Russian President Sets Priorities
Russia has not only fully overcome the protracted economic slump, but has joined the list of the top 10 world’s largest economies. This is what Vladimir Putin said during the first minutes of his eighth and the latest address to the Federal Assembly, which set the tone for the rest of his speech on April 26, 2007.
As compared with previous addresses, this one clearly changed its approach to development strategy. The head of the Russian state clearly chose the issues of the real economy and the competitiveness of its key industries over the analysis of macroeconomic indicators, tying those real issues tightly to improving the living standards of working and retired Russians.
This layout of the economic part of the address has become possible and preferable due to the economic and financial stability of Russia during the last few years, which has resulted in doubling the real income of people since 2000. Although the gap between the income levels is still inadmissibly wide, the President said that “the poverty level in Russia has almost halved over the past few years due to recently adopted measures.”
The President described the key stability factors underlying growth as follows: The Stabilization Fund was established in 2002 in order to fulfill all budget obligations and curb inflation, which was stimulated by record-high world oil prices. Such an approach justified itself and helped Russia to steadily develop its economy. The Russian Central Bank’s gold and currency reserves exceed $300 billion, taking third place in the world.
The President clearly defined the development of this sphere. “The nature of the economic challenges requires adjustments in the function and structure of the Stabilization Fund while maintaining – unconditionally maintaining – the conservative financial policy.” The transformation of the Stabilization Fund into a Reserve Fund and a Fund for Future Generations becomes a tool of this strategy. The ideology of this transformation was made public two months earlier in the President’s Budget Address. Based on this document, a three-year federal budget for 2008-2010 was developed and recently submitted for consideration by the State Duma.
The new procedure for using huge oil and gas revenues provides for dividing all these funds into three flows. The first one is proposed to lower the potential risks caused by a sharp drop in energy prices. Further on, part of the oil and gas proceeds will be channeled to the federal budget for implementing large-scale social projects. And, finally, the funds allocated to the Fund for Future Generations would improve the quality of life and develop the economy.
A pyramid with such a solid macroeconomic foundation creates all the prerequisites for many years of economic growth. But as we all know, there are voices increasingly expressing apprehension about serious obstacles to this plan, both in Russia and abroad. The main obstacle comes in the form of the Russian economy being based on the exports of raw materials. Natural resources are a boon per se, but excessive reliance on oil and gas windfall profits kills the taste for economic diversification and innovation. Meanwhile, the contribution of the fuel and energy complex into the GDP is decreasing, while government obligations to the people are increasing. An example: Between 2007 and 2009 alone, the average pension should increase by at least 65 percent, said the Russian President. “We cannot repeat the mistakes of the past and should do our best to guarantee a decent life to retired people.” This is the categorical imperative for Vladimir Putin: Allowing a pension system crisis would mean a significant devaluation of the last few years’ achievements in the eyes of the public.
Identifying priorities for the real sector of economy, Putin sharply grasped the sense of complacency of part of business and the administrative elite. When government statistics are fine, officials are not prone to delve into disagreeable details. In this connection, Putin’s analysis of the national project entitled Affordable and Comfortable Housing is very telling.
“The implementation of this national project significantly accelerated construction in many areas, ranging from low-rise construction to the development of individual districts and even towns,” said the head of the Russian state. However, he added promptly that even with its high rates of development, the construction industry does not keep up with fast-growing needs. This growth stands at 15 percent a year, which is almost an absolute record as compared with other real sectors of the Russian economy. Even the yearly commissioning of 80 million square meters of housing by 2010 will not meet the demands of modern Russian society, said the President, who put forward another task: “We need at least to foresee this growth as high as 100 to 130 million square meters a year.”
Such a long-term approach, which overturns the soothing official numbers, is very typical of Vladimir Putin. However, if in the construction industry the issue was about a change in the guidelines, the power engineering industry needs to have an unprecedentedly large program to be implemented accurately and in full. “We are faced with structural reform that is the largest in the past few decades. In actual fact, the issue is about another massive electrification of this country. We need to boost the power output in Russia by two-thirds by 2020. To do so, the government and private investors will invest about RUR 12 trillion [about $465.8 billion],” said Putin. The reform in power engineering is one of the most dynamic areas of the Russian economic landscape. Now this country is confronted with the growing shortage of electric power, a consequence of fast economic growth. By September 2006, power consumption in Russia increased by an unheard-of 4.8 percent for the year, as compared with 1.7 percent per year previously.
Of late, they have approved the “General Layout Scheme for Placing the Power Engineering Facilities Until 2020,” the key document, which is comparable to the GOELRO (State Commission on Electrification of Russia) Plan, developed back in the 1920s. The general layout determines the industry’s development for the next three five-year periods. The document takes into account the demand of the Russian regions, their energy consumption rates, and their plans to open new production facilities. The current capacity of the Russian power engineering plants amounts to 211,000 megawatts. According to the base scenario, by 2020 Russia will need one and a half times more, or 340,000 megawatts or even 392,000 megawatts. The level of needed investment: $420 billion, according to the base scenario, or $540 billion for the maximum scenario.
The President said oil refining was the number-one issue for the oil business: “In 2006, Russia led the world in terms of oil output figures.” However, oil refining lags behind in all indicators. Certainly, export is a lucrative business, but there are medium-term prospects that Russia may have to import petroleum. The fleet of automobiles in Russia is growing at all-time rates closely followed by the environmental fuel standards. According to the Federal Road Agency, the fleet of autos in Russia will hit 42 million cars in 2015, with the tripling of foreign makes being the main growth factor. So far, about 60 percent of the cars operating on the Russian market do not comply with the European standards. The depth of oil-conversion in Russia now stands at 71 percent as compared with 85 to 95 percent in developed countries. Russian refineries make 140 liters of gasoline from one ton of oil, whereas in the U.S. this figure is 450 liters. Without upgrading, say the experts, Russia will make only 3.2 liters of gasoline per car in 2011, and 2.6 liters in 2015.
According to the President, the gas industry needs energy saving: About 20 billion cubic meters of associated gas is burned in Russia every year. This is not only an unbelievable waste, but also a direct damage to the environmental safety of Russia’s vast territories.
“An efficient transportation system is still another element of the future growth infrastructure. The poor condition of Russian roads, and sometimes the lack thereof, are serious hindrances to economic development. Annually, our economic losses amount to more than 3 percent of the GDP. Remember that we spend 2.7 percent of the GDP on defense. And the mobility of the population in Russia is two and a half times lower than in developed countries,” summed up Putin in a tough manner. However, he warned against using linear solutions: “It is certainly not enough to mechanically increase financing. We need the legal base that would provide for innovative modern ways of financing road construction and operation.”
The address views roads and natural resources as prerequisites for an innovative economy, whose contribution to GDP is still low in Russia: “Historically, Russia was strong in aircraft building, both military and civil. However, we lost ground in civil aircraft construction. We have adopted a corresponding program and a decision to establish a United Aircraft-Building Corporation. I believe that the new aircraft-building corporation should become the engine for modernization of the entire industry,” said the head of state.
Putin specifically underlined the need to establish a system of research and design in nanotechnology, based on nuclear and molecular construction, noting that “Today, nanotechnology for most people is as abstract a notion as nuclear technology was in the 1930s.” The government has already allocated about $7 billion for the development of the nanoindustry program approved by the President. This came as a weighty answer to the critics of the raw-material-oriented Russian economy, and a symbolic completion of the list of priorities announced by Vladimir Putin.
“I would also like to note that the spiritual unity of the people and common moral values are as important as political and economic stability,” said Vladimir Putin bringing together the entire range of factors in his address to the Russian parliament.
By Igor Veletminskiy/RG
