Friday, 21 September 2012

Russia's budget battles- there's a lot at stake when the roubles are down

Russian president Vladimir Putin has criticized some of his ministers for poor financial plans and for ignoring his spending orders. His comments were made at a budget meeting in the black sea resort of Sochi. 

Putin says that the draft fiscal plan of Prime Minister Dmitry Medvedev's government means that thirteen decrees he made, straight after being sworn in for his third term as Russian president, won't be implemented. He demanded this be changed. Medvedev wasn't present at the meeting. The criticisms of his government have raised speculation that Russia's previous president and his government might be forced from their posts.

Dmitry Medvedev reportedly locked himself in his prime minister's office with the finance minister, Anton Siluanov, in a scramble to change the 2013-15 budget. Putin has asked Medvedev to reprimand two ministers for failing to stick to his priorities. Labour Minister Maxim Topilin and Regional Development Minister Oleg Govorun are the two specified for an upbraiding. Putin says they will, "bear personal responsibility," for their ministries not following his orders. He is angry that no new pension plan has yet been created as per his orders. Finance minister Siluanov says that pension reform can probably be included without huge disruption. Plans for the development of Siberia and the Russian far east also remain unprepared. Whilst saying it wasn't his job to do it, Putin's highlighting the task for Medvedev is seen by some as undermining his Prime Minister.

It seems the Russian government has come to an economic fork in the road. Putin is urging his ministers to work towards a balanced budget because of the financial crisis but also demands they meet his spending commitments. However contradictory messages are coming from different parts of the Russian government.

There has been in-fighting between ministries over budget allocations and the need to prepare for a second wave of financial crisis in recent weeks. Russia's Finance Ministry has been one of those throwing its weight around more than most. It has told the Ministry of Economic Development that its forecasts for the possible effects of a second wave of financial crisis aren't pessimistic enough. And it's been doing what finance ministries are notorious for, telling other parts of government they can't spend.

First, healthcare. The Healthcare Ministry wanted 2.7 billion roubles ($85 million) for research centres and 3 billion roubles ($94 million) for developing medical equipment. The Finance Ministry says it's not a priority.

Next, culture. The Ministry of Culture had wanted 1 billion roubles ($31 million) to buy museum specimens. In the current climate that was perhaps an easier one to shoot down. As for the 11 billion roubles ($345 million) requested by the Education and Science ministry for additional music and arts classes (hopefully for students, not them) a decision is yet to be made.

In the realm of science and technology the Finance ministry has come out against giving the Russian Foundation of Fundamental Research the 3 billion roubles (over $94 million) it asked for. Also denied are 8.5 billion roubles ($270 million) for developing the grandly titled 'infrastructure of tech cities', 9 billion roubles ($283 million) for buying equipment and 4.2 billion roubles ($132 million) to maintain the Skolkovo innovation centre outside Moscow. That may even mean that Skolkovo, the brain child of Prime Minister Dmitry Medvedev back when he was president in 2009, and hoped to be the start of a Russian silicon valley, may have been an enormously expensive white elephant. 

As regards child benefits the Finance Ministry suggests that if a child is under 18 months old the mother should only receive benefit payments if she earns below the minimum wage.

Perhaps most controversial of all is the ministry's rejection of the request for 34 billion roubles ($1 billion, 68 million) to raise public sector salaries. All ministries had hoped for gradual wage increases from next year. The Finance Ministry says instead it will raise salaries twice in 2017, it's reported. That's one of the decisions Putin doesn't like.

The aim of all this is to try and fix next year's budget further in advance and to try and get some control and efficiency in Russian government spending. The problem here is that unlike many lower priority expenses which are easier to put on hold, the above measures fall under so called 'social spending' and were considered a priority, at least by the ministries in question.

Dmitry Medvedev is speaking of the necessity to balance the budget and the immense damage that could result from overspending if a second wave of financial crisis hits Russia. 

Putin, for his part maintains that there are great projects in Russia that money must be put towards.

So what are the Russian government's biggest spending priorities? Defence it seems, and foreign debt. Foreign debt payments will be most welcome in this age of financial constriction and will help build confidence in Russia's economy among investors. The increase in the payments though is enormous, up 64% by 2015 compared to 2012. Defence spending is predicted to rise over 50% in 2015 compared to 2012. Few doubt that reform in Russia's armed forces is needed. But a figure as big as 20-21.5 trillion roubles (over $650 billion) for the armed forces in the next decade could start to cause public anger when people see, as indicated by these inter-ministerial arguments, that it will cost healthcare, education, science and wages.

It has been left to the economists to point out that you simply can't have everything. The Russian government has been put in a virtually impossible position. Trying to meet the demands for higher defence spending, paying off debt, salary increases, pension plans and all the other spending promises mean that a tight fiscal line can't be kept and the budget will not be balanced, they say. 

When it comes to wages in particular, these announcements will raise doubts as to whether Vladimir Putin can keep his election campaign promises to keep increasing pensions and to double the average pay of teachers, scientists and cultural workers by 2018.

The daily newspaper Kommersant reports that there have been 164 labour related protests in Russia from January to July 2012, more than for the last three years and they are on the increase. Outside the Russian government as well as within it, budget choices in the next few years could cause many more than just the President or the Finance Ministry to start throwing their weight around. 

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