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17.11.11
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Courting Disaster
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By Tai Adelaja
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The Russian Parliament is set to rubberstamp the country’s main financial document that many economists say will make life miserable for all Russians after the upcoming national elections. Russia’s draft budget for 2012 to 2014, which enters its second reading in the legislature on Friday, calls for sharp hikes in defense and national security spending while slashing expenditures on health and education, according to a group of economists who analyzed the document. With such an increase in military appropriations, the economists said, many Russians will have to live on a shoestring budget after next year’s presidential elections.
The highlight of the draft budget published by Nezavisimaya Gazeta on Wednesday shows that the government plans to reduce total public sector spending on education, healthcare and communal and housing utilities by 150 percent in the 2012 to 2014 budget years. At the same time, the budget calls for sharp hikes in spending on defense and national security, by roughly 150 percent over the same period. When juxtaposed with pre-election promises made by politicians, the draft budget reflects a completely different fiscal reality, according to many experts who participated in a roundtable discussion symbolically titled "Is there life after the election?" organized by the privately-owned FBK Company, an auditing firm.
While Russian politicians continue to promise voters future improvements in their living standards, the government budget request remains heavily skewed toward military expenditures rather than social spending, the experts said. Budget spending on national defense, security and law enforcement will increase from 27.4 percent of total government spending in 2011 to 40.1 percent in 2014, according to the draft bill. But the bill calls for devastating cuts in social spending, including in healthcare and education over the same period. Expenditures on education, which are expected to consume 4.6 percent of the federal budget in 2012, will only comprise 3.3 percent of government spending in 2014.
“The major drawback of this budget is its failure to take into account the likelihood of a second recession in the Russian economy,” said Igor Nikolayev, director of the Strategic Analysis Department at FBK. "The 2012 to 2014 budget will be quite normal if it's based on the assumption that the most painful global recession on record is now over. However, we are deeply convinced that the economy is not out of the woods yet," Nikolayev said. Many of the “unfunded liabilities” of the federal government – such as pension and benefits increases for state and military employees – arise out of pre-election promises that cannot be controlled, Nikolayev said. In addition, there are other expensive commitments and projects, such as the upcoming 2014 Sochi Winter Olympics, the 2012 Asia-Pacific Economic Cooperation (APEC) Summit in Vladivostok and various summits and championships for which Russia has to shoulder the cost at the most inopportune moment, he said.
The paradox of Russia’s current situation is that one would expect the government to invest more in health and education, particularly in tough economic times, said Yevgeny Gontmakher, deputy head of the Kremlin-linked Institute of Modern Development. "I cannot understand the logic of our leaders, who themselves admit that healthcare is chronically underfunded," Gontmakher said. "While it isn't a bad idea to give a pay raise to soldiers, spending on weaponry is almost always misappropriated and has never produced the desired results. The Russian military-industrial complex is a black hole that sucks in a huge amount of budget money."
Yevsey Gurvich, who heads the Finance Ministry-affiliated Economic Expert Group, said government anti-crisis policy measures must be nondiscretionary and dedicated to specifically designed projects, so that the government could effectively roll them back. "But the government has, on the contrary, been accumulating mandatory expenses in a time of crisis," Gurvich said. Compounding Russia's financial woes is its deteriorating demographic situation, which is gradually constraining the country's ability to extract the natural resources on which it relies heavily, he said. "That suggests to me that while social obligations are increasing, revenues are likely to decrease," Gurvich said.
The economist also revealed that the group had proposed a two-percent increase in expenditures on infrastructure, and one percent each on health and education while working on the concept of Russia's long-term socio-economic development through 2020. “At the same time, we proposed reducing military spending by four percent to compensate for likely budget shortfalls, but the government thought differently," Gurvich said. Alexei Kudrin, Russia's former finance minister, was dismissed in September for criticizing the federal budget and defense spending proposals. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have defended the high military spending, saying the country's aging military infrastructure and weaponry need to be replaced.
According to the economists, Russia is unlikely to experience any major economic cataclysm next year as the country's reserves continue to act as a safety-valve for releasing internal financial pressures. However, Russia's foreign currency reserves, which peaked at $598 billion in early August of 2008, have dwindled to $26 billion in October, the experts said. “The situation could become untenable if the country is suddenly faced with comparatively low oil revenues and increased military spending burdens," FBK’s Nikolayev said. |
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