The year of tough decisions

The year of tough decisions

The third year of V.V. Putin’s Presidency, his current third political cycle, is coming to an end.

It was a year of tough decisions, and this was what the President pointed out in his annual Address to the Federal Assembly of the Russian Federation on December 4.

Delivering his Address, V.V. Putin noted that in 2014 Russia faced trials that only a mature and united nation and a truly sovereign and strong state can withstand.

The historic reunification of the Crimea and Sevastopol with Russia, which was carried out in compliance with international law, and the efforts that Russia took in order to protect our compatriots in the south-eastern territories of Ukraine have caused massive economic and political pressure on Russia by the United States and its partners in Western Europe. This has been an attempt to talk with Russia from the position of strength. V.V. Putin said: “If for some European countries national pride is a long-forgotten concept and sovereignty is too much of a luxury, true sovereignty for Russia is absolutely necessary for survival”. This approach expressed in the part of the Address devoted to foreign policy summarizes and streamlines Russia’s foreign political course, which was pursued in 2012–2014. It is extremely important that this approach become a key factor increasing the consolidation of our society¹.

The main focus of the Address was devoted to internal problems of Russia’s development, and above all, to the execution of all the basic social obligations of the Government set out in the decrees of the President back in May 2012.

“Fragmentarity and inconsistency of the national administration approach leads to the fact that instead of urgent change there is a continuous process of simulating transformations: change for the sake of process, and not for the sake of result. There is a widespread development of poorly coordinated pseudo-reforms. But most importantly, there is no effective independent public expert auditing institution, as well as no monitoring of the results of reforms implementation. This gives rise to a system in which the state apparatus acts in a totally irresponsible way toward the society. That is why instead of strategic foresight and design we observe only “forever immediate” response to immediate challenges”3.

Instead of searching for ways to boost economic growth, the Ministry of Economic Development of the Russian Federation, in fact, only registers the recession and forecasts the decline of macroeconomic indicators; the data in table 1 show it clearly.

According to the forecast that was made in May 2012, the gross domestic product growth rate in 2014 would be 104.4%, however, this rate was reduced to 100.5% in September 2014. The forecast rate of investment in fixed capital was 107.3 and 97.6%, respectively. In December 2013, the outflow of capital from the country was expected to be 25 billion U.S. dollars, and in September 2014 – 100 billion4.

Table 1. Forecast of the main macroeconomic indicators of the Russian Federation for 2014, as a percentage of the previous year, in comparable prices

Indicators	Date of provision of the forecast
	11.05.12.	12.09.12.	12.04.13.	23.10.13.	27.12.13.	26.09.14
GDP	104.4	104.3	103.7	103.0	102.5	100.5
Industrial production index	104.1	103.7	103.4	102.2	102.2	101.7
Investment in fixed capital	107.3	107.3	106.6	103.9	103.9	97.6
Inflow (+), outflow (-) of capital, billion U.S. dollars	30.0	30.0	0	-25.0	-25.0	-100.0
Source: RF Ministry of Economic Development.

The developments of the Ministry of Finance of the Russian Federation have substantial deviations from the reference indicators and forecast parameters of the budget process.

This is particularly evident with regard to the consolidated budgets of the RF subjects (tab. 2) .

The deficit of the consolidated regional budgets relative to their own revenues based on three years (2014–2016) was forecast to be 212.3 billion and now it is expected to be 500.8 billion rubles, or almost twice as large. The amount of regional budgets’ own revenues will be reduced by 7% in a comparable estimate.

The crisis of regional budgets is evidenced even more clearly in the dynamics of key indicators such as the amount of profit, profit taxes, and especially the growth of public and municipal debts of regions (tab. 3) .

Table 2. Key forecast parameters of consolidated budgets of the subjects of the Russian Federation in 2014, billion rubles (in 2014 prices*)

Parameters	Forecast			2014, estimation of expected parameters	Dynamics of estimate for 2014 in comparison with forecasts
	2012–2014	2013–2015	2014–2016		2012–2014		2014–2016
					billion rub.	%	billion rub.	%
Revenues	8384.5	9370.6	8485.4	8149.6	-234.9	-2.8	-335.8	-4.0
Own revenues	7413.3	8242.3	7186.8	6682.2	-731.1	-9.9	-504.6	-7.0
Deficit	-9.0	-81.9	-212.3	-500.8	+491.8	+55.6 р.	+288.5	+2.4 р.

* Forecast level of inflation in 2014 was: in the forecast for 2012–2014 – 105%; in the forecast for 2013–2015 – 105%; in the forecast for 2014–2016 – 104.8%; expected level of inflation in 2014 – 107.5%.

Table 3. Key indicators of the budget process in the Russian Federation regions, billion rubles

Indicators	2011	2012	2013	2013 in % to 2011
Profit	8793.6	9213.0	8494.0	96.6
Profit tax	1927.9	1979.9	1719.7	89.2
Public and municipal debt	1387.3	1596.7	2026.4	146
Debt burden, %	23.8	25.0	30.8	+7 p.p.
Sources: RF Finance Ministry; Federal Treasury; Rosstat; ISEDT RAS calculations.

The amount of this debt was 1387.3 billion rubles in 2011; but in 2013 it reached 2026.4 billion rubles, i.e. increased by almost 1.5 times. The debt burden on regional budgets increased from 23.8% in 2012 to 29.3% in 2014 (according to the data for 10 months). The debt load in a significant number of regions exceeds the annual amount of budget revenues.

Possible reserves for significant increase in tax revenues, and consequently, decrease in the public and municipal debt and strengthening budget security are not used5. Research and expert estimates6 show that many private owners, especially oligarchic structures, use “loopholes” not regulated by the legislation and minimize their profit by formally increasing production costs, moving a significant part of created value added in the offshore, and by using other “profitable” tools, the origins of which are formed as a result of flaws in the public administration system in the country.

The turmoil on the currency exchange that happened in December 15–16, 2014 showed the absence of coordinated actions between the Government and the Central Bank of Russia.

The journal “Expert” characterizes their level of mutual understanding as follows: “Not a week passes without the Government and its individual members, the Central Bank and some of its leaders making another forecast that “adjusts” all the previous ones. The outflow of capital from Russia will be so many billion this year; oh no, it will sooner be so and this much; no, it will rather be so and this much and a quarter of this much... Inflation this year will be so much per cent per annum; no, it will be a bit higher; no, it seems to be a double figure; no, a very double figure”7.

Under such a system of management, the Government, of course, finds dozens of reasons justifying its failure to execute the Presidential decrees of May 7, 2012.

The President expressed his dissatisfaction with the performance of the Government in his Address to the Federal Assembly of the Russian Federation of December 12, 2013. “A year and a half has passed since the executive orders were issued. You know what I’m seeing? Either things are being done in a way that elicits a negative reaction among the public, or nothing is done at all. Clearly, we will fail to achieve our stated goals with this kind of work”⁸ .

Unfortunately, by the end of 2014 the state of affairs in the financial and economic sphere has deteriorated significantly. And the President, delivering his 2014 Address, again set a new range of economic objectives before the Government and federal and regional elites; these objectives take into account the actual external factors in the country’s development.

Great concerns are raised with regard to the fact that these new guidelines set out by the President will be achieved if the current inefficient state administration system based on the extremely liberal financial-economic bloc of the Government is preserved, since “the vulnerability of

Russia’s finance was already evident during the crisis in 2008, and yet, five years after that, we continue to follow the same disastrous course”9.

2015 will most likely be a year of tough decisions for the President, for the Russian citizens and for the country.

It is very important that the President’s decisions be timely, coordinated, and supported by the voters, just like they supported the return of the Crimea to Russia – its “native harbor”.