Cure for Russia’s Slump Could Be Worse Than Disease

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
Read More.
a | A

Russia’s long stretch of oil-fueled economic growth could be coming to an end. The greater danger, though, might be President Vladimir Putin’s plans to get it going again.

Economists polled by Bloomberg estimate that the Russian economy grew at an annualized rate of only 2 percent in the first quarter of this year, less than half the pace of the same period in 2012. Russia’s biggest industry, hydrocarbon extraction, contracted 0.8 percent in January and 2.2 percent in February. Growth in retail sales has slowed considerably compared with last year, and food retail has practically stopped expanding. Last week, Deputy Economics Minister Andrei Klepach said he expected growth of only 3 percent for the whole of 2013, down from a previous ministry estimate of 3.6 percent.

The slowdown is troubling for Putin, whose popularity depends heavily on the prosperity Russia has experienced during his time in power. In his annual message to parliament last year, Putin said that “interests of national development required” economic expansion of at least 5 percent to 6 percent annually. In the same speech, he suggested a way to help reach that goal: Invest some money from the government’s reserve funds -- accumulated specifically to cushion the budget in times of low oil prices -- in infrastructure projects.

Russia’s reserve funds, which held $172.3 billion as of March 1, have long been the object of bureaucrats’ covetous designs. Unlocking the money for government projects could mean an enormous transfer of wealth to corrupt officials. In one World Bank poll, about one in four companies that had bid for government contracts in 2011 admitted to paying a bribe.

Russia has plenty of economists willing to offer an intellectual justification for raiding the rainy-day fund. The Russian Academy of Sciences is full of academics who earned their doctorates in the era of central planning, and who have been saying all along that fiscal prudence and tight money were a Western poison concocted to bury Russia. Among the most influential is Sergei Glazyev, whom Putin appointed as his economic advisor in July.

Glazyev, a leftist economist who was foreign trade minister in the 1990s but fell out with the liberal team that had President Boris Yeltsin’s ear, has long suggested that Russia renounce monetary restraint. In January, he authored a report saying the central bank should sharply lower rates and start refinancing banks that issue loans to industry and to government “development institutions.” To Glazyev, the benefits of such investment in “reindustrialization” far outweigh the costs of inflation and other repercussions. He argues that, by stockpiling cash, the Russian government is merely bailing out the West, which prints dollars and euros irresponsibly to stave off its imminent collapse. On Putin’s orders, he is working on more specific proposals for speeding growth.

Last week, two Soviet-era academics -- Ruslan Grinberg, 67, who heads the Academy of Sciences’ Institute of Economics, and Viktor Ivanter, 77, of the Institute of Economic Forecasting -- made public their own proposals for unleashing the power of Russia’s financial reserves. Grinberg argued that “over-accumulation of reserves is even more dangerous than a lack of them,” maintaining that Russia had enough money now to combat three or four crises on a 2008-2009 scale, according to the RBC Daily newspaper. Grinberg estimated that $112 billion would be enough of a cushion. The rest could be spent by the government on rebuilding Russian industry. Grinberg suggested civil aviation, while Ivanter preferred road and housing construction and river transport.

In a sign that at least the monetary easing might become reality, Putin nominated Elvira Nabiullina, former head of the pro-stimulus economics ministry, to become Russia’s next central-bank chief.

So far, the finance ministry is holding out, noting that Russia already has a budget deficit despite the high energy prices. The state-owned investment bank VTB Capital estimates that the budget deficit will amount to 0.5 percent of gross domestic product in 2013, according to the RBC news service. At a conference held by the daily newspaper Vedomosti, Deputy Finance Minister Alexei Moiseyev attacked the appetites of “development” champions, saying that state-owned companies commonly submit proposals for projects costing more than $30 billion.

“Government investment in this country necessarily means big corruption costs and inefficiencies in assessing investment projects,” said Valery Mironov, head of the Development Center think tank, in an article on the Free Press website. “When money is parked in U.S. bonds, it loses its value much more slowly than when it falls directly into our bureaucrats’ hands.”

Economists such as Mironov are battling a rising tide. Putin, who has always protected Russia’s reserves, seems to be more willing to listen to the advocates of higher spending. In his third term in power, the president is increasingly turning back to a Soviet approach, bringing back the Hero of Labor award and stepping up anti-Western rhetoric. Acting on the advice of Soviet-era economists would fit the mood.

(Leonid Bershidsky, an editor and novelist, is Moscow correspondent for World View. Opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author of this story:
Leonid Bershidsky at

To contact the editor responsible for this story:
Mark Whitehouse at