Anatoly Chubais slams the federal government’s economic policies

Anatoly Chubais, chief executive of RAO Unified Energy Systems, has lashed out at the government’s economic policy and lectured the prime minister on the nature of inflation. He described the government’s tariff policy as dishonest, unlawful, and unprofessional.

Anatoly Chubais, chief executive of RAO Unified Energy Systems (RAO UES), has lashed out at the government’s economic policies and lectured the prime minister on the nature of inflation. He described the government’s tariff policy as dishonest, unlawful, and unprofessional, saying that due to this policy RAO UES is losing revenue and could miss out on $20 billion in investment.

At a meeting on March 23, the government discussed economic growth scenarios for 2007-09 and approved an innovation option with almost no arguments. This scenario entails the authorities taking active measures to reform the economy and restrain inflation. According to the Economic Development Ministry, this will produce GDP growth of 5.7% in 2007, 5.8% in 2008, and 6% in 2009. Prime Minister Mikhail Fradkov didn’t insist on doubling GDP.

The calm progress of the meeting was disrupted by Anatoly Chubais, who pointed out that although the Economic Development Ministry analyzes the contribution of various factors to GDP growth (for example, the Affordable Housing national project will boost growth by 0.03-05%), the electrical energy sector is not among them. “These things happen: you work on something for a long time, you think it all through, but you end up forgetting the most important point,” said Chubais, in an acid comment aimed at Economic Development Minister Herman Gref.

Chubais said that the electricity sector stands on the threshold of huge investments: $7 billion in 2006 and $20 billion in 2007. These investments will boost growth in energy machine-building, electrical appliances, the construction industry, and science. According to Chubais, the plan for transformations in the electricity sector will have far more impact than any other project on GDP growth, budget revenues, and living standards. But the key that could either start or stop the electricity sector project is the government’s tariff policy, and at present it is “dishonest, unlawful, and unprofessional.”

The policy is dishonest because real inflation exceeds the government’s target figures by 2-2.5% each year, while electricity tariff calculations are based on the target figures, so the electricity sector misses out on revenue that could be used for investment. This also contravenes the law on state tariff regulation for electrical and heating energy, which says that tariffs should “take account of economically-justified profitability of investment capital.” Chubais then drove the final nail into the coffin of the government’s policy by using the term “medieval chiromancy” to describe the idea that monopoly tariffs strongly influence inflation: “That’s like calculating the contribution of a moving wheel to the performance of a car engine.”

Anatoly Chubais: “If you want to stop inflation, change the reference price of oil for the Stabilization Fund and stop increasing state spending on items other than debt payments, or change your currency policy – but don’t try to fight a consequence.”

A slightly stunned Mikhail Fradkov then asked whether the government’s economics and finance specialists are aware of this. Chubais noted that the necessary changes in the thought processes of state officials will happen if the prime minister makes their careers dependent on inflation rates.

Finding no answer to that, Gref said after the meeting that he’d propose giving Chubais a Nobel Prize for economics if Chubais could prove that monopoly tariffs have no impact on inflation. Gref attributed his opponent’s harsh judgements to the start of a battle among the natural monopolies “for their share of revenue from what is by no means the wealthiest group of consumers: households.” The Economic Development Ministry proposes raising electricity tariffs by 6.5% in 2007, while RAO UES wants 11-13%.

RAO UES executive Andrei Trapeznikov said: “The tariff increase rates proposed by RAO UES would make it possible to provide decent rates of return for investors, and serve as an incentive for energy-saving.”

Vladimir Mau, rector of the National Economy Academy, notes that debates over the nature of inflation started in Russia in the 1990s. Back then, economists Andrei Belousov and Andrei Klepach – now a deputy minister and a department chief at the Economic Development Ministry – maintained that inflation primarily depends on monopoly costs, while Yegor Gaidar argued that inflation is of a monetary nature. According to Mau, this debate is now about strategy: “If you restrain inflation by restricting monopoly tariffs, in the long run you’ll end up with an unmodernized and inefficient economy. But if you don’t restrict tariffs, half the economy could be ruined within a few years.”

Yevsei Gurvich from the Economic Expert Group maintains that the natural monopolies do indeed contribute to inflation, but this is an inevitable cost of restoring correct price proportions. Excessive money supply is the cost of the government’s reluctance to permit the ruble to grow stronger and make Russian enterprises less competitive.

Arkady Dvorkovich, head of the analytical directorate at the presidential administration, adds that once the market is liberalized, investors will be able to finance projects by taking out loans and repaying them with revenues from selling electrical energy.