Evgueni Primakov: The second stage of the Russian recovery has started

2006: Achievements and disproportions

At our traditional meeting a year ago my presentation was entitled “Will 2006 Be Crucial for Russia?” In my opinion, in many respects it was. What do I mean by “crucial”? I mean that certain principal trends are now being replaced by their opposites. It was not necessary for them to obtain a clear-cut full-fledged status, to say nothing of climaxing in their development. If we were to proceed from such understanding of that - and I do proceed from that - many stereotypes that had been persistently imposed on our society from the 1990s on disappeared last year. Which ones do I mean?

First, after we spent a lot of time in a tug-of-war we have finally, and hopefully, discarded for good the premise that even at the dawn of establishing of market relations in Russia, and prior to the creation of a well-developed market we could do without a resolute and efficient interference by the state in the course of economic life in this country.
Dogmatic liberals argue that the state should limit its activities in this area to nothing but micro regulation as there is no need whatever for the sate to invest in the manufacturing sector. An example of this is the resistance mounted by the Finance Ministry against setting up the investment fund, or in other words against channelling budget allocations to the targe projects the nation needs so badly. But for the perseverance of the Ministry of Trade and Economic Development that steadily fought its opponents, the Fund would have never been established. By the way, the “disengagement“ in 2006 of the “tandem” of these two ministries that had previously stood for the idea of a total ousting of the state out of economic matters proved to be meaningful evidence that a break-up of this premise took place in this country.
Second, last year we all heard President Putin say that - given high global prices - the natural resources sector should be a vehicle of economic development and a means of raising living standards of Russia’s population. Is it not an evidence of a dramatic change of the trend so zealously supported by those who used to state that not a single kopeck of the Stabilisation Fund money should be spent at home for fear that it might allegedly provoke soaring inflation? Inflation was caused by a number of reasons rather than just one and it never went downhill while the Stabilisation Fund remained untouchable. The line on an unrestrained strengthening of the rouble-to-dollar exchange rate is also a result of the fight against inflation, which does much harm to the competitiveness of Russian manufacturers.

The creation of stocks of non-renewable resources is a necessary step as is evidenced by the world’s experience. But how should we spend unplanned revenues we are earning owing to high world prices for the goods we export? Recently I read professor Aleksei Kudrin’s article in the journal “Issues of Economics”, where he presents an interesting table showing target projects financed by the funds that accumulate non-renewable resources in Kuwait, Alaska, Chile, Norway and Venezuela. It is clear from that table that in all these countries without exception the money they accumulate become a source of funding national economies in one way or another. The example of Alaska is very characteristic. Two funds are set up in Alalska, a permanent fund and a reserve fund. About half of the revenues of the permanent fund is paid to the population as their dividends, and the remainder is reinvested. The reserve fund is used to credit the budget. A variable cap is fixed for the use of the fund’s money that can be reviewed by law-makers.
Why is Alaska’s example so important? Because that state also faces demographic and development problems. The Norwegian state oil fund is another characteristic example which supporters of immunity of stocks of non-renewable resources are so fond of referring to. However, to quote the table the money of the Norwegian fund “can be used only for transfers to the budget of the central government”. The inclusion of this table cannot be evaluated as other than the author’s objectivity as a researcher.

I think that 2007 will not see the triumph of the stance of those who state that money accumulated in the Stabilisation Fund may not be spent even for the creation of Russia’s transport infrastructure, where 50,000 settlements and villages have no connection to main motorways, or to cover that part of the budget, which decreases due to lower taxes in the science-intensive manufacturing sector, the processing industries and small business. We have also passed the point of no-return in that the number of those who realise that reduction of the tax burden in these segments would promote the necessary change of the structure of Russia’s economy thus stimulating its further growth and in the long run increasing budget revenues, is growing.

Third, in 2006 there was a resolute turn to the socially oriented economy. I mean the four national projects proposed by President Putin – in the areas of public health, education, housing construction and the development of agriculture. The resolve with which this initiative was proposed is stressed and accounted for by the fact that right from the start of economic reforms in Russia dogmatic liberals harped on the idea that the state should take care of only the disabled and incapable people, while the rest should solve their social problems on their own. In essence they denied state investments in the human being.

Fourth, the fight against corruption began in 2006.I cannot say that it has overcome its “random attack” character. But even the facts of several high-ranking corrupt officials having been fired and criminal proceedings against the middle-layer apparatchiks started, instil hope. This hope is invigorated by Vladimir Putin’s words that the perfect union between state officials at all levels and business has become the most dangerous evil. If resolute action follows this statement corruption in Russia would be deprived of its breeding grounds.

Next, about Russia’s economic development in 2006. For a number of years we have seen this country’s annual economic growth of almost 7% of the GDP, a much higher rate than the world’s average. What is the most significant about that is that this growth has taken place for quite an extended period in the absence of serious falls. For the first time in years inflation in 2006 was lower than 10%. Gold and hard currency reserves showed a record growth, and the living standards of the population have also risen. I think that all these positive results are to a large degree linked to the fact that what is taking place is a drastic change of the trends that began to take shape in the 1990s. At the same time, would it be right to think that we have already reached a point at which the role of the state in the economy is levelled down? It would not; we cannot assess the situation like that. Alongside certain achievements a number of disproportions became evident in 2006 in the economy that require taking serious measures with an eye at overcoming them. I will dwell on some of them.

First. In the conditions of positive economic dynamics there was no sign of overcoming the demographic crisis. In Russia it has two dimensions. On the one hand it is the decrease of the entire population and on the other – quite a rapid outflow of workforce from Russia’s economically most important regions. I have in mind Siberia, the Transbaikalia and the Far East. In 1991 about 22 million people lived on the territory that is nowadays called the Siberian Federal District. At present they number 19 million. According to the projections of the States Statistics Committee, by the end of 2025 there will be a little more than 17.5 million residents in this area. In other words, compared to 1991 the size of the population will have decreased by 20%. The Siberian Federal District occupies one-third of the entire Russia’s territory, but the trouble is not that this area is underpopulated. The pattern of the spread of the population is very unequal. As Anatoli Kvashnin, Presidential representative in this district said speaking at a session of “Mercury Club”:” Put a pair of compasses on the map with the centre in Novosibirsk and draw a circle of 600 kilometres in diameter. 12 million out of 19 million Siberians will be the residents of that circle.”

An even worse demographic situation is taking shape in the Far East, where the number of population in the last 15 years decreased by more than 16%. To solve the demographic problem, which is a top priority issue for the nation, a systemic complex plan of the development of these regions should be proposed. Someone may object saying that a big number of such projects have already been adopted. My answer is none was of a comprehensive, multilateral and systemic in character. Of course, it was also due to the fact that there is no adequate means of monitoring and control of the implementation of even these segmental projects that could help solve the problem vitally important for Russia, the economic and political problem directly influencing this country’s security. Shortly before the end of 2006 President Putin spoke about that at the Security Council. Orders and assignments have been given. Let us see how they are going to be implemented in 2007.

The second disproportion. The development of our economy in 2006 led to a rather high dynamics of consumption. This is very good. But the growth of consumption is taking place against the background of low competitiveness of the products of the Russian industry that was characteristic for a number of years.
Such imbalance stimulates further growth of import, whose rate is significantly higher than growth rates of Russian industries. The share of wholesale and retail trade in the GDP amounted to more than 35% last year. The share of industrial product in the GDP decreased. No one is willing to disregard issues of development of trade and services, which was the sin of the economy in the Soviet period, or erect a barrier for imports. This should not be done. But the issues of domestic industries’ competitiveness become more and more acute. And this can be achieved only by switching our industries onto the innovation tracks. This cannot be done without a strong state involvement.

In the last several years a real breakthrough took place in Russia. Budget-supported investment and venture funds were established here along with special economic zones, there are plans to set up the State Corporation of Development that will be responsible for financing long-term investment projects including export-oriented ones. At the same time there are facts, which we should not close our eyes on – of insignificant scale of use of new tools of investment activities. For example, four technical and technological innovative zones are now being established in Russia. Compare this with 57 such zones in China.
Incidentally, the innovative way of development is becoming more and more acute and urgent for Russia also in connection with its complicated demographic situation. It leads to a decrease of supply of workforce, which can only be overcome by raising intensity of labour and its productivity, and that is impossible without technological progress. The third disproportion is due to the fact that with a certain reduction of the number of people living beyond the poverty line, the gap between the 10% of the earners of the biggest revenues and the 10% of the lowest-paid people remains intact or even increases. According to the State Statistics Committee, the volume of earnings of the well-to-do is growing while the volume of revenues of the lowest-paid people remains the same. So it is exactly the rich who benefit the most from the economic growth. This is a trend that causes concern. It is far from being a factor of bringing about social stability in Russia.

At the same time we should pay attention to another aspect of the problem, which I would call an aggravating factor. It is known that poverty in the developed countries is mainly localized among the unemployed, migrants and families with many children. In Russia 35% of people living under or close to the poverty line are families of working people with one child or two children. The bulk of the poor in Russia are contract employees or old-age pensioners. Suffice it to say that the pay of two thirds of agricultural workers and more than half of the people in the sphere of culture and the arts is lower than the minimum subsistence level. On top of other things the cheap workforce accounts for the lack of interest in the technical and technological progress.

Another major disproportion is the fact that along with the development of federalism we actually preserve the financial system of a unitary state. If several years ago this could have been vindicated by the intention to save the country’s territorial integrity, using financial flows from the centre to the regions as a means of strengthening the single state, following the building of a political vertical structure by way of appointing governors, such an explanation is meaningless. All the more so that in all federative states political centralization is strengthened owing to the growth of economic independence of the federation subjects. What should we say about the growth of economic independence of our regions if most of them transfer to the centre the bigger share of taxes they collect, being totally dependent on the transfers and subventions from the federal centre. Such a practice is often accounted for by the need to level out this country’s social and economic situation. Indeed, this has to be done but not using the methods that are unacceptable to either the recipient, or the donor subjects.

Well, speaking about disproportions, unfortunately, we have a lot of them. They include:

– the slowdown of the growth rates of export of oil and other natural resources is not compensated for by the growth of export of products with a big share of added value;
- given the need to ensure high and sustainable economic growth there is no system of long-term crediting at a reasonable interest rate;
# the growth of foreign investments is limited a comparatively narrow area of extraction of natural resources;
- as one of the world’s biggest energy producers, in terms of efficiency of the use of energy, Russia is lagging behind other countries sometimes by factor of 100%;
- no mechanism is in place to ensure efficient protection against monopolistic pricing policies;
- a high level of the intellectual potential is incompatible with its extremely low productivity amounting to 0.5% of the research-intensive products and state-of-the-art technologies on the global markets;
finally, serious disadvantages of the decision-making mechanism are evident; the government knows well in advance that all the bills it tables at the State Duma would be automatically supported by parliamentary majority. The most striking example is the Preferences Monetisation Law whose drastic weaknesses negatively affected the beneficiaries also in 2006 especially in the process of provision of pharmaceuticals to social security beneficiaries.

Making an attempt to analyze the domestic political situation in 2006 I’d say it became evident that one of the phenomena causing grave concerns was the fact that nationalists moved by xenophobia began to raise their heads. One of the main features of a Russian citizen should be patriotism. This is love of Motherland and its people. However, the nationalists are characterised by the desire to ride the high horse before others, emphasising the superiority of the people they belong to over others. Some people regard internationalism that opposes that trend as a Communist definition, which in the conditions of the development of market economy should allegedly be replaced by nationalism. Such a theory is absolutely wrong and harmful. Its harm can aggravate if, undoubtedly guided by common sense, such theoreticians come up with ambiguous terminology, for example the assertion that what inherent to Russia is “sovereign democracy.”

Russia certainly has been a sovereign state with a long and rich history. Naturally, both Russian state institutions and mentality of the majority of the population retain their originality. Russia is moving along the road to the human values shared by all of mankind, including democracy, choosing its own direction with regard to its traditions, history, the multinational character of the state and its geography. As other nations Russia would not accept groundless abstract sermons from abroad, and more than that, imposition on it of different types of building of society and forms of governance. However, it is expedient to prevent those who are making attempts both at home and abroad to separate Russia from the objective processes underway in the world, including globalisation, trans-nationalisation of economic activities and the rapprochement of civilisations, from using the things that are embraced by the notion of state sovereignty.
To defend Russia’s interests and the interests of its entire population is necessary. But this should be done without humiliating, harmful and dangerous matching ourselves to other nations and countries.

And next – about the international context, Russia is developing in. After the end of the Cold War the world departed from the bipolar system, beginning to create a multi-polar world order. China and India with their enormous human potential are rapidly developing. By their aggregate GDP in 2006 these two countries outdid the United States. Taking into account that the economic growth in China and India is two and a half times higher than that of the United States, it becomes evident that the contribution of these two countries to the growth of the world’s economy is the biggest in the world. The share of the European Union in the global GDP was also bigger than that of the United States. Brazil and Argentina are also turning into post-industrial nations. The integration process in the Latin America is also a promise of good things coming their way. It is hard to imagine that a dynamically developing Russia would not become an independent centre in such a multi-polar world.
However, there are subjective obstacles to the making of a multi-polar world order. These include U.S. foreign policies. In the present conditions that country is the world’s most developed economy, the strongest nation militarily and the most advanced in the area of R&D. With regard to the above, those who are making attempts to preserve the U.S. hegemonistic positions also during the period of establishing a multi-polar world order have become ever more influential under the current US administration.
This reflects negatively on the process of neutralisation of the threats mankind has been facing ever since the end of the Cold War. I will identify three such threats. The first is the creeping proliferation of nuclear arms and other weapons of mass destruction beyond the boundaries set by the five official members of the Nuclear Club, who have mastered the art of self-restraint when it comes to the use of such weapons. The second one is international terrorism that is now wearing the disguise of Islamism, even though it has nothing in common with Islam as a religion. The third threat is the spreading of regional conflicts. Their danger is further aggravated due to a possibility of all the three threats interlocking. In the days of the Cold War stability on the world arena was maintained by the mutual containment of two superpowers, each being the leader of one of the two opposing ideological camps. In other words, it was based on the confrontation with clearly defined boundaries. At present prevention of new threats is possible only by pooling the targeted efforts of all basic centres of the multi-polar world in the making. But to make this truth that can hardly be doubted, a reality is not so easy. The military operation in Iraq indicated that the United States has arrogated the right of monopoly in identifying the country that threatens international security and making unilateral decisions on the use of force against it. Simultaneously it declared its resolve to export democracy into the country of its choice, if its customs and conduct do not satisfy the United States.

Nowadays the collapse of such policies can be ascertained, and many US representatives have done so. Quite recently even President Bush admitted for the first time that the United States did not win a victory in Iraq. No doubt about that, as after the U.S. operation chaos reigns in this Arab country. A religious civil war has begun. The danger of Iraq’s falling apart is getting ever-clearer outlines, and it is now Al Qaeda’s main stronghold.

The collapse of the U.S. policies pursued in Iraq delivered a fatal blow on the American doctrine of unilateralism. This was also indicated by the results of the latest Congress elections, when the Republicans lost their majority in its both houses.
But the mortal blow does not signify the end of this doctrine, all the more so regarding an all-out campaign to prolong its existence. The much-touted “new U.S. strategy” in Iraq is another evidence of that. In essence, it boils down to the decision made by President Bush in disregard of the will of the Congress and the predominant public opinion, to route an additional contingent of 22,000 U.S. troops to Iraq. A decision of mediocrity devoid of any prospects, which is allegedly expected to facilitate the U.S. withdrawal from the Iraqi deadlock, as if just increasing the number of U.S. troops in that country by one-sixth it could all be so easily done. The decision was cynically ignoring the fact that more U.S. troops were killed in Iraq than there were New Yorkers murdered in the September 11, 2001 terrorist attack, to say nothing of the Iraqi death toll of dozens and dozens of thousands.

It is a fact that more and more people in the United States begin to see the wrong done by unilateral decisions of the use of force. But this does not yet signify the preparedness of the U.S. administration to take universal multilateral action against new threats to the world’s security and stability. It is characteristic that the stake is made on NATO’s enlargement rather than on the consolidation and modernisation of the United Nations as the universally recognised international mechanism.

Set up in the years of the Cold War as a regional organisation NATO is nowadays spreading its military influence over different regions. This organisation has enacted its military force in Afghanistan, and nobody knows what is in store. A plan of the military intervention in Iran and Syria if not by the United States then by NATO, currently discussed in the media, cannot fail to cause concern. Naturally, it is a long way from the discussion of an idea to its implementation, and many NATO members would hardly be willing to get over it. But is the fact that the new NATO entrants and the countries that are dying to join the bloc are ready to pay exorbitant prices to earn American benevolence, not alerting?

Having captured more and more countries the North Atlantic Treaty Organisation has approached our borders, and this cannot fail to make us uneasy. All the more so that NATO extension is accompanied by the anti-Russian rhetoric, as well as the aggressive policies pursued by the U.S. in the former Soviet republics. Moscow cannot fail to regard all this as activities bred by the displeasure of certain circles in the West by the fact that restoring its enormous prospective potential, Russia is regaining its status of a superpower.

I would say that under the circumstances this country is pursuing the optimal foreign policies. With a need to strengthen its strategic and tactical military potential Russia uses every opportunity to demonstrate its desire to become one of the principal forces, capable of stabilising the international situation. The year that passed confirmed successes of Russia’s foreign policies, including establishment of close and - at times - strategic relations with many Asian countries, especially China and India, its ever-strong striving to have close ties with European countries and mutually beneficial partner relations with the United States. The main thing is President Putin’s taking up the course that combines firm advocacy of Russia’s national interests and the desire to avoid confrontation with other countries.

As I imagine, western politicians should re-consider Russia’s role and place in the present-day world, those of the real Russia, whose domestic situation they allegedly view as a threat to its neighbours, not the fictitious Russia that allegedly pursues imperialistic policies, using the flows of energy resources to other countries, but the real Russia that is not going to move in the freeway of somebody else’s policies, but Russia that makes efforts to fight international terrorism and the creeping of weapons of mass destruction, Russia that does not accept the division of the world based on the civilisation-related and religious principles, but strives to rely on its unique potential to put an end to the most dangerous conflict in the Middle East. Russia that pursues its policies, cooling hotheads who fail to learn their lessons in Iraq but are all but ready to repeat pernicious combat techniques against unwanted regimes.

The conclusion that can be drawn is that on the whole 2006 was a successful year for Russia. Positive processes in the economy and policies were predominant, but the unsolved problems and certain disproportions obtained sharper outlines. They should be directly in the focus of attention in 2007, especially in view of the aggravating pre-election situation.