Thursday, August 26, 2004
Russia can't decide whether to save or spend petro dollars
REUTERS
MOSCOW: Russia, like many oil exporters enjoying the fruits of record crude prices, is piling up cash at dizzying speed, prompting calls to spend the money rather than save it for a rainy day.
Finance minister Alexei Kudrin, architect of a windfall fund set to top 570bn roubles ($19.5bn) by ’05, says he will only use surplus money to pay off debt or plug gaps in pension funding.
But with dollars flooding the world’s number two oil exporter, analysts are wondering how much longer Mr Kudrin can ignore pleas from big-spending ministries such as defence and agriculture for more cash.
The debate about what to do with the oil bonanza goes to the heart of the dilemma facing Russian policy makers.
With the economy heavily dependent on oil exports, Russia is vulnerable to an oil price slump, which would derail ambitious government plans to double the size of the economy in 10 years.
So, is building a financial cushion to help Russia weather a drop in oil prices the best option, or would the money be better spent laying the foundations of a more diversified economy?
Although next year’s draft budget, to be submitted to parliament on Thursday, promises another year in the black, some think Russia should continue to squirrel away oil revenues.
“The IMF (International Monetary Fund) has argued that as long as oil prices remain this high, Russia should continue to save windfall revenues until a rainy day when oil prices may be lower,” said CSFB economist Peter Worthington.
Norway, for example, sits on a fund worth more than $130bn. And spending heavily is seen as inadvisable in an economy where inflation is likely to top 10% this year and may come down only slowly going forward.
“There is a risk to stimulating the economy through fresh fiscal spending when it is already operating at full throttle due to very high oil prices and the liquidity effect associated with that,” said Mr Worthington.
“We’re worried about the inflationary risks under that scenario.” However, Alfa Bank economist Natalia Orlova said the fund’s anti-inflationary role in soaking up cash had decreased after a banking crisis this summer and the Russian economy now needed more liquidity.
There is also concern money spent might be money wasted. “The big problem is introducing an effective bureaucracy that can spend the money effectively. We’re still waiting for that,” said Paul Forrest, an economist at Moscow Narodny Bank.
Mr Kudrin has said he is wary of spending fund money other than on debt payments. Nevertheless covering a pension fund deficit, caused by a 10% cut in payroll taxes next year, was a priority, he said.
Yevgeny Yasin, an economics minister from 1994-97, criticised using the fund to plug a pensions deficit which need not have opened up in the first place. He called for more spending on research, education and developing small business.
“It’s a stupid idea to pile up money without having any idea of how to spend it,” said Mr Yasin, now head of the Institute for Higher Economics. “Human capital, not oil or gas, is Russia’s main resource. It is the future of the country and you can’t save money on it.”
Economic indicators were already encouraging, Mr Forrest said, meaning the market now wanted to see “real policy objectives and not just political rhetoric” in other areas. Ministerial complaints about fiscal stinginess have so far fallen on deaf ears, but there may be pressure from parliament to raid the stabilisation fund.
“The deputies may prove to be more generous than Mr Kudrin,” commented Alexei Zabotkin of United Financial Group.
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