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The Kremlin Tries Keynes: Putin’s New Cabinet Looks To Spur Economy With (Big) Spending


The Kremlin is turning to an age-old prescription to turn the economy around: Spend more. 

Moscow’s stock markets hit new highs in the first half of January, drawing plaudits from investment managers around the world. Russia’s budget is the envy of many Western countries, with a surplus equal to 1.8 percent of the economy. Foreign currency reserves are among the largest in the world.

Yet, the economy is still limping along, by some estimates on the verge of stagnation. New figures released on February 3 show gross domestic product growth slowed to 1.3 percent last year, down substantially from 2018.

Many Russians are impatient with stagnating wages, scaled-back pensions, higher taxes, and still-high loan rates.

The prescription, in the Kremlin’s eyes, is a page out of John Maynard Keynes’ writings 90 years ago, for any economy facing recession, or even stagnation: Spend more.

Most economists predict an uptick in growth. But how big of a boost, and whether it will be enough to kick the economy into a higher gear, is far from clear.

“The question is…how much the growth will be, whether it will be a substantial increase in the growth dynamic or just a moderate one,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said.

“I don’t expect a strong, major impact from government spending on the economy," he added.

President Vladimir Putin shook up the government in January, by pushing out his long-serving prime minister, Dmitry Medvedev, and pulling in the head of the State Tax Service, Mikhail Mishustin.

In his state-of-the-nation speech, Putin specifically called for spending more on social welfare initiatives: $65 billion through 2024 for things like free hot lunches for schoolchildren and subsidies aimed at encouraging families to have more children.

Praised for modernizing Russia’s tax collection system, Mishustin’s ascendance to the premiership is widely seen as a sign that the Kremlin wants to not only spend more money, but to do it smartly.

Putin “wants to make sure the money is put to use effectively, efficiently, that it doesn’t just end up making more billionaires,” Tikhomirov told RFE/RL.

Looser purse strings is a shift in thinking for fiscal planners and central bankers in Moscow from recent years.

Putin wants to make sure the money is put to use effectively, efficiently, that it doesn’t just end up making more billionaires.”
-- Vladimir Tikhomirov, BCS Financial Group


Russia’s current fiscal strength is largely the result of conservative policies, which pegged the budget to a relatively low world price -- $42 a barrel -- for oil and gas, major sources of revenue for the state. When oil prices exceed a certain level, excess revenues have been funneled to a rainy-day fund. That fund now totals just under 8 trillion rubles (about $125 billion).

The tighter-fisted policies have helped Russia weather the sanctions imposed on it by many Western countries following Moscow’s annexation of Ukraine’s Crimean Peninsula in 2014. It’s also helped push down long-term interest rates, though only slowly.

They’ve been championed by officials like Aleksei Kudrin, a former finance minister who now heads the Audit Chamber, a financial oversight body; Central Bank chief Elvira Nabiullina; Finance Minister Anton Siluanov; and Maksim Oreshkin, the now ex-economic development minister.

Oreshkin lost his job in the shake-up, which many observers viewed as a sign that the Kremlin was looking to open the spending tap further – though he is now a Putin aide.

Moreover, the man he replaces at the Kremlin is Andrei Belousov, who in turn replaced Siluanov as Mishustin’s first deputy prime minister. Belousov himself is known as a supporter of increased state spending.

"An unprecedented volume of funds will be allocated to the implementation of the pledge to provide citizens with social support," Siluanov said on January 29. "These decisions will not affect budget and macroeconomic stability."

Mikhail Mishustin’s ascendance to the premiership is widely seen as a sign that the Kremlin wants to not only spend more money, but to do it smartly.
Mikhail Mishustin’s ascendance to the premiership is widely seen as a sign that the Kremlin wants to not only spend more money, but to do it smartly.

Putin also ordered officials to step up funding of the National Projects, a six-year, $400 billion initiative launched in 2019 and designed to modernize the economy. The projects have gotten off to a slow start, with funds going unspent. Some economists warn they could turn into a drag on the economy.

Mishustin is expected to figure out how to better spend the money. That, plus the overall additional expected spending, has prompted some economists to brighten their forecasts for 2020 and 2021.

“The increase in spending should cause faster growth in consumption at least,” Natalya Orlova, chief economist at Alfa Bank, told RFE/RL.

“I think in 2020 the cabinet will not ease budget policy dramatically, but in 2021 there will be pressure on the Finance Ministry” to spend more, she said.

Foreign investment will continue to decline due to the persecution of entrepreneurs and explicit attempts by officials to engage in insider trading.”
-- Vladislav Inozemtsev, Center for Research On Post-Industrial Societies


Russian and foreign experts have warned for years that the Russian economy is hobbled by more systemic problems: corruption, bureaucracy, and lack of judicial independence and rule of law.

Policy makers also face doubts about official statistics, said Vladislav Inozemtsev, an economist and director of the Center for Research On Post-Industrial Societies, a Moscow think tank. The State Statistics Service changed its methodology last year, prompting questions about the reliability of official data.

“Foreign investment will continue to decline due to the persecution of entrepreneurs and explicit attempts by officials to engage in insider trading,” Inozemtsev wrote for the online newspaper Delovoi Petersburg.

“Domestic businessmen will take a wait-and-see attitude. In such situations, the effectiveness of government investments (including the National Projects) and the question of whether the pension reforms will have a significant effect will become critically important,” he said.

Among the factors hobbling the National Projects so far is the reluctance of private sector investment, Tikhomirov said. Businesses and entrepreneurs partnering with state agencies have been slow to commit resources to join the effort. There’s no indication right now that will change.

Also, he said, in poorer regions outside of big urban centers like Moscow and St. Petersburg, the public sector is the biggest source of jobs. Reforming that trend would require laying off aging public-sector workers and paying bigger salaries to attract younger people instead of what he called “babushkas” -- literally, grandmothers.

“The government realizes that if you have lay off the babushkas, you’ll have to increase social spending in the region, and that’s expensive,” he said.

Ruben Yenikolopov, a rector at the Russian Economic School, called the government changes “cosmetic.”

“They will not lead the country out of a state of stagnation in which economic growth rates still lag behind the world average, nor can they accelerate it to 2 to 2.5 percent per year,” he wrote in a commentary for the newspaper Vedomosti. “That is, the swamp remains in place, but now the economy may begin to jump over the bumps a little more actively.”

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