Russia Set to Fall Further Behind US in Terms of Living Standards

DSCN2995“Change Yourself for the Better.” If you read the following article, about the OECD’s forecast for economic growth in Russia, between the lines, you will discover a takeaway message that has been apparent to numerous observers for a long time. Until Russia does away with official kleptocracy, rampant corruption, outrageously bad governance, and the shock-and-awe policing of politics and business by the siloviki—i.e., unless it renounces Putinism and all its ways—there is little chance the living standards of ordinary Russians will improve much in the next forty years. Photo by the Russian Reader

Russia Set to Fall Further Behind US in Terms of Living Standards
OECD’s Experts Have Predicted the Futures of the World’s Major Economies
Tatyana Lomskaya
March 7, 2018

Russia is one of the few member states and parters of the Organization for Economic Cooperation and Development (OECD), in which real per capita GDP will fall by 2060 relative to the benchmark, the United States, according to an OECD reported entitled “Long-Term Prospects: Scenarios for the World Economy, 2060.” Vedomosti has had access to the eport. A source at the OECD confirmed its authenticity while noting it was a preliminary draft.

In the absence of reforms, Russia’s per capita GDP will grow only 0.7% in the next twelve years, predict OECD economists. The stumbling block is low workforce productivity. In recent years, it has not increased at all, and it will accelerate to a mere 0.5% in the period 2018–2030. Another brake on economic growth is poor demography: the economically active and able-bodied segment of the populace has been declining. By way of comparison, due to its positive demographic circumstances, Turkey’s standard of living will increase considerably by 2060 to about three fourths of the figures for the US, write the report’s authors.  In Russia, it will increase to 40% of the benchmark before decreasing slightly.

It is hard not concur with the diagnosis, notes Alexander Isakov, VTB Capital’s chief economist for Russia. Demography and workforce productivity are the biggest constraints on economic growth in Russia.

In his March 1, 2018, address to the Federal Assembly, President Putin promised to increase per capita GDP by 50% by 2025. He said = Russia must firmly gain a foothold among the world’s top five economies by then. Putin meant GDP at purchasing power parity (PPP), Economic Development Minister Maxim Oreshkin explained on the TV program Pozner. According to the IMF, Russia is now in sixth place in terms of GDP (PPP), four percent points behind Germany. The goal is to “bypass Germany,” explained the minister.

The goal can be brought within reach by applying active budgetary (e.g., tax cuts and increases in oil and gas costs) and monetary (e.g., lending) stimuli, says Kirill Tremasov, director of the analytics department at Locko Invest, but this is fraught with great risks.

Without reforms, Russian and the other BRICS countries will slow the growth of the world’s real GDP for forty years beginning in 2019, warn the report’s authors. To accelerate growth, they must increase workforce productivity by reforming governance, increasing the duration of schooling, and reducing trade tariffs.

If during the period 2020–2060, the BRICS countries develop the rule of law (which the World Bank evaluates on a scale from minus two to plus two), increase schooling to the median level of the OECD countries, and decrease trade tariffs to OECD median levels by 2030, the growth of per capita GDP will be 25% to 40% higher than in the baseline scenario. A key factor is governance reforms: combating corruption, improving law enforcement and the judiciary, increasing the efficiency of the civil service, and involving ordinary citizens more actively in politics.

The report notes this is especially important for Russia. Among the BRICS countries, Russia has the worst score for rule of law (-0.8) and the best score for average length of schooling (10.8 years). The Russian civil service has been adapted to the current political system, which assumes maximum centralization and the absence of political competition. Tremasov is skeptical: it is impossible and pointless to reform the civil service without democratizing the political system.


“How Living Standards Will Change: The OECD’s Baseline Scenario. Real Per Capita GDP at Purchasing Power Parity in 2010 Prices (US=100).” The blue horizontal lines represent predicted outcomes for 2018; the red lines, predicted figures for 2060. The countries included in the survey, as  listed from top to bottom, are Brazil, Russia, Turkey, Poland, Italy, France, Great Britain, Finland, Germany, Switzerland, Norway, and Ireland. Source: Preliminary Calculations from the OECD. Courtesy of Vedomosti

In his May 2012 decrees, Putin charged the government with increasing workforce productivity by one and a half times by 2018, but it had increased only by 3.8% as of 2016. Minister Oreshkin listed the obstacles: underinvestment, insufficiently developed infrastructure, and a lack of resources to upgrade productive assets.

Managers do not have a “culture of constantly improving efficiency and productivity,” he complained.

Workforce productivity is indeed the main obstacle to economic growth, but an increase of investments is needed in order to increase it, notes Natalya Orlova, chief economist at Alfa Bank. In 2017, about 50% of the increased investments in Russia were due to the extractive resources sector, although the bulk of GDP is generated in other sectors, says Orlova. Investments in agriculture grew by a mere 1.3%, fell in manufacturing and construction, and the commercial sector crashed altogther, falling 9.7%. Investment growth has been hindered by economic and geopolitical uncertainty, and the government has an ever harder time of reducing that uncertaintlywith sanctions in place, notes Orlova. Business, on the contrary, needs guarantees the rules of the game will not change for a long time.

Growth in productivity is impossible without increased competition, Tremasov points out. It is competition that compels companies to introduce new technology, reduce costs, and improve management. The more intense the competition in a sector, the higher the productivity, he notes, citing the retail trade and metallurgy as examples. Therefore, the main means of increasing economic efficiency is reducing the state’s share in the economy, argues Tremasov, as well as attracting foreign investors, reforming the judiciary, and reining in the security services [siloviki].

Measures to improve the country’s demographic circumstances will bear fruit in twenty-five years, when the corresponding generation enters the labor market, notes Isakov. The authorities should thus concentrate on increasing productivity.  If the market functions smoothly, the difference in productivity between companies in the same industry decreases, he argues, because they borrow technology and methods from each other, while inefficient companies are forced out of the market. In Russia, on the contrary, differences in productivity within industries are some of the highest in the world, due in part to gray sector employment practices, Isakov concludes.

Economic growth could take off if reforms are implemented, argues Orlova. The Russian economy is currently so inefficient that the jumpstart supplied by reforms would be huge.

Translated by the Russian Reader


“Not Gonna Get Us,” t-shirt in souvenir shop and news stand at Petersburg’s Pulkovo Airport, October 23, 2016. Photograph by the Russian Reader

Budget Expenditures on Security Forces to Grow to Two Trillion Rubles by 2019
Vladimir Dergachov and Elizaveta Antonova
October 23, 2016

The authorities have decided not to save money on the security forces, despite the difficult economic situation in the country. The draft budget shows that annual spending on national security will grow to 2 trillion rubles by 2019.

The government has inserted an increase in expenditures from 1.94 trillion rubles to 2 trillion rubles [approx. 30 billion euros] by 2019 under the line item “National Security and Law Enforcement.” These figures are contained in the draft budget for 2017-2019, as submitted by the Finance Ministry. (RBC has the relevant memorandum in its possession.) These expenditures also include the secret part of the budget, which this year grew to 22.3%.

Total budgetary provisions for national security are supposed to reach 1.943 trillion rubles in 2016. Over the next three years, a spending increase in this sector has been laid into the budget. In 2017, 1.967 trillion rubles will be spent on the security forces; in 2018, 1.994 trillion rubles; and in 2019, 2.006 trillion rubles. That is, spending on national security will increase by 63 billion rubles [approx. 933 million euros] over three years.

The “National Security and Law Enforcement” section of the budget has fourteen subsections, including prosecution and investigation authorities (the Prosecutor General’s Office and Russian Investigative Committee, the Justice Ministry, the Interior Ministry, security, border guards, Interior Ministry Troops, drug police, and the penal system). The section also includes spending on emergency situations, migration policy, civil defense, and specialized applied research.

A government spokesperson forwarded RBC’s questions about spending on law enforcement to the law enforcement agencies.

RBC found out which ministries would benefit from the allocation of funds after the latest reforms in the law enforcement sector.

How Creation of the National Guard Impacted the Budget

In early April 2016, President Vladimir Putin abolished the Federal Drug Control Service (FSKN) and Federal Migration Service (FMS) as free-standing entities, incorporating them into the Interior Ministry. The Interior Ministry, in turn, lost part of its powers. Its internal troops and special forces units were turned into a new security agency, the National Guard of Russia. The National Guard acquired, in particular, the OMON (Special Purpose Militia Detachment or riot cops), the SOBR (Special Rapid Deployment Unit), the Licensing and Permit Center, and the Extra-Departmental Security Service.

As a result, the line item for spending on drug control agencies has been eliminated. (The subsection contains dashes after 2016, in which 27.3 billion rubles were allocated.)

The draft budget also incorporates a spending decrease in the line item entitled “Police Agencies,” from 683.4 billion rubles in 2016 to 625 billion rubles in 2019. (Hereinafter, expenditures are given for the period from 2016 to 2019.)

Spending on the line item “Internal Troops” will nearly double due to the formation of the National Guard: from 114.6 billion rubles to 206.6 billion rubles.

When asked about the growth in spending on this line item, National Guard spokesman Yevgeny Kubyshkin suggested that RBC readdress their question to the government officials who drafted the document.

Among other significant changes in spending due to agency and ministerial shake-ups is the more than tenfold reduction on “Migration Policy,” from 33.7 billion rubles to 285.5 million rubles. This line item incorporates spending on the Federal Migration Service, which has been merged with the Interior Ministry.

The Russian Interior Ministry’s press office confirmed to RBC that appropriations were reallocated when the budget for 2017-2019 was drafted. Monies were reallocated to pay for the Interior Ministry units transferred to the National Guard. Sources at the ministry also confirmed that spending on the abolished FMS and FSKN had been accounted for in the ministry’s budget.

“Thus, the parameters of the draft federal budget of the Russian Interior Ministry for 2017-2019, excluding pension funds, are 695.1 billion rubles in 2017; 691.9 billion rubles in 2018,; and 689.7 billion rubles in 2019. This testifies to the fact that federal financing of the Russian Interior Ministry will remain nearly at the levels of 2015-2016,” a source at the ministry told RBC.

Prosecutors Get More, Security Officers Less

The line item for “Prosecuting and Investigative Authorities” stands out among the expenditures, with an increase from 86 billion rubles to 94.8 billion rubles.

The growth of spending on prosecutors and investigators is due to the fact that, as of January 1, 2017, military investigators will be merged with the Investigative Committee and will be financed out of their budget, Investigative Committee spokeswoman Svetlana Petrenko explained to RBC. RBC is waiting for a response to its questions from the Prosecutor General’s Office.

Spending on the line item for the “Penal System” will be slashed from 196.3 billion rubles to 176.8 billion rubles. Federal Penitentiary Service (FSIN) spokeswoman Kristina Belousova declined to comment.

The subsection “Security Agencies” (which includes the FSB) will be also be cut, from 306.4 billion rubles to 292 billion rubles. RBC’s request for information from the FSB’s Public Relations Office went unanswered.

The line items for “Justice Authorities” and “Border Guards” have been marked for slight decreases in spending. Over the three years, spending on the Justice Ministry will decrease from 43.4 billion rubles to 42.6 million rubles, while the border guards’ budget will be reduced from 124.2 billion rubles to 119 billion rubles. The Justice Ministry promised it would answer RBC’s inquiries at a later date.

According to the government’s draft budget, spending on “Protecting the Populace from Emergency Situations” will be reduced from 81.2 billion rubles to 70.1 billion rubles. On the other hand, spending on “Fire Safety” will be increased from 109.9 billion rubles to 119.4 billion rubles. RBC has sent an inquiry to the Emergency Situations Ministry and is still waiting for a reply.

“Non-Transparent” Expenditures Grow by Two and a Half Times

However, expenditures on “Other National Security and Law Enforcement Issues” will grow by two and a half times, from 108.4 billion rubles in 2016 to 237 billion rubles in 2019. According to the budget classification codes, this subsection includes expenditures having to do with the “leadership, management, and provision of support for activities such as the development of overall policy, plans, programs, and budgets, as well as other undertakings in the field of national security and law enforcement not covered by other subsections in this section.”

The Russian budget already contains a voluminous secret section, and line items like “Other Expenses” make expenditures even less transparent, Vasily Zatsepin, head of the military economy lab at the Gaidar Institute for Economic Policy, told RBC. According to Zatsepin, this subsection could contain anything whatsoever, for example, “financial assistance to certain districts in the Donetsk and Lugansk regions [of Ukraine].”

However, the subsection “Applied Research in the Field of National Security and Law Enforcement” will be slashed from 27.5 billion rubles to 22.3 billion rubles, respectively.

Security Priorities

The government memo makes clear that overall allocations for the entire national security section of the budget amount to 2.3% of GDP. Their share of total federal spending is 11.8%.

Although spending in this category in terms of GDP will drop from 2.3% to 2% by 2019, spending on national security in terms of overall spending will increase over the next three years, from 11.8% in 2016, to 12.2% in 2017, to 12.5% percent in 2018, and to 12.6% in 2019. This is more than combined spending on education, health care, culture, sports, media, and environmental protection.

The regime’s priority is to redistribute the budget toward foreign policy and the deep state, as well as social welfare payments to the populace to maintain stability, Nikolay Mironov, head of the Center for Economic and Political Reform told RBC.

“Everything else is overlooked, although education, health care, and the national economy, whose line items have been cut, are strategic areas. Investment in them does not pay off in the current year, but always pays off later,” argued Mironov.

Translated by the
Russian Reader

Medvedev: A Bad Cop Setting Losers Straight in the Kleptocratic Police State

Dmitry Medvedev at Terra Scientia youth forum. Photo courtesy of Zebra TV
“Bad cop” Dmitry Medvedev at Terra Scientia youth forum. Photo courtesy of Zebra TV

Medvedev: It Is Wrong to Compare Low Salaries of Schoolteachers and High Salaries of the Security Services 
This was the premier’s reply to complaint from resident of Dagestan at Terra Scientia
Alexei Obukhov
Moskovsky Komsomolets
August 3, 2016

Russian Federation Prime Minister Dmitry Medvedev made a bold statement at the youth forum Terra Scientia on the Klyazma River. Replying to the question of why a teacher’s salary in Dagestan is four or five times lower than that of a security services officer, the politician said it was wrong to compare the two professions.

As reported by Zebra TV, a young man from the Caucasian republic posed the question to the premier. According to the young man, a teacher in Dagestan might earn 10,000 to 15,000 rubles a month [approx. 130 to 200 euros a month], while an employee of a law enforcement agency could earn 50,000 rubles a month [approx. 675 euros a month].

In response, Medvedev noted the two professions were not comparable. As an example, he cited his own experience. When he finished university, his monthly salary [during Soviet times] was 90 rubles a month, as opposed to 250 rubles a month for policemen.

However, noted Medvedev, his priority was graduate school, not a career in the Interior Ministry or the prosecutor’s office, although he had received an offer.

Ultimately, Medvedev concluded, an “energetic” teacher will always find an opportunity to supplement his salary. The premier advised young people to follow their vocations. Such was his reply to another question, about whether it was worth going into social work given the extremely low wages in the field.

Earlier at Terra Scientia, a female participant had complained about her inability to get a mortgage although she had two university degrees and worked in an orphanage. The discussion’s moderator chided the young woman for asking such a question while holding an iPhone. The woman claimed the smartphone had been a gift. However, she never did get an answer to her question.

Translated by the Russian Reader. PM Medvedev’s “outrageous” behavior in this case is wholly consistent with Nikolai Mironov’s analysis, two months ago in the same newspaper, of Putin’s need for a “bad” prime minister, a fall guy and scapegoat for all purposes and seasons.