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Apr. 04, 2007

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April 25, 2007

Vladimir Putin’s 10 Principles

The Russian president has defined his priority budget policies for 2008-2010.

The key novelty of the recently published budget message from the head of the Russian state is its shift to three-year planning. Previously, budget strategy was determined for just one year, but now the president has set goals encompassing a significantly larger period. In addition, the three-year plan is seen as a step in the direction of what until recently seemed an unrealistic goal – a switch to budgetary planning over a 10- to 15-year period.

Experts who looked beyond the macroeconomic vectors in Vladimir Putin’s eighth budget message as president focused on the fact that the head of state has looked beyond the horizon of his rule. This was never done by his predecessor, Boris Yeltsin, who had to deal with endless economic crises in the 1990s. In this sense the president’s message is nothing less than a declaration that the economic course, the foundations of which were laid during Vladimir Putin’s rule, will remain in place even after his departure from the Kremlin in 2008, which the president has announced many times. And, in the economic sense, the document details the switch to long-term planning. Such a shift is absolutely necessary: Both the budget revenues that are directly dependent on world oil prices and government debts will change significantly.

And so, the 10 theses of the budget strategy for 2008-2010 that will form the foundation of Russia’s three-year budget contain such important goals as the reduction of the tax burden, lowering inflation and reorganizing the Stabilization Fund. An analysis of these priorities allows one to evaluate the strategy of turning the federal budget into an instrument of effective macroeconomic regulation.

The task of reducing inflation to between 3% and 4% per year after 2010 is more than difficult if one is mindful of the multitude of failures in past years on this front. In the 2004-2005 period, for instance, authorities were unable to achieve inflation goals, which in the end came to 11% annually. So what is the current optimism based on? On another one of Vladimir Putin’s 10 principles: an analysis of the efficiency of all budgetary expenditures, a comparison of expenditures and their resulting effect. “Control over the targeted use of budgetary resources must become more efficient, oriented not only at exposure, but also chiefly at the avoidance of financial disturbances,” Vladimir Putin said, emphasizing the importance of the audit.

A new principle of government investment was also declared. The basic document that will regulate the relationship between state customers and contractors will be a contract that spans the entire period of the realization of the investment project. The state’s expense responsibilities are included in the document and cannot be reevaluated. This is one more restricting factor instituted by the president.

Of course, there are further factors contributing to inflation – for example, the considerable increase in domestic gas prices, which reflects on Russian enterprises’ production costs. With this in mind, in another key document – “Scenarios of conditions for socio-economic development from 2008 to 2010” – inflation is forecast to be 6% to 6.5% per year by the end of 2010. As a result, leading economic experts point out that inflation of 3% to 4% is achievable no earlier than in five years’ time, which fits in with the definition of the long-term budget prospects.

An extraordinary amount of this direction will depend on the balancing of the budget. To execute this task, the president identified the Future Generations’ Fund and the Reserve Fund, which will take the place of the current Stabilization Fund, which has already accumulated more than 2.5 trillion rubles (about 50 billion British pounds sterling or $95 billion U.S.). The times dictate the fashion: The Stabilization Fund was created three years ago to even out fluctuating oil prices, and it’s now become clear that it is ensuring the Russian economy only against short-term drops in prices on raw materials. The Stabilization Fund as an institution has run up against the new realities of long-term budget planning. In order to guarantee budget stability in the case of long-term price decreases, an Oil-Gas Fund will be created, which will accumulate revenues not only from oil exports, but from gas as well. It may start working from 2010-2011.

Balancing the interests of insuring against risks and those of innovation is intended to be achieved by dividing the Oil-Gas Fund into the Reserve Fund, the size of which, by various estimates, will amount to 5% to 7% of Russia’s gross domestic product (GDP), and the Future Generations’ Fund. The resources of the Reserve Fund, analogous with the Stabilization Fund, will be allowed to be invested only in low-yield, high-level securities. In contrast, the resources of the Future Generations’ Fund, as it has been conceived, may end up being much more lucrative. They could possibly be invested in securities of not only developed countries, but also of developing ones, as well as in shares of Russian companies.

It is typical that the budget message includes measures for stimulating business. In previous messages to the Federal Assembly, the president has spoken more than once about the danger of ‘tax terrorism’ and the absolute power of the tax police. A law has now been adopted on tax administration, which the energies of big business are gradually ‘smelting’ into everyday practice. The budget message promises to reduce the tax burden for Russian businesses. The message proposed coordinating the reduction of the united social tax with the reform of the pension system and the development of voluntary pension insurance. In addition, already this year the mechanism of value-added tax refunds for exporters is being improved, which will make tax less burdensome for businesses. The theme of the day, as we can see, is moving toward restoring mutual trust between business and authority. And a solution to this task will yield positive results, the meaning of which for the Russian economy goes far beyond the short-term framework outlined in the last budget message.

By Maxim Kholmov

The 10 budget principles:

  1. Price reduction. The goal is to guarantee a reduction of inflation to 3% to 4% per year.
  2. Long-term budget balancing. The Stabilization Fund will be reorganized into the Future Generations’ Fund and the Reserve Fund, which will provide for budgetary expenditures in the case of a significant decline in oil prices.
  3. Financial planning. Creating and ratifying the federal budget for a three-year period is seen as the basis for the transition to long-term financial planning of a 10-to-15-year period and longer.
  4. Responsibilities come first. Fundamentally, budget policies must completely fulfill all current responsibilities. Principal decisions on revocation, cancellation or restructuring must be worked out before the conclusion of budget formation.
  5. Improving the quality of life. We need not simply report on medical and education services, but must make progress in reducing illness and mortality, and improve the competitiveness of our schoolchildren and older students. When developing measures and programs, the government should figure out the end goals of such actions, as well as the procedures for evaluating their consequences.
  6. Modern principles of state capital investment. The basis of the document regulating relationships between state customers and contractors will be a contract that covers the entire period of realization of the investment project. Expenses are included in the state’s responsibilities and cannot be revised.
  7. Improving the quality of state services. To employ mechanisms that stimulate budget institutions to improve the services they provide and the efficiency of budgetary expenditures. To implement forms of financing that provide coordination between the results of institutions’ activities and the resources they receive.
  8. Efficiency audit. Increasing the quality of financial management in the budget sector. Control over the targeted use of budget resources must become more effective and oriented not only at revealing but also at preventing financial offenses; it should create the basis for making concrete decisions.
  9. A fitting old age. The goal is to work toward pension reform, and to resolve the problem of imbalance in the Russian Federation’s Pension Fund.
  10. Development of the Far East and Trans-Baikal. To devote special attention to forming and realizing a federal targeted program aimed at assisting the socio-economic development of these territories.

Konstantin Zavrazhin
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