Hansl B., « With the ruble depreciation, ‘Made in Russia’ could once more become a worldwide trademark », Brookings Institution, Washington DC, 3 November 2015. http://www.brookings.edu/blogs/future-development/posts/2015/11/03-ruble-depreciation-russia-hansl

[3] See also Daniel Leigh, Weicheng Lian, Marcos Poplawski-Ribeiro, Viktor Tsyrennikov, « Exchange rates still matter for trade », document posted on the site of CEPR on 30 October 2015, http://www.voxeu.org/article/exchange-rates-still-matter-trade#.Vjhy77aVWtw.twitter

[4] We send the reader to the French translation made by the Saker Francophone on 29 September 2015, http://lesakerfrancophone.net/le-rapport-de-serguei-glazyev-et-ses-annexes-attention-ce-document-est-une-somme/ . The original was published in Russia under:

« Доклад Сергея Глазьева: «Речь о неотложных мерах по отражению угроз существованию России», in Biznes Online, 15 September 2015, http://www.business-gazeta.ru/article/140998/

 


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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