Andrey Kobyakov


Andrey Kobyakov’s speech at the XI Universal Russian National Sobor (Assembly), held in Moscow on March 5-7, 2007

Your High Eminence!

Esteemed colleagues!

Ladies and gentlemen!

Please allow me to divert from the original plan of my report. The fact is that at the beginning of today's session, Metropolitan Kirill asked the participants to focus on a number of important issues. Unfortunately, many of them were not discussed – probably, because some of them require detailed economic knowledge. Therefore, as a professional economist, I am just obliged to express my view on the questions which are still unanswered.

One of those questions is about the Government's Stabilization Fund. Why is it kept in foreign securities? Is that correct? Should we spend these reserves? If we should, which methods and which purposes are to be preferred?

His Eminence pointed out one more paradox. Why is the Government's economic team so obsessed with attraction of foreign investments, simultaneously "sterilizing excessive liquidity" in the Stabilization Fund, substantiating this with the argument that in case we start spending our incomes from export of mineral resources, this would result in inflation? Does that mean that state expenses, including those allocated for investments, imply a menace of inflation, while foreign investments do not?

By the way, the described contradiction is not the only paradox of the Government's policy.

Generally, the Government's practice is sometimes strikingly incoherent. The Government realizes and acknowledges a monstrous inequality of incomes in the population. Still, it refuses to abolish the flat tax system with obstinacy, worthy of a better cause.

Take another example: the Government – namely, its economic team and especially the Ministry of Finance Ц declares that one of its priorities is to curb inflation. Generally, "inflation-curbing" has become a kind of fetish in our country, while other subjects, like economic growth, industrial modernization, overcoming poverty, appear to be regarded as subordinated, and less significant.

One explanation is that our financial officials have studied only the handbooks of the monetarist school, today dominating in American economic science. Could they be unaware of any other schools of economics? Or, possibly, they are just doing their best to implement foreign recipe and advice?

It is noteworthy that the United States, in its domestic policy, does not always follow the advice it disseminates globally. For instance, in 2001, at the onset of the economic recession, Washington's financial authorities literally stuffed the US economy with money. Using the tragic events of September 11 as a convenient pretext – as the slowdown actually started half a year before Ц both the President and the Congress of the United States authorized a massive credit and monetary saturation of the economy. At first, this was explained with the necessity to support the financially undermined air carriers, later the insurance business, and eventually, the whole economy, including the consumer sector, even without any effort of face-saving. Thus, the imperative of inflation-curbing is a commodity for export and not for domestic use. In their economic policy, the Americans are quite pragmatic, and never absolutize monetarist dogmas.

The fact that the Russian Government declares "inflation-curbing" its greatest priority is not the whole problem. For some reason, our ministers apprehend the nature of inflation in an oddly abridged version, using an oddly reduced array of instruments. The Government is focused only on the monetary factors of inflation, ignoring the rest of them.

Today, one of the major sources of inflation is the inadequate practice of price-setting in natural monopolies, primarily in the sphere of gas and electric energy. Do you remember what Yevgeny Primakov's government was doing when it had to deal with the financial crisis of 1998? First of all, they froze the prices and tariffs for production and services of natural monopolies. In this way, it became possible not only to suppress the impulsions of inflation but also to stimulate growth of national industrial production, the growth reaching 17.5% in manufacturing industry months after the crisis! Certainly, the manufacturing industry acquired a powerful initial impetus from devaluation of the ruble which made its production competitive at the domestic market. Still, without the measures for freezing natural monopolies’ tariffs, it would be impossible to make use of this unexpected advantage – as the whole economy would be hurled into inflation, from which we could be suffering even today.

Now, look what the incumbent government is doing. This government authorizes a hike of tariffs for gas and electric energy with a speed outranging the rate of inflation. Prices in these spheres have been lately growing, and are supposed to grow in the nearest years, surpassing the inflation rate in several times. That is the real generator of massive inflation.

The tariffs for gas and electric energy determines price-setting in all the production chains of all the other spheres of industry. While the Government satisfies the appetites of producers of gas and electricity, the spiral of inflation is spinning up. At the same time, industrial growth beyond these sectors is being suppressed.

Unfortunately, Mr. Primakov has already left the conference hall. He would not just confirm my arguments but add much more.

Now, the Government is initiating tax amnesty. In itself, this measure is ostensibly useful, though the methods of its implementation are arguable. In case tax amnesty is implemented correctly, the state budget may really receive a large amount of money. But that is not the point. The point is how this money inflow is going to be used. And that is unclear. This is the very government which is telling us that we have got a budget surplus, and practicing sterilization of monetary mass. In case the Government was going to implement a large-scale investment program, these additional reserves would be precious. But such a program, as far as I know, does not exist by today.

This is only a few paradoxes of the Government's policy. Do you see any logic in the contradictions I just described? There is no logic – as there is no evidence of any defined strategy; the evidence is not there, as the strategy is not there. I'll return to this point a few minutes later. Now, I have to say a few words about the Stabilization Fund.

First of all, on behalf of the Government's officials, I'll try to explain why the stabilization money is kept in foreign securities.

The very idea of the Stabilization Fund is based on the intention to hoard a part of the incomes, achieved from export of energy resources in the conditions of high fuel prices, in order to use it as a shock damper in the event of a rapid decline of those prices and therefore the export incomes.

By definition, state finances have got a special status – which suggests special caution, special mechanisms and guarantees of reliability in use of this money, including its hoarding. This means that low-reliable or high-risk instruments Ц which are the same Ц are inappropriate for hoarding state finances.

In global practice, reliability of securities is estimated by so-called rating agencies, among which Standard&Poor's and Moody's Investors Service are the most respected. According to their expertise, our country's grade of reliability is too low. Meanwhile, ratings of securities-issuing companies cannot exceed the so-called sovereign rating, the rating of the country. Therefore, they say, neither Russia's state bonds nor securities of Russian corporations can be regarded as reliable instruments for conservative, low-risk financial investments. In other words, in accordance with those formal criteria, the finances of the Stabilization Fund can't be reliably placed in our country or in any ruble-nominated financial instruments.

Therefore, it is admitted that the Stabilization Fund should be hoarded in foreign currency, or rather in foreign securities (bonds) which have deserved the highest grades – as securities, unlike cash, also bring income. This income is not large, not exceeding 4-5%, as the more reliable some particular securities are considered, the higher is the demand for those securities, and therefore, the lower is their return.

Doing in this way, the Government reports to the President and to the population that the state finances are placed with maximum reliability (i.e. in the safest way), and also bring income. Ostensibly, there is no evil design, and claims that the Government thus subsidies other national economies, are groundless. We just have got no other option, they say.

In addition, acting in this way, the Government sterilizes "excessive" money, keeping them outside the turnover and thus performing another benefaction – saving the country from inflation.

In this way, I tried to reproduce the logic of the government. And now I'll demonstrate – on behalf of my own Ц that this government is dodging. The whole of this formal logic is untenable. Moreover, schemes based on this logic are faulty.

First of all, our country has got only one official currency, the ruble. This axiom is expressed in relevant legislation and governmental resolutions. Therefore, state finances, including the Stabilization Fund, are to be calculated in rubles. Our budget is calculated in rubles, and not in US dollars or euros.

Secondly, we have just heard the official statistics of inflation from Mr. Sharonov (deputy minister of economics). According to government figures it is 9% annually. Many speakers have indicated invalidity of those figures. Possibly, our statistical bodies somehow manage to derive them for the consumer inflation. But we also have to measure inflation in the productive sector. The PPI is officially about 25%. Even the official deflator ratio, used by the Government for calculating GDP growth and better measuring the real amount of inflation, comprises from 15% to 20% during the recent years.

Thirdly, the return on US state bonds – from 4% to 5% Ц is a bit higher than the official amount of inflation in the United States (from 2% to 3%) but still much lower than the inflation we have got in Russia today.

What does that mean? That means that the Stabilization Fund's reserves are invested at the rate of return which is much smaller than domestic inflation rate. In other words, these investments in fact have negative real return. That is, they are made with a loss. And even in case the present inflation, estimated only in the consumer sector (9%) is correct, that means that the US state bonds in which our Stabilization Fund is invested, bring a 4.5% surplus, but at the same time, if calculated in rubles, these assets are devaluated with a rate of 9% a year. This means that our Stabilization Fund, invested in US state bonds, brings us annual real loss of 4.5% in real terms, or, in other words, is melting away with a speed of 4.5% annually. And if we use the aggregate deflator ratio as a more correct measure of inflation, this real loss is about 10-15% annually.

Moreover, we have to consider that in the practice of asset placement, the Government uses the services of international investment banks or other financial intermediaries which purchase various securities in accordance with a contract, signed with our Government. Therefore, the Government also spends for fees paid to those intermediaries. We'll also have to pay fees when the Government eventually decides to sell these securities in order to release these funds and convert them into cash.

Moreover, during the last years, the ruble is permanently revaluated – which is quite natural, regarding a high external surplus, the presently high oil prices, the visible economic growth and increasing attractiveness of the rapidly growing Russian stock market. Meanwhile, the finances of the Stabilization Fund are officially calculated in rubles Ц besides, a large deal of them is going to be spent also in rubles. But these reserves are kept in securities, nominated in US dollars and other foreign currencies. Therefore, under the conditions the ruble revaluation these assets are devalued with a speed the ruble revaluation Ц making several more per cent of loss yearly. The later the Stabilization Fund's finances are converted from foreign currencies back into rubles, the higher would be the losses for Russia's economy.

Still, that is not yet the whole list of disadvantages. The fact is that in financial analysis, efficiency of investments is estimated not only in the terms of actual amount of income or loss. Besides, we are to calculate also the so-called "unrealized benefits". In the discussed example, this is real benefit, or in many cases a real profit which could be achieved in case the Stabilization Fund's reserves, instead of being hoarded, were spent for creative purposes. For instance, a newly-built railroad. Or, purchase of new equipment by a (not necessarily) state-owned enterprise. In this case, those finances would have materialized in new production, in new services, which would be already generating incomes. And, most importantly – they would be really useful for economic and social development. While money is hoarded, it does not bring any profit. Moreover, it even does not provide a relatively smaller income, because Ц as I've just demonstrated Ц it actually provides losses.

Therefore, Your High Eminence, I would answer your question about the possibility of spending of the Stabilization Fund, definitely positively. To spend it is not only possible but necessary, as that is the only correct and rational way of its use.

I have to drive some objections to our Ministry of Finance which insists that the Fund should not be spent because the menace of inflation. Generally, money can be spent in many ways.

For instance, we could invest part of this money for increase of state employees, as well as pensions and stipends. They say that in this way, we would create an unendowed demand. However, firstly, this demand may be endowed by increase of imports. Secondly, according to the Keynesian learning, this demand would serve as an additional impetus for production of goods and services, as the demand is fulfilling the same function in economy as thrust in combustion. It is true that such spending would cause a certain increase of inflation – but at the same time, it is necessary for the solution of the most significant problem of social polarization.

Okay, let us admit that in this issue, the Government, sticking to the monetarist doctrine, does not want, or is unable to accept the logic of a different economic approach. But on the other hand, the same Government has approved the Priority National Projects – for which the monetarist recipe is inappropriate.

However, the Stabilization Fund's finances may be spent in alternative ways – those which consider generation of new value. Those are various productive programs. In case the finances are invested in multiplication of productive facilities, for production of good and services, for expansion of various economic ad social benefits, this spending does not suggest inflation. Supply generates its own demand, in accordance with the J.-B. Say's law. The money, spent for purchase of necessary means of production, converts into incomes of these means' owners, being then spent for purchase of goods, produced by those means. I don't believe that the officials of the Ministry of Economy and the Ministry of Finance are unaware of this law.

Moreover, such kind of spending may be even anti-inflationary. For instance, in case the state uses this money for housing construction, and thus dumps the inadequately high real estate prices. This is an elementary implication of the "law of demand and supply", familiar to schoolchildren, not speaking of educated officials.

Finally, the Stabilization Fund may be used for investment programs. To my mind, this way of spending should be considered a higher priority. Development of basic infrastructure, investments in industrial and technological parks, as well as fundamental and applied research and project engineering, determines the speed and quality of the economic development, thence, the future of ourselves and our posterity.

The only counter-argument I permanently hear – not only from irresponsible scientists and experts but also from officials of the Government's economic team Ц is that the state, allegedly, is an inefficient investor, which is unable to find correct application for spending. My reply is harsh: they are again dodging.

For instance, Mr. Anatoly Chubais, CEO of United Energy Systems Corp., recently frightened us with the prospect of deterioration of energy facilities, which would force us to detach whole cities from energy supply by 2010. I have only one question: where have you been since your appointment? Relevant calculations were available five years ago, but Mr. Chubais was busy solving different problems. Yes, it is quite true that in the process of "liberal reforms", the economic activity collapsed, the GDP reducing more than twice in mid-1990s, and therefore, the demand for electric energy also collapsed. At that time, the existing potential of power generation was even excessive. But today, when we finally elevate to the amount of GDP of 1990 – the last pre-reformist year, we find out that no new power plants have been built, and we start raising alarm Ц better late than never.

Under those conditions, should we still seek directions of state investments? Should we reiterate the same mantra of inefficiency of the state as an investor? But who, if not the state, has built all the power plans in our country? Who is doing the same in China and Brazil?

Take the same United States which is most frequently – though most selectively Ц referred to by our homegrown liberals. Take the example of F.D. Roosevelt's "New Deal" during the Great Depression. Mentioning the "New Deal", we mostly refer to the large-scale program of road infrastructure (by the way, why not to use the experience in this productive way of spending?) which generated the perfect and thick network of highways. But Roosevelt's policy included also the Tennessee Valley venture, with large-scale melioration and construction of 17 electric power stations, later replenished with nuclear plants. All this was done by the state, and until recent years, privatization of the Tennessee Valley Authority had been out of question.

Electric energy systems are the most obvious and essential field of state investments, for which the Stabilization Fund's reserves are to be spent without delay. State investments in these spheres are absolutely logical and natural. Most of the relevant research institutions and special construction organizations are still state-owned, and being engaged, for example, in construction of nuclear power plants in Iran or India – anywhere but our home. Why?

Because of "inefficiency" which is elsewhere efficient?

There are a lot of such promising fields of state investments. But I would like to remind that global experience has also proven high efficiency of non-state mechanisms of implementing state investment programs. It is possible – and actually, quite necessary Ц to build channels enabling to convey state credit, the so-called "term loans", to the private sector for supplying private investment projects. This suggests creation of an efficient and transparent system of selection, expertise, and competition among private investment projects. One more form is joint state-private investments. Economic science contains the definition of a multiplier of state investments Ц a design enabling every 1 USD of state investments to mobilize 3 USD of private investments. This design suggests that the state conducts the most unprofitable preparation work, undertaking basic capital investments, primarily in infrastructure, creates basic conditions for arrival of a private investor, saving his time and efforts for the start of the project.

During the last two years, I've repeatedly heard of private-state partnership. This term is often used by Prime Minister Mikhail Fradkov. However, I haven't heard of any efficient example of its implementation. Meanwhile, efficient forms of private-state partnership flourish in South America.

All the mentioned forms of investment management are well known. Still, these mechanisms are not implemented in Russia until today.

I would also like to discuss the presently popular concept of an "energy superpower". At a certain time, this slogan was undoubtedly useful – as it helped our country to overcome the imposed complex of inferiority. However, this concept is today used up; applied again and again, it is becoming counterproductive.

This concept has already caused a number of complications in foreign policy. It has produced a negative impact on Russia's relations with countries of near and far abroad. Today, it rather undermines the country's reputation. In domestic policy, it is absolutely counterproductive, setting false goals for economic development.

The already hyperinflated share of fuel and heating industries in national economy is still expanding. As a result, other branches of economy are qualitatively suppressed. The asymmetric fuel-based orientation of the economic system is becoming a dangerous tendency. Most dangerous is the dependence of the whole national economy from the global market conditions, with all possible negative impacts, also for economic security. This asymmetry results in scientific and technological retardation, in loss of competitiveness in present and especially in future.

Russia's economy requires diversification. This necessity was emphasized by many speakers at today's Assembly. I'd just indicate that a country covering one seventh of the Earth's land and having a population of some 150 million, is just obliged to sustain an economy with a complete circuit of reproduction, and to contend for a decent role among the world's leading economies.

Therefore, we have to shake free of the concept of the "energy superpower" as soon as possible. Otherwise, we may find ourselves in a quite unpleasant and even tragic situation, in which only one half of our aspirations is fulfilled. In case of collapse of energy prices, we may find out we'd completed something large and energetic, but not a superpower at all.

My improvised speech may appear too emotional, and some arguments not completely expounded. Still, I found it necessary to present my viewpoint of a number of urgent and really crucial issues raised during the discussion at the Assembly.

I represent a team of authors who raise such issues regularly. The Russky Predprinimatel (Russian Entrepreneur) Foundation has been publishing a magazine with the same name, presenting it for the first time in the same hall where the Assembly was opened – in the Hall of Church Assemblies of the Christ the Savior Cathedral. By that moment, the view that morality has no relation to economy had been dominating for over a decade. From the very beginning, we committed ourselves to return moral content to economic affairs, declaring that economy can be sound only if it is based on sound morality.

At that time, we looked like odd birds. Today, I am happy to see that this view is becoming more and more popular, even with a prospect of becoming a mainstream view.

During six years, we consistently maintained the view that economy is not more than an instrument; its task is to serve to the society's benefit; it is subordinate to goals of a higher order.

The model we have today is economic growth without any goal at all. This is a model with no prospect.

Absence of a clear strategy of Russia's economic development, revealing absence of articulated basic values, suggests that we are deprived of criteria of good and evil – not only in social and moral implications, but in economy itself.

Is economic growth good? Ostensibly it is. But in case it is asymmetric, in case it increases the existing imbalance in an already disproportionate fuel-based design, suppressing other economic branches, the final answer may be reverse.

Is increase of investments good? Ostensibly it is; after all, we've been waiting for it for so many years. But in case investments neglect geological exploration and protection of the environment, if they practically don't penetrate in the social sphere, we have nothing to boast with: this is a way towards degradation.

Is the increase of incomes of households good? Probably so. However, in case it encompasses only a 20% of the richest layer, while others gain nothing at all, this development will lead us to more inequality, social tensions, and hostility of Russians towards Russians. By the way, it is also unfavorable for the economy itself. It is well known that the middle class in Roosevelt's America, as well as later in European and other countries, was created artificially, brought up on intention – as only in case it exists, the economy may acquire a broad effective demand, creating an internal impetus for its self-development.

The necessity for transformation is urgent. However, transformations in economy may turn inefficient, and even counterproductive, in case they are isolated and not related to spiritual, moral, social, political, and cultural context. Russia needs not any kind of transformation. Russia needs comprehensive, systemic, inter-conditioned and interrelated transformation. We need a comprehensive strategy. An attempt of its outline was expressed in the Russian Doctrine, the effort also initiated by the Russky Predprinimatel Foundation. This work involved contribution of over seventy experts, many of them taking part in today's Assembly. This project was completed during only six months, and published in autumn 2005. In the nearest time, a new run of this book will be issued. We would greatly appreciate a possibility of public discussion of the Doctrine. Using the occasion, I ask His Eminence – as far as I know, our work has aroused his interest Ц about the possibility of discussing this document under the auspices of the Assembly.

I believe that such initiatives will become numerous – as the strategy of Russia's development is a really national, public task. Besides, the leading circles Ц as far as I am told by politicians and officials Ц experience deficiency of ideas. The purpose of the Russian Doctrine and related projects is to help the power to formulate a comprehensive, systemic strategy of development, which would rest upon the tradition of our society, upon Russia's civilizational code, at the same time, to galvanize modernization and equip us with adequate response to the challenges of present and future.

In reality, everything is interrelated. For instance, Russia is a great country. It will have to develop its remote eastern territories; this is, after all, a condition of territorial integrity. But how can this problem be solved without demographic revitalization? In its turn, demographic progress is a complicated issue as such. Still, among the factors of demographic growth, the most indispensable factor is the atmosphere of social optimism. In this issue, we reach the highest level of goal-setting. In our country, people have to acquire a higher goal for themselves and their succession – that is a specific feature of our civilization.

Now, take a different aspect of the same problem. In order to avoid degradation of the easternmost regions into an exclave, separated from the heartland, we need development of transport. In its turn, large-scale transport infrastructure possesses a powerful synergetic effect. A new level of development arrives along new transport routes.

I completely agree with Mr. Vladimir Yakunin, President of Russian Railroads Concern, that Russia's space itself is a powerful resource of development. One of the chapters of the Russian Doctrine is dedicated to this particular aspect. It is of crucial importance not only because trans-continental transportation may become as profitable for Russia as oil exports, but also because transport projects of that scale would help to revive Russia’s manufacturing, metallurgic and assembling industries, as well as construction companies, to implement innovations, and to generate an impetus for applied scientific research – which means contracts for years ahead, and lots of new jobs.

The same problem should be also addressed from a geopolitical viewpoint. I am devoutly convinced that in the XXI century, economic activity will be centered not just in the Asia-Pacific region, as it is widely believed, but in the continent of Eurasia. Our country is greatly interested in such a prospect, enabling it to find itself not in the periphery but in the very center of global development. Russia has got a sufficient potential to accelerate such a shift. In its foreign policy, relevant prospects are associated, primarily, with the Shanghai Cooperation Organization. However, its economic aspect is lagging behind diplomacy – for the same reason that economic strategy is not yet defined.

Construction of trans-continental "bridges", transport corridors, infrastructure belts, may be introduced as one of the new mega-projects of Russia, with huge prospects of a genuinely comprehensive, multi-task development, corresponding with the above mentioned imperative of demographic progress – as projects of such a dimension potentially arouse a genuinely creative inspiration, establishing the desired atmosphere of public optimism and substantively meaningful life.

One more mega-project should be embedded in high technologies. The very fact that the definition of the "economy of knowledge" has become popular, penetrating into the thinking of Russian top-level politicians, is essentially positive. Still, we face a danger of subrogation of meaning. The means should not be confused with the goal. Otherwise, we'll return to "economy for economy", "knowledge for itself" we have already stumbled upon. As a matter of fact, economy of knowledge is to serve for solution of particular problems of the society. The higher is the objective, the better. Only a boldly formulated mission can mobilize scientific creation and generate new clusters of innovations. Therefore, it is essential to sort out and clearly formulate the most crucial, priority directions of the scientific and technological breakthrough. This may be: energy of future, transport of future, housing technologies and city planning of future; new medicine; new materials. In order to accomplish this directive selection, the state has to undertake a special kind of organizing effort.

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