300 billion rubles short of a real "social turnaround"

President Putin announced a set of new policy initiatives on Monday, promising 100 billion rubles in extra state spending. Pro-Kremlin analysts have already declared that this sum will suffice. We have attempted to estimate the actual costs of Putin’s promised program.

Russia remains a land of the unexpected. Who would have guessed that one of President Putin’s routine meetings with Cabinet ministers would suddenly produce a sensational and momentous (of course) policy program. Political analysts have already labeled Putin’s initiatives a “turnaround.” The United Russia party chorus has exclaimed: it’s the right decision! Putin himself prefers to describe these new directions of activity more modestly: “national projects.” And he’s promised to allocate 100 billion rubles for them.

Pro-Kremlin analysts have already declared that this sum will suffice. Well, perhaps another 15 billion rubles or so might be required, but no more. Is that really the case? We have attempted to estimate the actual costs of Putin’s promised program.

What has Putin promised the nation by the end of his term in office?

1. To raise the salaries of state-sector doctors by 10,000 rubles a month, and the salaries of nurses by 5,000 rubles. Russia currently has over 600,000 state-sector doctors. The promised pay increases for them will cost the federal budget an extra 6 billion rubles a month, or 72 billion rubles a year. Since there are just over two nurses for each doctor, their pay increases will cost a similar sum. And that’s not even counting veterinarians – Russia has over 70,000 of those. But no one seems to pay attention to them, apart from the Narcotics Police.

2. New diagnostic equipment for over 10,000 municipal health clinics, as well as a substantial number of district hospitals and paramedic stations. An average diagnostic system for a therapist costs at least 80,000 rubles. Even if each clinic only gets one system, with no computer, all this will add up to 810 million rubles. A two-week training course for using this equipment costs at least 7,000 rubles per person. Training doctors nationwide will require a further 280 million rubles. It all adds up to another billion.

3. Substantial purchases of new ambulances, including resuscitation vehicles, medical equipment, and modern communications systems. Resuscitation vehicles cost between one and three million rubles each, depending on their equipment. Buying even a thousand such vehicles, at around 1.5 million rubles each, will require a further 1.5 billion rubles. Presumably, medical equipment and communications will cost as least as much again. Total: 3 billion rubles.

4. Building some new high-tech medical centers in Russia’s regions. Each center measuring around 3,000 square meters, with fittings and communications, will cost at least 100 million rubles. Add half as much again for furnishing. Not to mention that each center will require medical equipment, and personnel trained in using that equipment. Ten centers would add up to at least 1.5 billion rubles. Twenty centers would cost 3 billion rubles.

In other words, the health care component of Putin’s program will cost more than 150 billion rubles a year. But the program also includes equally substantial objectives and costs in education, housing construction, and agriculture. If everything Putin promised the government is actually done, extra spending will exceed one trillion rubles over three years. Hello, hyperinflation. Goodbye, elections.

Sad as this is to admit, the Russian authorities still haven’t learned to count. They miscalculated in the case of monetization, with the costs ending up orders of magnitude greater than expected; it seems they are miscalculating here as well. Putin’s number-crunchers need to be sent back to fourth grade, or told to quit confusing economics and politics – if only because arithmetic doesn’t follow the laws of public relations.

* * *

Who – or what – has managed to increase spending in the federal budget for 2006? This process wasn’t as simple as it seems.

The Finance Ministry’s first draft didn’t go down well with the United Russia party’s leadership – and United Russia’s votes in the Duma will be required to approve the government’s economic policies. In early July, United Russia questioned the decision to base spending calculations for 2006 on an average oil price of $35 a barrel, given that oil prices are currently approaching $70 a barrel; Duma members asked why the government was being so tightfisted. At a meeting with President Putin, however, they were told that it’s criminal to seek substantial spending increases, since this could boost inflation. Apparently, Putin was listening to Finance Minister Alexei Kudrin’s arguments at the time.

All the same, consultations between the Cabinet and Duma members continued, via a specially-convened working group. By August 8, the next time United Russia leaders met with the president, Putin was heeding the Duma’s arguments. The budget was recalculated using the figure of $40 a barrel – enabling spending to be increased by 332 billion rubles. What’s more, a special Investment Fund was created, containing over 60 billion rubles.

“A growth budget at last!” exclaimed United Russia members, rubbing their hands in glee. They promised that by mid-September, the party’s supreme council would approve a list of socially-significant projects on which the additional money should be spent. United Russia figured this would appeal to voters.

But President Putin also wanted to appeal to voters. On Monday, September 5, he did the unprecedented: getting directly involved in the distributing a third of the reserves United Russia had won from the Finance Ministry, and indicating how these funds should be spent. Well, the king of the political jungle – the lion – has planted his paw on the meat, and all other animals have backed away.

Of course, United Russia is now insisting that it’s quite all right, and that Putin’s proposals include a lot of the party’s policies anyway.

Comments from experts

How much will President Putin’s promises cost? And if this much money is injected into the economy, won’t it provoke inflation? We asked some experts.

Oksana Dmitrieva, member of the Duma’s budget and taxation committee:

Only agricultural workers are paid less than state-sector health workers and teachers. So raising their salaries is a social and economic necessity. Wage rises stimulate consumer demand, which is a factor like any other in economic growth. Next year’s federal budget allocates 42 billion rubles for increasing state-sector wages. Doubling them would require 200 billion rubles. That means an additional 160 billion rubles. A further 200-250 billion rubles would be required to help the regions match federal pay scales for state-sector workers. That’s a total of 410 billion extra rubles. The state certainly does have this money: the Federal Treasury’s revenues are understated by about 1 trillion rubles in the draft budget for 2006, and there’s also the money in the Stabilization Fund, still lying there like a dead weight. And raising wages in this way won’t affect inflation. “Injecting” this money into the economy will be just like pouring a bucket of water into the sea: it won’t make the sea overflow its banks. Besides, inflation in Russia isn’t caused by the volume of currency being too large; it’s caused by rising prices for raw materials and energy resources.

Yevsei Gurvich, head of the Finance Ministry’s economic expert group:

According to our estimates, President Putin’s package of social policy proposals will cost around 115 billion rubles. Inflation will increase, of course – but it won’t be higher than in 2005. Previously, we had calculated that inflation would be under 10% next year. The additional “injections” will boost inflation by 0.5%. That is, it will amount to 10.5%.

Yevgeny Gontmakher, research director at the Social Studies and Innovations Center:

Time will tell how President Putin’s proposals are implemented, and how much they will really cost Russia. After all, besides raising salaries for state-sector health workers and a minority of teachers, this also includes plans to build a specialized children’s center and two research institutes. As everyone knows, any building project in Russia exceeds initial cost estimates by at least 30-50%. I think the budget will have some financial problems. All the same, the extra injections into the economy won’t provoke another outbreak of inflation: the pay rises only affect a minority of state-sector workers. Inflation in Russia is mostly due to the tariffs of natural monopolies: energy, housing services, and transport.