Former prime minister Yegor Gaidar holds a press conference

Yegor Gaidar, one of the ideologues of Russia’s market reforms, says that even though the economy is growing, Russia still faces the threat of a banking crisis or a complete catastrophe if oil prices fall. The situation can only be salvaged by an action plan currently being written at the Transition Economy Institute. Gaidar is unable to reveal the details at present.

Yegor Gaidar, former prime minister and now head of the Transition Economy Institute, held a press conference on January 17. In his usual unaggressive style, he criticized everything the government is doing. He started by discussing the possibility of oil prices falling.

“Accumulated short-term resources enable the government to manage the situation calmly over the next two or three years. By 2008-10, the situation looks more risky,” said Gaidar. In his view, “back in 2001, the economy wouldn’t have been disturbed if the price of oil had fallen to its long-term average.” Gaidar pointed out that “the long-term average price of oil over the past 150 years has been around $20 per barrel.” He said: “We have now established our system of federal budget commitments in such a way that if oil prices fall to slightly above the long-term average, even $25 per barrel, this would have serious consequences for the budget, the balance of payments, and the ruble’s stability.”

Gaidar stressed that oil prices are now approaching the levels they reached in 1985. Back then, a six-fold price drop “launched the mechanism of the Soviet Union’s collapse.” Therefore, what Russia needs is a plan of action. Gaidar’s institute is currently working on such a plan. Gaidar is unable to reveal the details at present; the techniques are still top-secret.

For the time being, Gaidar recommends lowering the reference price for the Stabilization Fund from the present $27 per barrel to the former level of $20. Oil tax revenues over that threshold shouldn’t be directed into the economy – it can’t digest them, anyway.

“But we can’t keep increasing the Stabilization Fund forever!” said someone in the audience.

“For some time, we can,” Gaidar answered confidently. He added that he also has a solution for spending Stabilization Fund money effectively, but that’s another issue he cannot discuss as yet. Gaidar promised: “Work is being done on that topic. People are working on it right now. The government will announce everything when the time is right.” All that could be gathered from Gaidar’s hints is that Stabilization Fund money will be redirected into the pension system somehow, thus turning the Stabilization Fund into a Future Generations Fund. But the details haven’t been made public yet.

As for the government’s attempts to stimulate innovation or establish special economic zones – they’re pointless. If the state provides funding, the money would be stolen. If the state offers tax breaks, criminals would take advantage of them.

Gaidar was then asked to rate the quality of Russia’s economic growth on a scale of one to five (where one is worst and five is best).

“Two…” said Gaidar. “There are two aspects here… In terms of policy, the government would score a five up until 2002, and a two from 2003 onwards.” Meanwhile, economic growth as such isn’t too bad – the statistics are objective. “Against that backdrop, even the YUKOS affair isn’t enough to bring the stock market crashing down.” All the same, this doesn’t provide any guarantees against banking crises in future. “The threat of a banking crisis during the next three to four years is one of the very serious threats confronting the Russian economy,” said Gaidar. Overall, however, “in the 2006-08 period we don’t predict a drastic crisis scenario, even if oil prices fall substantially.”