Two different ideas behind the Stabilization Fund dispute

Some of Russia’s senior ministers and officials accept the standard prescriptions issued by international financial organizations. Others hold that Russia should take a special economic path. The two camps are clashing over the fate of the Stabilization Fund.

Prime Minister Mikhail Fradkov has only one flaw: he doesn’t talk enough. If he said everything he is instructed to say, immediately, things would be easier – or clearer, at least.

The first Cabinet meeting for March saw an argument over the Finance Ministry’s rejection of some recommendations compiled by the Cabinet staff, to the effect that money from the Stabilization Fund should be invested in the stock market. Whether this advice was helpful or not, the economic logic that has prevailed in the government to date indicated that such measures would be sure to increase inflation.

At the second Cabinet meeting in March, Fradkov expressed outrage over a diametrically opposed issue – excessive inflation (4.1% for the first two months of 2006) – and threatened to punish those responsible, particularly the Finance Ministry.

At both these meetings, the blame list was headed by the same person: Finance Minister Alexei Kudrin. Those who speak via Fradkov are striving to revise a certain economic policy completely – and against his will, the flexible, cautious Kudrin has come to personify that policy.

All dictatorship aside, there’s real pluralism among our leaders: open war between two economic concepts. This offers the opportunity to compare the reasoning behind them.

The minds of the Westernizers

Finance Minister Alexei Kudrin, Central Bank Chairman Sergei Ignatiev, Economic Development Minister Herman Gref, and a few other senior officials are often referred to collectively as “the economic liberals from St. Petersburg.”

Actually, insofar as they act in unison at all, they aren’t so much economic liberals as economic traditionalists – adhering to the standard prescriptions issued by international financial organizations. In other words, they’re simply Westernizers.

They maintain, for example, that inflation is a very bad thing and the government should fight it by cutting spending, trying to print fewer rubles, and trying to keep easy oil export revenues out of the economy. This is why the Stabilization Fund was established to colect and store excess petrodollars. This also explains attempts to slow down any increases to state-sector wages and pensions, restrict agricultural subsidies, and restrain the size of “investment funds” set up for industry lobby groups.

Following the Western economic mainstream, the Russian government’s Westernizers are prepared to offer verbal (and selective practical) support for “debureaucratizing” the domestic market, and even anti-monopoly measures on occasion. The same reasoning makes them support gradual moves to open up the Russian economy, and World Trade Organization membership.

In the abstract, this is by no means the worst kind of policy – but we should be honest and acknowledge that it’s going through a crisis in today’s Russia, for entirely valid reasons.

High oil prices have brought “Dutch Disease,” with its symptoms becoming obvious over the past year. The Russian economy is becoming less competitive; retail trade is growing, while industry is starting to stagnate. The ruble has been allowed to firm rapidly, but this is no longer helping to restrain inflation. Official figures show inflation remaining stably high, and in practice it’s actually increasing.

The measures required by these circumstances (according to Westernizer reasoning) seem to be as follows: clamp down on inflation, firmly restrict state spending, and direct all excess money into the Stabilization Fund, no matter how large it becomes. And do everything possible to make Russia more competitive: such as ensuring free, equal, fair, and unrestricted competition in the domestic market, accepting high unemployment and the shutdown of some enterprises as an inevitable cost of restructuring, and more.

Clearly, no one is prepared to accept all of the above at present. And that doesn’t just apply to the Kremlin, the industry lobby groups, and the general public. The St. Petersburg liberals themselves, even if all the levers were in their hands, would lack firm liberal convictions and simple resolve to implement all those measures.

Thus, even if the government’s Westernizers do have some sort of strategy these days, it isn’t particularly inspiring. It consists of resigning themselves to gradually-deteriorating economic performance and slower growth, moving along the same old path, patching holes and getting rid of the most glaring inconsistencies. And waiting for oil prices to fall, thus rescuing the unfortunate Russia from the curse of easy petrodollars and Dutch Disease.

The hearts of the Slavophiles

Given all of the above, it’s easy to understand why some different voices have started speaking so resolutely in the halls of power: the voices of those who propose a special path.

Let’s call them the Slavophiles. Their camp is much larger than the dwindling ranks of Westernizer officials. Prime Minister Fradkov and his talking head, deputy Cabinet chief-of-staff Mikhail Kopeikin, occupy a prominent place among the Slavophiles, but not the leading place.

There are the Kremlin-linked tycoons who have been too hasty in moving ahead with expropriation, bogged down in business disputes with offended foreigners, and don’t know how to make their own way into the international economy.

There are countless lobby-groups, possessed by one simple thought: unstoppering the Stabilization Fund and sharing out its petrodollars.

There is the general public, with ordinary citizens also becoming increasingly convinced that it’s time the Stabilization Fund was shared around.

This boiling lava of interests and emotions is being molded into concise formulas and comprehensible prescriptions by the “special path” intellectuals whose moment has finally come. Some of them are concentrated in the liberal-conservative wing of the United Russia party; some are in less prominent but no less vocal circles. There are also some eloquent solo intellectuals with a record of holding senior state office and reputations as professional economists.

Their arguments aren’t always consistent with each other, but the common reasoning is basically as follows.

Petrodollars are not a curse. On the contrary, they offer a unique opportunity for Russia. They shouldn’t be set aside; on the contrary, they should be poured into the economy vigorously. Which sectors, which industries? Effective investment will be indisputably guaranteed by the competence of state officials – or rather, the intellectuals who advise them. Pumping this money into the economy isn’t likely to increase inflation: they just know this, in their hearts. And even if inflation does rise a bit, that’s nothing to fear. Firstly, the game is worth the candle. Secondly, if price-rises become a problem, prices can be frozen – that’s what leaders are for.

Russian society will respond to all this with higher living standards, and the economy will show rapid growth. Export-oriented sectors (to be identified in advance by state officials, acting on the infallible counsel of their advisors) will respond by becoming much more competitive. Not immediately, of course, but after ten or twenty years. And until then, the domestic market should be protected from exports by tariffs set high enough to be insurmountable. If that prevents Russia from joining the WTO, that’s all right. It might even be better.

The moderates among these advisors say this is much the same as what Keynes prescribed. Indeed, Keynsian prescriptions used to have a short-term and even medium-term effect in many economies that were closed to external competition – but only on the condition that the initial inflation level was low, so that the Keynsian healers and their money-pumping measures would have a safety margin for increasing inflation. In Russia, however, inflation has already reached a level at which any sensible country would reject Keynsian remedies.

So the special path experiment won’t lead Russia to the well-mannered Keynsian Europe of half a century ago; it’s more likely to produce something like Latin America in the 1970s-80s.

And we might not require decades. Our journey along the special path is likely to end of its own accord as soon as the oil prices that nourish such illusions fall. That’s a matter of years, not decades.