The 2005 Federal Budget has been crafted to suit the interests of the influential cliques in the government, not to meet the strategic priorities set by the president

Maxim Rubchenko and Yekaterina Shokhina

On August 23, the cabinet approved a draft of the federal budget for 2005. Opening the meeting, Mikhail Fradkov stated that “the 2005 budget should focus on making the tasks set by the president a reality, such as doubling the GDP, increasing economic growth, and combating poverty.” However, it seems that the prime minister’s words were a mere token of good will.
Income and spending continue to drift steadily downwards in relation to the GDP after their peak in 2002. This year, the planned budget surplus will increase noticeably to 1.5% of the GDP, as opposed to last year’s 0.5%.
According to the tradition establish under Boris Yeltsin, the largest increase in funding from the federal budget (40%) will go to what is referred to as “general issues of the state,” or in other words feeding the army of Russian bureaucrats. Among the various types of officials, law enforcement and the military are in the lead for the fourth year in a row. A significant portion of the defense budget will go toward developing contract military service, modernizing the armed forces, establishing naval bases on Russian territory for the Black Sea fleet, and special programs to improve border patrols and prevent terrorism.
Taxes will continue to fall, and the nominal base rate for the Single Social Tax will sink from 35% to 26%. This tax cut will supposedly lead to an additional increase of 0.4-0.6% in the GDP and a 1.3-1.5% increase in investments compared to 2004, or at least this is what the Ministry of Finance is promising.
Economic analysts, on the other hand, are less optimistic. “Of course, if they cut the SST it will noticeably increase companies’ financial resources, even though the actual rate is falling to a much lesser extent,” explains Dmitri Belousov, an expert at the Center for Macroeconomic Forecasting and Short-Term Analysis. “However, this is not enough to bring about high growth rates. Russia absolutely needs government programs to widen the bottlenecks preventing economic growth by creating transportation infrastructure, developing new technologies, and increasing energy efficiency. The necessary funding for these programs could be achieved by moving to a zero-budget-surplus policy.” However, the government can’t seem to say no to the budget surplus, even though Alexander Zhukov made just such a proposal immediately after being appointed deputy prime minister. Experts are making even sadder predictions regarding increased investments. “Many experts do not see the 2005 Budget as a budget for growth and are unhappy that spending is going to law enforcement and the military to the detriment of education and medicine,” says Sergei Suverov, Director of the Analysis Department at Zenit Bank.

Unshakable principles
The main new feature of the 2005 Budget according to Fradkov is the new approach to spending the Stabilization Fund, “which must turn from an exclusively savings-oriented instrument into a tool for budgetary and economic policy.” However, things are not so unambiguous. According to government projections, the Stabilization Fund will total 574.4 billion rubles on January 1, 2005, approaching one trillion rubles by January 2006. The Ministry of Finance plans to use 92.2 billion from the fund to pay off foreign debt and another 74.6 billion to help the Pension Fund if it experiences a deficit after the SST is cut. However, the fund will still contain almost 300 billion more than the minimum amount required by law. Alexei Kudrin believes that this money should only be used to pay off foreign debt as “if we spend the money domestically, it could lead to higher inflation, while paying off debt does not threaten to have such consequences.” This has long been the position of the Finance Ministry. There is nothing new here at all.
The most important aspect that remains a mystery after reading the draft budget for 2005 is how the budget reflects the “focus on addressing the tasks set by the president” Fradkov referred to. Or perhaps it is more important to ask why the president’s priorities are not reflected at all in the country’s main financial document.

Division of power
The answer is obvious: because government spending is not being guided by the country’s development priorities, but rather by the extent of influence of various gangs of bureaucrats. You can judge for yourself: a third of the budget will go to the law enforcement-military group, whose influence in today’s Russia is beyond a doubt. The second most influential clique in the government is the financial and economic group, the Ministry of Finance and the Ministry of Economic Development and Trade, led by Alexei Kudrin thanks to his power to hand out the money. The Finance Ministry’s main goal is to pump resources into the budget and prevent a deficit that will keep the ministry from fulfilling its obligations to service state debt. The solutions the ministry offers are budget surpluses and the Stabilization Fund. The second main goal of the Finance Ministry is keep inflation low, hence the strong opposition to non-interest spending.
German Gref is in a more complicated situation. On one hand, the MEDT is also responsible for inflation, and here Gref and Kudrin are of the same mind. Yet Gref is also responsible for the economic growth rates that will double the GDP in ten years, and here his interests are objectively opposed to Kudrin’s, because rapid economic growth requires lower taxes and more government investment.
However, first of all, increasing state spending is indeed doomed to spark rising inflation, which Gref does not want in the least. Secondly, the finance minister obviously carries more clout. Thirdly, it seems that Putin is willing to let the MEDT off the hook regarding growth rates. In any case, he invited Kudrin and Gref to Sochi to report on the 2005 draft budget, both of whom have stated that there is absolutely no way to double the GDP in ten years. Putin did not invite Fradkov, who keeps demanding higher growth rates from the ministers.

Reform without growth
To all appearances, the ministers were able to convince Putin that it will be impossible to increase the GDP and conduct structural reforms at the same time. Three years ago, while working on plans to develop the economy to 2008, German Gref stated that until 2007, during the period of structural reforms, the economy would not grow very quickly. Only after reforms would rates increase dramatically. Kudrin expressed a similar opinion at the August 19th cabinet meeting, stating that the GDP could not grow quickly as “the government has flunked the reforms.”
Obviously, as the goals shifted, the prime minister and his deputy were left looking like idiots. Both had made clear demands on the cabinet ministers to increase GDP growth, just as the president ordered. On the other hand, Gref and Kudrin substantially strengthened their position in the cabinet. This would not be a problem if the MEDT and the Finance Ministry were not objectively interested in a single aim, that of increasing income from raw commodities exports. They can thus meet their goals automatically without having to get their officials to do anything at all.
The main problem, however, is that with this division of interests, the issue of efficient use of the money taken from the economy become moot. For this reason, “extra” money is being stupidly invested in US Treasuries. Officials’ constant instance that business share more with the rest of society, a new tradition over the last few months, reeks of calculated betrayal in this light. The resources taken from Russian enterprises in the form of taxes are in fact being used to strengthen the American economy.
The third most influential group in the budget process is the social services sector, represented in the current cabinet by Mikhail Zurabov. His high-priority position seems necessary, as Zurabov has been charged with turning state benefits into cash payments. To make this happen, he has been given extensive powers. Nonetheless, one can’t help but feel sorry for the Minister of Health and Social Development. He is clearly being set up as the fall guy, should the benefits monetarization program fail miserably.

Gordeev’s revolt
The rest of the ministries and agencies not among the priorities are either being given the leftovers (for example, spending on environmental protection will decrease by 8%) or are being left to the vagaries of the market, such as the budget for housing and public utilities, which will decrease by 58% (!).
However, this division of power is making other “non-priority” ministries increasingly upset. On August 23, Minister of Agriculture Alexei Gordeev revolted, angry that federal spending on agriculture and fisheries in 2005 had been cut by 10%. “I cannot support this draft budget as a whole or in its details. I disagree with it ideologically,” Gordeev stated. Gordeev’s ministry has developed a strategy to expand Russian agriculture, in part with the goal of increasing agricultural exports, in particular grain. The 2005 Budget will put an end to these plans.
“What is now being planned has no precedents anywhere in the world!” says Evgenia Serova, President of the Agro-Food Economy Analytic Center. “Direct subsidy at the regional level is prohibited worldwide. This is the road to market ruin. Agriculture will develop exclusively in poor regions receiving federal subsidies, where agriculture will be subsidized. But where there are subsidies, there is also protection of local producers from competitors from other regions. As a result, the single agricultural market will be destroyed in Russia, right when it was beginning to form. We are not opposed to reducing federal subsidies, but they should not be handed over to regional authorities.”
With this understanding in mind, Gordeev practically demanded that the budget priorities be changed and in part that the state stop pumping money into the Stabilization Fund, which is now equal to twelve years’ worth of state support for agriculture. “I don’t see any resources in the regions that could take on the burden of supporting agriculture,” Gordeev stated. “The issue of how to create competitive agriculture in Russia must be tied to the federal center, just like the application of social policy in rural communities. None of these goals will be met in 2005.”
Gordeev’s stand promises to stir up scandal. He requested Fradkov’s permission to “inform the main political party that their campaign promises will be broken.”

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