A piggy bank of $6 trillion for Putin’s cronies to “salt the stash away”

Tomorrow, on October 24th, the State Duma will be considering a proposed draft of the federal budget for the years of 2019-2021 in its first reading. One cannot be calling that document anything else but short of sensational, and Vladimir Milov, a leading Russian political and economic analyst, explains why. We have just recently heard about the “absolute lack of any other alternatives” but raising the taxes and increasing the retirement age. However, now the Putin’s government has found trillions of surplus cash in the excess revenues. And that impressive stash will be given away into a piggy-bank for Putin’s cronies.

On October 24th, the State Duma will be considering a proposed draft of the federal budget for the years of 2019-2021 in its first reading.  One cannot be calling that document anything else but short of sensational, and here is why. First and foremost, do forget everything that you have been told of late on the topic of: “we would not be able to go on without having to have raise the VAT and increase the age of retirement.” The new draft of the budget is simply bursting at the seams with the surplus money, giving us promises of the record high surplus of money (the amount by which the expenditures will exceed the revenues) — the proficit, which will reach the mark of 1.9 trillion rubles in 2019, 1.2 trillion in 2020, and 950 billion in the year of 2021.

If we were to add to this amount the 2.6 trillion of the surpluses that were received in the first nine months of the current year (by January this figure will be exceeding the mark of 3 trillion), then in four years the government will accumulate more than 6 trillion of surplus rubles — the extra money that it is intended to stash away in a piggy bank of the National Welfare Fund. The amount that should be accrued in it by the end of 2021 should well exceed the mark of 14 trillion rubles.

As a matter of fact, this surplus will be even higher should the world oil prices spill over the forecasted estimate of the government (in the scaled up base case of the draft for the years of 2019 and 2020, the planned budget has stipulated allocations of $63 and $60, respectively, despite the fact that the price on oil has already reached a mark that is more than $80). There is a number of factors that may end up causing the oil prices to drop, first of all, it is the risk of having a slowdown in the global economy due to the flaming up trade wars which is going on, nonetheless, if the prices for oil will still be higher, the amount of the extra money stashed in the governmental piggy bank will be still increasing, and, maybe it would not even be the 6 trillion, but perhaps it will get a full blown 10 trillion mark.

We have just recently heard about the “absolute lack of any other alternatives” but having to have raise the taxes and increase the age of retirement, and now just out of the blue sky the government has found trillions of surplus cash in the excess revenues.

Frankly speaking, I cannot quite compartmentalize all of these in my head: we have just heard about the “absolute lack of any other alternatives,” but we have to have our taxes raised and get our retirement age increased, and, then all of a sudden it turns out that the government has discovered trillions in surplus revenues. As if it is happening in some sort of an absurdist novel, against the back drop of all of  these record cash surpluses, the government still plans to have quite a substantial increase in the tax burden in 2019: in the cumulative total, it is going to grow up to 750 billion rubles, give or take. (There are 525 billion from the increase in VAT rate, 160 billion from the excise taxes, 46 billion from the car recycling tax fee for vehicles, and 18 billion from the import duties on parts and components for the industrial manufacturing and assembling).

This is a ginormous amount of money, and there is every reason to suspect that the increase in taxes will hit the economy in a much more painful way than the decline in GDP growth to 1.3% in 2019 which is expected by the government. We have already been placed face to face with the zero growth in investment field, and, for the very first time this year we had a decline in  the manufacturing output in September, and now, out of nowhere the government suddenly wants to raise taxes by almost more than a trillion to top it all off. And one simply cannot say that the government does not have enough money,  since as you can see for yourself the surplus in the form of the excess revenues will be just  simply tremendous in the next three years.

Pardon me, but it is impossible for one to see any rational logic in this approach of increasing the tax burden in the face of a huge surplus in the revenues amount. With the exception of one consideration: the government is waiting for some new crisis of some colossal proportions, in anticipation for which it is accumulating a “cash cushion” of contingency reserve provision, while refusing to share this amount of money with the economy. As a matter of fact, in the rhetoric of the official authorities that are explaining the need for a new accumulation of contingency reserve provisions, this consideration is quite obvious: the allegedly large financial contingency reserve provision has  already as if allegedly “saved» us during the 2008 – 2009 crisis, and that practical experience of contingency reserve provision accrual must be repeated yet again starting with 2014.

It is not very clear from what exactly that contingency reserve provision  has “saved” us already, because during the crisis of 2008 – 2009, Russia was on the list with the other 15 economies in the world that had the worst rates of development, and the decrease in the level of the actual earnings of the population after 2014 has become one of the longest ever since the collapse of the USSR. At the very same time, the contingency reserve provisions were squandered away in support of inefficient business structures that had revealed close connections to the authorities, and the preservation of an inefficient government expenditures structure, while the economy has not been able to bounce back and reach any significant growth rate for more than 10 years. In accordance with the governmental forecasts for this year the level of the GDP in Russia will reach $ 1.64 trillion based on the median for the annual currency exchange rate, which is 1.3% lower than the same level of the GDP was in 2008 if it would have been converted into dollars at the exchange rate available at that period of time. For ten years we have not achieved any progress in any direction whatsoever. So, what was it exactly that we have been rescued from with the aid of the contingency reserve provision funds that have been blown away twice already? So, the 10 years that have passed without any growth whatsoever happening is not a bad enough story as it is, and it could have been worse then? .. Wow, that is some quality of the economic management provided by Vladimir Putin and Co.

However, you should not let your hair down quite yet, for you should hold your breath in the anticipation of any upcoming growth in the future as the government makes a straight confession about that. In the draft of the new budget it is only in the distant year of 2021 that we are promised the 3% growth in the GDP, and in 2019 we would have to endure a reduction in its growth rate because of the policy of increasing the tax rates. However, where will all the factors all of a sudden that will ensure us with economic growth of at least even those 3% emerge from even in the very least, and even in the distant 2021?

Can it happen so that the capital will stop getting drained out of Russia and start flowing back in instead? Thus far this cannot be observed since the rate of the capital outflow this year has already beaten all of the state predictions. Could it happen so that  the general public will start getting a ton of money on its hands? Well, not quite so, for the the government predicts a rather modest growth rate in the real disposable income for the population in its base — line case scenario: 1 — 2% per year in 2019 – 2021, and it is closer to zero index in the conservative one. The prices on oil? However, the government does not predict any further growth for them ($ 58- $ 63 in accordance with the base — line version of the forecast for the next three years), and should there be any growth in there, then the surplus money will not get funneled back into the economy, but according to the “fiscal budget rule” it will be used to create contingency reserve provision funds instead.

Then, where will the acceleration of  the growth appear from? In principle, the answer that is coming from the governmental package of documents attached to the draft of the bill is clear: they are still painting the same very fantastic picture of the rapid investment growth for us, like they have been doing before in all of the previous years. The forecast for the draft of the budget for 2020 – 2021 is 7 – 8% of the growth in the volume of the investments made into fixed assets in 2021.

Without making any attempts to answer the rhetorical question on what exactly is bound to would need to have happened in the Russian Federation in the upcoming years, that would ensure the sudden rush of the investors coming over here in flocks, I would like to point out to one thing, namely, that we have been testing the quality of governmental forecasts on the rapid growth projected for the investments in real life for many years by now. Last year, for instance, when they were adopting the current federal budget for this year, they have predicted an increase in investment rate for the year of 2018 by as much as 5.7% (and these were their premises for making the forecast of the GDP future growth by more than 2%). Factually, in real life we have got a 3.6%  growth rate in the investments in the first quarter, 2.4% in the second one, and, in August the growth rate for investments was reset in general. As of now, the forecast for the investment growth rate from the Ministry of Economic Development and Trade has already reached the mark of 2.9%,  which is one half of what the forecast made a year ago has predicted. And, it is most likely to change yet again, and naturally so there will be none of that “more than 2% of GDP growth” happening either, of course. If they still make their forecasts for the future economic growth rate based on these inflated forecasts of rapid growth of investments drawn from year to year, then pull  down the curtain for it is all over, and there will be no growth whatsoever.

All in all, of course, this is an impressive story in and of itself: for the Putin’s power has already provided us with a decade that was marked with no economic growth and it keeps ensuring its continuous future absence even for the future years to come, and that pretty much means the following: “dear Russians, do forget about any increase in your income and improvement in your well-being.” The governments of the countries that our official authorities point out to us using them as the examples of places where there is a higher retirement age established, would have been forced to go into resignation should any of the similar practices happen under their rule over there, and in the course of their election the popular vote would get swang in the favor of their opposition. And, now let us talk about pensions, among the other things.

During the discussions on raising the age of retirement, we were told that it was allegedly being done for the sake of a substantial increase in amount of the pensions. Thusly, do we find the said increase in the new draft of the federal budget? No, we could not be further off that promised mark, since the average annual growth rate of the real pensions for the years of 2019 – 2021 is planned to be at the level of 1.6% — 2.5% per annum, and that is according to the most optimistic assessment of the base- line case scenario (according to the conservative estimated version, it would be even less than that one).

Budget expenditures on the costs of paying the pensions in 2019 will grow by 0.6%, while the spending for the Federal Penitentiary Service of Russia/FPS, Russian Federal National Guard Troops Service, and RT (Independent non-for-profit organization “TV-News/TV-Novosti,” and also the International News Agency “Russia Today”) will get an increase of 6 — 7%.

There are no plans set up to increase the transfer from the federal budget that is bursting at the seams with the money surplus to the Pension Fund: the growth in the federal pension spending will increase by 0.6%, and even that is only going to happen in the year of 2019. Meanwhile, the total budget expenditures will increase by 4.7% , and, let us say that the cost of supporting, well say, the FPS, Russian Federal National Guard Troops Service, and the media empire of “Russia Today” (Independent non-for-profit organization “TV — News/TV — Novosti” and the International News Agency) will be increased by 6 -7%.

All in all, from an economic point of view, it is more or less clear why the authorities have been pushing the agenda of the increase in the retirement age – it was not their intention to increase the level of the pensions, but just ever so slightly shift the fiscal burden off due to having to support and maintain the system of paying pensions from the federal budget in order to accumulate even more reserves. And there is yet another additional reason for that, it is done in order to provide the funding to the much favored projects for the infrastructure, the beneficiaries of which are all well — known cronies of Putin. Additional annual expenses for these new projects will amount to approximately 500 — 600 billion rubles. per year, which is twice as much compared to the increase in expenses for the payment of insured pensions (that is only 200 — 300 billion).

It is obvious, that the contracts awarded to Rotenberg are much dearer to the hearts of the authorities than the pensions. By the way, Rotenberg has found himself placed in a tragicomic situation: as he had already expressed his readyness to build a notorious bridge to Sakhalin at the expense of federal budget funds, but then the federal agencies have announced that the bridge was pretty much not needed, basically, because there was not sufficient volume of cargo traffic to use it for. Nevertheless, despite its redundancy, the bridge was still included in the plan of the motor trunk road infrastructure development. While that one has not yet made it onto the itemized list of projects to be funded by the budget, there is, however, a whole lot of other stuff, which is by far not any less interesting than that one, for instance, there are 12 billion rubles to be allotted for the creation of an industrial zone in the area of the Suez Canal in Egypt, or there are more than 100 billion in subsidies for the commercial project of  “Novatech” – the company ( the co-owner of which is Gennady Timchenko — a friend of Putin ), the company “Arctic LNG” is exempt from many taxes, and is utilizing imported equipment in its production activities while it is unclear whether it will ever bring at least anything into budget.

All in all, it appears that the state investment from the Development Fund is that very “magical key” with the help of which the government is planning to  unlock the achievement the economic growth rates of at least 2 — 3% per annum. However, as life has already taught us in practice, nothing comes out of that: the cumulative amount of the budget investments has reached and exceeded the mark of 2 trillion rubles per year in the recent years, and we still have not been able go back to any noticeable rates of the economic growth for more than 10 years by now. Nonetheless, we  continue to take money away from the economically viable and efficient enterprises (through the tax increases) and redistribute it to benefit the inefficient ones ( through  the budget investments). Also, we keep on believing that some aluminum cucumbers would still grow on that tarpaulin fabric field.

This is the main thing that you need to know about the federal budget for the upcoming three years: the government is rolling in the money of the surplus cash, but it is still continuing to raise taxes while at that. At the same very time, it does admit to the fact that raising taxes is bound to slow the economy down. Nevertheless, it does hope that the budgetary investments will speed it back up, despite the fact that we have been falling into that same very trap over and over again for many years on end, and it does not work. Truth to be told though, Putin’s cronies will make a very decent buck on the investments from the budget  — those additional hundreds of billions stripped away from the taxpayers will be sinking straight into their deep pockets.

By the contrast, the ordinary Russians should not expect any growth in their real incomes nor in real pensions in return as the government is openly admitting to the fact that it will not be happening. At a  maximum it would be 1 — 2% per year. Thus, where will the extra trillions of surplus cash in the state revenues go? That stash will “get salted away” into a piggy-bank, which we would be in need of when a mighty economic crisis would strike again, which is inevitable as a consequence of such a “wise” economic managerial leadership provided by V.V. Putin and his “brilliant” team of professionals. One can clearly see through this “economic model” in its entirety as it is set in plain sight.

This Article first appeared in Russian at the Insider’s site

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