Photo by Waltie / CC BY
Photo by Waltie / CC BY

BY SERGEY ZHAVORONKOV

This article first appeared on Intersection. It has been edited lightly for style.
A worrying few years lie ahead for Russia’s economy. The Russian government is cash-strapped at both national and regional levels, and it will be education, health, wages, and welfare that take the hit. High military spending is set to continue.

President Vladimir Putin will soon sign the country’s 2018–2020 budget into law. Passed by the state Duma on November 29, this budget reflects a relatively optimistic view of Russia’s economic prospects. In 2018, budget revenues will amount to 15.258 trillion rubles, expenditures will reach 16.529 trillion, and the deficit will stand at 1.3 percent of GDP. In 2019, revenues are planned to reach 15.555 trillion and expenditures will amount to 16.374 trillion, whereas the deficit will stand at 0.8 percent of GDP. By 2020, revenues are estimated at 16.285 trillion with expenditures at 17.155 trillion, and the deficit is also expected to reach 0.8 percent of GDP. To put this in U.S. dollars, the 2018 expenditures should amount to $255 billion.

Those statistics look promising. Too promising, in fact. In reality, government expenditures are very likely to be much higher. The budget is drawn up with the base price of Urals oil set at U.S. $40 per barrel in 2017 prices (subject to an annual indexation of 2 percent, starting in 2018). According to estimates by the Ministry of Finance, the average annual exchange rate of the dollar will amount to 64.7 rubles to the dollar (Maxim Oreshkin, who heads the Economy Ministry, predicts that the exchange rate will fall to 65.7 rubles to the dollar by the end of 2018). These estimates are both wide of the mark: the average annual price of Urals oil has been above U.S. $51 per barrel in 2017 (with an upward trend), while the average annual exchange rate of the dollar has declined and remains below 60 rubles to the dollar. However, the budget’s understated price of oil and the overstated dollar exchange rate virtually balance each other out in terms of ruble-denominated income. Thus, according to the September adjustment of the annual budget, the increased oil price generated 418 billion rubles in revenue, yet the understated ruble-to-dollar exchange rate reduced the revenues by 364 billion. In other words, revenues ultimately increased by less than 0.1 percent of GDP.

The deficit will be financed from borrowings and the National Welfare Fund (starting in 2018, the National Welfare Fund will incorporate the Reserve Fund, which will, in fact, confirm that the National Welfare Fund is certainly not an instrument of long-term investment for the benefit of future generations, contrary to previous claims). The National Welfare Fund will hold a little more than 4 trillion rubles, and it is unclear how this money could finance the 2019–2020 deficit of 8.3 trillion, even taking into account new borrowings of 1.8 trillion rubles. Apparently, more borrowing will be needed. The 2018 GDP is set at 97.462 trillion rubles (up by 2.1 percent), and in 2019 the authorities plan to lift it by 2.2 percent, increasing to 2.3 percent in 2020. In their reports, the World Bank and OECD experts doubt these very modest forecasts, even though the figures are below the growth rates observed in the global economy, as well as in the European and North American economies.

Furthermore, Russian statistics give rise to ever more questions year after year. Based on 2016 results, it turned out that the GDP growth was ensured mainly by various adjustments and estimates, such as allegedly unregistered growth in the small business sector, recalculations of previous years’ results (upwards, of course), or the immense statistical error of over 1.5 trillion rubles, amounting to approximately 1.5 percent of GDP (previously, it was held at 250–300 billion rubles). Such figures easily “eat up” the planned GDP growth for 2017.

In this case, the flaws in official statistics are brushed aside by government reports on successes. Recently, in a televised interview with Channe One, Prime Minister Dmitry Medvedev said that “the real income of the country’s population is growing, and real wages are rising.” In the past, President Vladimir Putin repeatedly stated the same thing. In fact, according to Rosstat (Russia’s Official Statistical Office), the real income of Russian citizens decreased by 1.3 percent over the course of the first ten months of 2017.

Average Wage Stagnation, Cuts to Health Care and Education

Voters should remember Putin’s promises made before the last presidential elections. At that time, Putin said that “the average real wages in Russia should increase by at least 60–70 percent by 2020, and the authorities should focus on creating highly efficient jobs.” In 2011, the average salary/wages in Russia amounted to 25.6 thousand rubles (the calculations take a 13 percent income tax into account). By November 2017, the average figure had risen to 38 thousand rubles. However, the inflation rate for the same period amounted to 53 percent. In other words, real salaries/wages did not increase by 70 percent but instead fell by more than 5 percent, and people’s real income dropped by more than 10 percent. (The difference is explained by the fact that real income takes into account retirement pensions and income from entrepreneurial activity, both of which decreased even more dramatically). People’s real income in the Russian Federation has been declining for four consecutive years: by 5.9 percent in 2016, by 3.2 percent in 2015, and by 0.7 percent in 2014. Two-thirds of the working population in Russia receive below-average wages.

A glance at the structure of budget expenditures over the last few years is also revealing.  The increase in expenditures for “beneficial” social purposes is noticeable only in comparison with the very slim levels observed in 2016–2017. For the sake of comparison, let us take the pre-crisis year of 2013, when the federal budget provided 607 billion rubles for education. It was 597 billion in 2016 and 630 billion in 2017. In 2018, that number will be 653 billion rubles, and in 2020 it will be 668 billion. As readers may remember, prices have already risen by a factor of 1.5. The implication? Dramatic cuts to education have occurred since 2013.

The health care situation looks even worse: 494 billion rubles in 2013, 506 billion in 2016, 452 billion in 2017, 460 billion in 2018, and 499 billion in 2020. So the numbers, again, have remained level, but what this amounts to, due to inflation, is far less. The problem is that the burden of providing health care will be higher with an aging population. The main costs in this case (hospitals and general schools) are borne by regional budgets, and the situation is quite lamentable there as well. Putin’s “May decrees” of 2012—bringing teachers’ salaries to the regional average, and doctors’ salaries to twice the average—are carried out through mass layoffs (if there are two doctors earning the same salary, then, if one is dismissed, the salary of the other doctor can be doubled) and statistical manipulations (for example, in the past, teachers’ income consisted of a “basic” and “motivating” component for extra workload and pupils’ academic performance; at present, only the enlarged “basic” part has been kept, but the total real salaries have shrunk rather than increased).

Penniless Pensioners, a Bulked-up Military

Social policy expenditures consist primarily of retirement pensions. In 2013, such pensions totalled 3 trillion, 960 billion rubles; by 2016, that number was 4.588 trillion, and in 2017 it is 5.71 trillion. The government’s expenditure plan marks out just 4.706 trillion for 2018 and 4.873 trillion for 2020. Thus, while the expenditures on retirement pensions for an increasing number of pensioners did go up in 2013–2016, they are now expected to be reduced. For several years, the retirement pensions of working pensioners (more than 20 percent of the total number of pensioners) were not indexed to inflation, and the retirement age for civil servants has been raised. In real terms, pensions will continue to shrink, which has been admitted by the authorities: for example the head of the Accounting Chamber, Tatyana Golikova, predicts a decrease of 2.7 percent.

In contrast, military spending rose from 2 trillion, 141 billion in 2013 to 3.775 trillion in 2016. In 2017 it fell to 2.778 trillion, and it will decline further in 2018 to 2.771 trillion, but will grow again afterward, to 2.808 trillion in 2020. It should be borne in mind that the actual military spending in Russia is much higher than the planned figures. Traditionally, additional budget revenues, if any, are allocated to this sector. Moreover, some military expenditures are concealed under other civilian items, primarily under the “national economy.” Police spending rose from 1 trillion, 487 billion in 2013 to 1.898 trillion in 2016, 1.977 trillion in 2017, 2.108 trillion in 2018, and 2.140 trillion in 2020. The share of concealed budget expenditures in 2013 amounted to 13.8 percent of the total expenditure and increased to 18.6 percent in 2017, with a planned increase to 20.1 percent of the budget in 2020. These are absolutely bizarre figures that cannot withstand any comparison with the secret parts of budgets in developed economies. At the same time, a significant proportion of the “secret expenses” most likely does not go to military purposes but simply remains in someone’s pocket.

The income estimates have many gaps. For example, the budget is calculated on the basis of the assumption that 50 percent of profits generated by state-owned companies (as reported under the IFRS) will go to the state budget. However, it is commonly known that none of the previous declarations to that effect were fulfilled: neither Gazprom nor Rosneft nor many other large companies have paid those contributions. State banks such as VTB and Rosselkhozbank, as well as the Russian Railways (RZhD) and the Rosseti power grid company, have shown either a loss or a minimum profit for many years. As regards Rosneft, it transfers its dividends not to the state directly but to a state-owned intermediary structure, Rosneftegaz, which has classified books of account; without conducting any economic activity, Rosneftegaz has announced a loss for 2017.

In coming years, the Russian budget will continue to allocate about a third of its spending to military and police needs, whereas the social policy expenditures will decline, with ordinary citizens getting ever poorer. In general, Putin’s plans for his beloved voters on the eve of the presidential elections can be described with an old Soviet anecdote from the “Armenian radio” series (a fictitious radio station giving humorous answers to listeners’ questions). A listener asks: “Will there be money under communism?” The radio answers: “Yugoslav opportunists say there will be money. Chinese Maoists say there won’t be any money. The correct dialectical answer is that when communism is built, someone will have money and someone will not.” The situation under Putin’s rule is quite similar to that anecdote. According to his new budget, the military-industrial complex will have money while the majority of the population will have none.

Sergey Zhavoronkov

Sergey Zhavoronkov

Sergey Zhavoronkov is an economist and a member of the board of Moscow’s Liberal Mission Foundation. He is the author of several books and articles in the field of institutional economics, regional development, and state regulation.
Sergey Zhavoronkov

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