Turning Off the Dangerous Path

While the Kremlin bosses are telling the people how the sovereign power state is rising from its knees, and their opponents are painting pictures of the “beautiful Russia of the future,” the country is falling deeper into the gap of economic decay both socially and organizationally.

It would be equally difficult to overcome the consequences of them both for the supporters of the “strong state in the future,” as well as for the adamant adherents of the liberal democracy.

The real income of the population is declining, bringing into sharp focus the frightening level of poverty; the health system is falling apart, causing the ever growing exponentially level of depopulation; more and more people are escaping from the country, while the corruption along with effective dysfunctionality of the authorities are undertaking attempts to concentrate the fiscal  resources for the “quantum leap directions,” which makes absolutely no sense. If it is set to continue developing in that modus operandi, then Russia is bound to rather quickly reach the state of the classic failed power (note: a dysfunctional cripple of a state), where the authorities exist in one kind of reality universe and its society resides in quite another one, and these two worlds never interact.

Such state of affairs is dangerous, primarily due to the fact that Russia is bound to turn into an unfit place to live in for those folks, who cannot escape from it. Under these circumstances, it is important to design an array of systematic measures, which would have been capable of putting an end to  the movement leading towards the dysfunctional cripple of the state sans changing the existing regime, the stability of which remains quite high thus far, and the struggle to preserve it promises to be rather rigorous.

In my viewpoint, there are four visible tasks of the highest significance as of today, the resolution of which is overall possible, even despite the current political situation, which exists in the country now.

In my viewpoint, there are four visible tasks most significant as of today, the resolution of which is overall possible even despite the current political situation that exists in the country now. First of all, it is a turning point in the fight to end poverty. The streamline measures in this direction appear to be self-apparent: it is an increase of the cost of living and the transition from the way it is calculating parameters, which are based on the price of bread and potatoes towards the existing world standard of calculation based on a percentage of the average income level.

The abolition of the income tax on all incomes below the newly established minimum wage level. Indexation of pensions and benefits as a bare minimum at the rate of one and a half fold higher than the inflation rate, and the same practice should apply to the retired pensioners, who are working as well. The introduction of targeted cash assistance programs for the impoverished citizens (additional payments), or some quasi-money aid type (food stamps). The main principle here has to be in the utter refusal from any “support programs,” that are non-monetary in their nature (the same holds true for the nutrition programs in schools), due to the fact that under the current bureaucratic system their efficiency would be almost furtive.

The measures pointed out above will cost the budget approximately 2-2.5 trillion. rubles per annum and will ensure a serious multiplier effect, spurring the acceleration in the economy by at least 1.5-2% of GDP on an yearly basis (at least a third of what would have been spent would then be returned straight into the budget via an increase in tax collection, that would be backed up by economic growth).

On a parallel track, one should slash down the prices that have been rising recently as a result of actions undertaken by the state, or the state corporations. In this particular case, the measures of paramount importance could be the freeze of tariffs for housing and communal services, pricing for gas & gasoline, and also for the freight and passenger transportation by all-Russian, or regional monopolists as well. On top of all of this, restrictive measures on the import of food items from the countries that are “under sanctions” has to be lifted immediately since in the current situation that would enable a prompt decrease in the prices for the majority of food items by 20 -40%.

Russian agrarians made a rather poor use of the “break to take a breather” that they had received, and the high time has come to admit to the fact that the whole country must not be held responsible for a some individual industry’s failure. Also, it is also mandatory to lift all the restrictions on the import of goods from abroad, including purchases made over the Internet, as well as abolishing customs duties & fees on such goods. I would emphasize, that the main goal in here should be placed in setting priorities in the interests of domestic consumers over that the interests of domestic producers. The “import of deflation,” that would be initiated in this fashion happens to be one of the most efficacious ways in the fight against poverty. Within the existing set of circumstances, it can also result in a decrease in inflation rates up to a zero point, and to an onward reduction in the interest rates, as well as in an increase in credit financing of individuals and businesses.

The next critical issue is a breakthrough point in the matter of ensuring the health of the citizens.

The crisis in healthcare sector today has transformed into one of the most drastically prominent negative trends across Russian economy.

In here there are two most crucial tasks. On the one hand, this is the cessation of the experiments with the “optimization” of healthcare system, and a real increase in salaries for the doctors, the refusal from the centralized procurement of medicines and medical equipment, as well as the transfer of the power of authority for the acquisitions to the medical institutions. The termination of the policy of “import substitution”. A radical revision of the approach to charity in the healthcare sector, up to a point inclusively so when there is  a real reduction in the amount of payable income taxes and personal income owned by businesses and private individuals in direct proportion to the amount of the money they are spending to provide charitable support for the medical programs. Special attention must be paid to the dangerous epidemics, and first & foremost to the HIV infection, the spread of which in Russia has transformed into a problem to the national security.

On the other hand, the country is in need of a radical ecological recovery program. It is necessary to seize all the operations of the most hazardous industries immediately; renounce any construction of the garbage incineration plants based on the usage outdated technologies; adopt an emergency environmental action program in large cities. The demographic problems in Russia need to be resolved not by the increase in the birth rate (it would still be implausible to break down the global trends in one particularly chosen country), but rather by extending the active healthy lifespan of the existing Russian population. The programs, which are required in this sphere will call for a budget funding of 1-1.5 trillion. rubles per annum for at least the duration course of the next 10-12.

The task of overcoming the ever-growing regionalization of Russia also seems to be of paramount importance to me. At the same token, the present goals of “developing the Far North and the Far East” appear to be absolutely imprudent to me. The major problem of Russia today is not in its outskirts, stretching from the Amur Region to the North Caucasus, but rather it is in its “poverty belt,” which coils around the big cities and the industrial centers.

It encompasses the entire farther sprawled suburbs of Moscow and the outskirts of St. Petersburg, stretching from Pskov all the way to Karelia; the southern Volga region and the Kurgan region; as well as the regions surrounding the main centers of Western Siberia. Large cosmopolitan centers draw in the most active part of the population to themselves; they turn into centers of employment and tax collection; they crash the local businesses and deprive the entire regions of any bright prospects for the future. The preservation of the current trends is disrupting the economic and the social collective territorial integral unity of the country, which is increasingly dangerous. The time has come to start thinking either about some radical shift in the entire taxation system, or about creating an entire array of “macro regions” in Russia, against the backdrop of which the substantial tax resources could be redistributed. One way or another, the current case situation under which the budget of the Moscow city is 9 times bigger than the total budgets of the seven surrounding territorial regions is not acceptable.

And finally, the last of the most important and longtime overdue “local” changes is the increase the functional efficiency of the state governance. In general, over the past twenty years, the Russian authorities have backed up the trend of creating an unacceptable caste of governmental officials, the recruitment of which was based on the principles of personal loyalty and did not stipulate the presence of neither honesty of said cadres, nor their competence. As the result of that process a completely inefficient system has emerged, in which the increase in budgetary expenditures has ceased to be accompanied by the proportional increase in the final results achieved.

In my point of view, said problem is far less relatable to the country’s top leadership, since the majority of them have moved up to the local and regional levels a long time ago. The example of China demonstrates, as well as a number of different authoritarian countries indicate a quite feasible possibility of maintaining a long-term political stability in the country under the scenarios, where there is a rather active rotation of lower-level managers underway, along with the organization of  a substantial competition at this level, and a successful enough fight against corruption, that does not cause any serious discomfort for the ruling elite. This task is of paramount urgency for Russia, especially since the cessation of economic growth, when paired with a constantly growing expenditures in budget indicate that the bureaucracy is utterly dysfunctional, which in turn becomes a threat to the ruling regime.

How can one ensure the implementation of such measures? Strange as it may seem, in my viewpoint, there are indeed good prerequisites in place in Russia today in order to accomplish this. The first stimulating incitement can be arranged by the usage of a budget surplus (about 2 trillion rubles a year) and some part of the reserve funds (1-1.5 trillion rubles). There is virtually no monetary reasoning in place at present for an inflation, consequently, by applying all of the above stated measures, it can be suppressed completely. Under such circumstances, the Bank of Russia might as well start to be launching a more active money supply policy, since under pressure consumer demand will remain an instrument of counteracting inflation for several more years.

In the last years, world monetary policy has become radically different from the one, that was implemented in the 1990s, and even in the early 2000s. The interest rate of central banks has been kept steadily below current inflation rates for quite some time by now: in the US the Federal interest rate has been 1.5-1.75% since October with the annual inflation rate at 2.1% during last year; in the euro currency zone the interest rate of the European Central Bank has been at zero with inflation at 0.7% since March 2016, in Britain the base rate of the Bank of England since August 2018 remains 0.75%, while prices in the course of the past 12 months have grown by 1, 5%. Against this backdrop, the key interest rate of 6% looks at a bare minimum twice as high in Russia, with the inflation rate of approximately 3%. The goal in here is to reduce the cost of servicing loans for individuals and competitive businesses, as well as to enlarge governmental borrowings in order to fund social programs. At the rates of 2-3% per annum, government debt of 50-70% of GDP seems to be rather reasonable. And that, I’d point out comprises almost ten reserve funds, the allocation of even some part of which to improve the living standards of Russians could have substantially change the dynamics of the economy in the country.

The list of reforms, which are possible is not limited by the aforementioned, however, the implementation of even some of these measures could have led to rather intrinsically meaningful changes, which, would curtail the most serious negative trends sans producing any economic and social revolution in the country. And while the absence of any changes is inherent in a landslide collapse of the entire model, which has emerged in recent years. All in all, countries arrive to democracy and the rule of law not from the state of despair, (which can be clearly observed in the example of Venezuela, or a number of the African states), but rather as a result of the development and further improvement of the standards of living (as it has proven to be the case in the experience of some Asian countries becoming successful). Further deterioration of the economic situation in Russia will not foster these changes in the country, the way many oppositionists today tend to perceive it, but will rather substantially decrease the possibility of their implementation.

The author is Vladislav Inozemtsev, Doctor of Economics, Professor, Director of the Center for Research of the Post-Industrial Society.