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Analysis: To Spend Or Not To Spend

One of the big decisions facing the Russian government this year is what, if anything, to do with the money that has accumulated in the so-called stabilization fund. The creation of the fund, which is now worth more than 500 billion rubles ($16.7 billion) because of unprecedented global oil prices, was widely hailed domestically and abroad as one of the government's signal economic achievements of 2004.

Recognizing Russia's overwhelming economic dependence on the export of raw materials -- especially energy -- the government created the fund at the beginning of 2004 to accumulate proceeds from high oil prices in a special account that could then be used to ameliorate the economic effects of significant downturns in energy prices in the future. When oil prices are above $25 per barrel, as they were throughout 2004, up to 90 percent of the excess proceeds on oil exports are automatically diverted to the fund. Already by the end of March, Deputy Prime Minister Aleksandr Zhukov was boasting that the fund contained nearly $5 billion.

Despite the windfall from high oil prices, the Russian economy still faces numerous problems that make it increasingly difficult for politicians simply to allow the vast resources of the stabilization fund to sit idle, waiting for a rainy day. As might be expected, left-leaning politicians led the call for using the stabilization fund to resolve social problems. Communist Party leader Gennadii Zyuganov, during this summer's debate over the monetization of most in-kind social benefits, cited the fund in his rebuttal to government claims that social benefits had to be restructured for economic reasons. "The country's huge hard-currency reserves and the stabilization fund deprive the government of the right to speak about an inability to afford benefits," Zyuganov wrote in an open letter to Putin in June. "Rather, it is a case of the government's clear lack of desire to fulfill the norms of the Russian Constitution." Although the government has not made any announcements regarding the use of the stabilization fund for the monetization of benefits, periodic media reports indicate that some regions expect just such a policy. On 29 December, for instance, Regnum quoted Federation Council member Yevgenii Bushmin, who represents the administration of Nizhnii Novgorod Oblast, as saying that his region expects to receive 100 million rubles from the fund for benefits payments this year.

Of course, opposition arguments like Zyuganov's carry little weight in Russia these days, but other voices within the government and the pro-Kremlin Unified Russia party have also been floating ideas for spending the stabilization fund. Prime Minister Mikhail Fradkov told a cabinet session in August that in 2005 the fund "will cease to be a cumulative institution and will become an instrument of active budget policy."

In the wake of a wave of horrific terrorist attacks in August and September that culminated with the Beslan school hostage taking, the government proposed sharp increases in defense and antiterrorism spending, increases which many argued should be covered with financing from the stabilization fund. Finance Minister Aleksei Kudrin -- who has been one of the staunchest figures opposed to spending the stabilization fund, except for the non-inflationary purpose of paying down the country's foreign debt -- conceded in an October interview with "Itogi" magazine that the fund could be used to pay for such things as the creation of an Interior Ministry fingerprint database and other projects that are "an important part of the fight against terrorism."
One minister has proposed several possible uses for the fund, including a federal program for the development of civil aviation and a guarantee fund to attract investment.

Union of Russian Entrepreneurs and Industrialists (RSPP) President Arkadii Volskii, one of the Kremlin's most loyal supporters in the business community, told Ekho Moskvy on 29 December that the government's policy of accumulating hard-currency reserves and building up the stabilization fund is inhibiting economic development. He accused government economic managers like Finance Minister Kudrin and Economic Development and Trade Minister German Gref of adhering to a stubborn belief -- "some kind of blockheadedness" -- that "it's good when money just sits there." Volskii said some of the funds should be distributed to business in the form of development loans "so the money works for the country rather than for foreign banks."

Moscow Mayor Yurii Luzhkov, writing in "Trud" on 3 December, made similar arguments, accusing the government of a policy of "accumulation for its own sake." He criticized the government's policy of investing the fund in foreign securities, saying that doing so was tantamount to "supporting the foreign producer, not the domestic producer."

More nefariously, perhaps, political scientist Sergei Markov told on 30 December, that one potential use of the stabilization fund could be to "purchase assets" in Ukraine as a way of increasing Russia's influence there in the wake of the 26 December victory of opposition presidential candidate Viktor Yushchenko.

In October, Industry and Energy Minister Viktor Khristenko proposed several possible uses for the stabilization fund, including a federal program for the development of civil aviation and a guarantee fund to attract investment to the housing and municipal-services sectors, reported.

Perhaps in response to opposition from Kudrin and Gref, Khristenko has changed his tactics a bit. On 2 January, he told RosBalt that "indubitably we cannot touch the funds that go into the stabilization fund." He added, however, that the government in 2005 could create "in addition to the stabilization fund" a sort of "development fund, the resources of which could be used to fund strategically important projects that are capable of exercising systematic influence on the development of our economy." Although, Khristenko did not say where the money for this development fund would come from, Kudrin told ITAR-TASS on 1 November that he will propose reducing the amount currently set aside for the stabilization fund by raising the threshold beyond which profits are diverted into the fund from $20 per barrel to $21.50 per barrel.

Such concessions notwithstanding, Kudrin, Gref, and presidential economics adviser Andrei Illarionov have so far presented a united front advocating spending the stabilization fund only on reducing Russia's foreign debt. Any domestic use of the fund, Illarionov has stated, threatens to spawn inflation and endanger the government's macroeconomic program.

In the wake of the vocal opposition of these liberals to the government's actions regarding Yukos over the past 15 months, the battle over the stabilization fund could be the issue that ultimately pushes them out of the government. As economist Vladimir Mau told "Vedomosti" on 30 December: "A sharp political battle has already evolved around the 'cheap money' in the stabilization fund. Pressure to use the fund's money given high oil prices will only grow and will only become more difficult to resist."