Carnegie had a piece yesterday denying that Russia has a problem with its reserves. But the article by Anton Tabakh is full of half-truths, and misleading statements. As usual, Carnegie is carrying water for the Regime.
I have covered a lot of this before in different posts on the blog, but I think putting it all in one place may be valuable for future discussions.
Health Care Spending
First, Tabakh takes on the Milov article I posted here earlier this week on the health care budget. He claims that Milov and others are panicking over nothing.
Many seem to have forgotten that for over a decade, the state has channeled the lion’s share of medical funding through the Federal Compulsory Medical Insurance Fund, not the Health Ministry. The fund’s budgets for 2016 and 2017 are 1,688 and 1,692 billion rubles, respectively. This means that healthcare spending may fall slightly in real terms, but not by a third.
But RIA Novosti reported two weeks ago that the draft budget did not provide enough money for the Fund. In addition, as Milov pointed out, what has happened is that the responsibility for funding the bulk of healthcare costs has been dumped on the regions, most of whom cannot afford it.
The Reserve Fund (sometimes called the “Stabilization Fund”) is being used to pay down Russia’s deficits. Over half of the money in that Fund will be spent next year, 1.15 trillion rubles of 2 trillion rubles.
In short, the Reserve Fund is doing what former finance minister Alexey Kudrin had in mind when he set it up in the early 2000s: cushioning the economy from the shock of falling oil and gas prices and buying it time to adjust to new realities.
But the problem is that the government is not adjusting “to new realities”. In fact, they’re doing the opposite. They’re pretending the problems don’t exist. Problems that, by the way, are systemic, and not a temporary phenomenon. Problems that should have been addressed during the “fat” years of high oil prices. Instead the Russian Regime is taking the easy way out and using the Reserve Funds as a crutch, hoping that the price of oil will magically start rising again. Meanwhile, the Reserve Funds cannot be replenished because the price of oil is so low.
National Welfare Fund
The National Welfare Fund is supposed to be dedicated to future pension payments. Instead it is being used for other purposes. The Fund currently holds approximate 4.6 trillion rubles. However, Tabakh admits that one-third of the money in the NWF is “illiquid”. That is, the money is recorded on the Finance Ministry’s books, but it is actually physically elsewhere.
In fact, they are sitting on at least 3 different books. The Finance Ministry is, as you would expect, counting these funds as theirs. But then the money is also included in the Central Bank’s International Reserves spreadsheet. And the money is also being used to prop up VneshEconomBank, and presumably other state-owned banks. The added benefit of this is that the money in those banks earns interest. Think of it like putting money you don’t need now into a CD at your bank. That money is earning interest, but you can’t access it until a certain set time in the future.
Tabakh also says that some of the money from the NWF was used to buy eurobonds issued by Ukraine in December 2013. The Russian government is currently suing Ukraine to try to get this money back, but it is not looking promising. That is, this is money that the government has on its books as coming to them in the future, but they are likely never going to get it back.
Foreign Direct Investment
As for Foreign Direct Investment (FDI), I have discussed that here too. At this point, most of what is called “FDI” is Russian money that has been laundered out of the country, and then re-invested from offshore zones like Cyprus.
The same thing is happening when Russia “borrows” abroad. For example, when Russia did its Eurobond placement in September of this year, Minister of Finance Siluanov bragged that 53% of the sales were from the US. But in essence, the government is borrowing from itself, though the
To be fair, Tabakh does conclude that there are systemic issues that are not being addressed by the government:
This is not to say policymakers should be complacent. Russia’s federal budget faces long-term pressure from a deficit-plagued pension system, outsized spending on the security services and military, an unstable tax base, and gaps in regional budgets that will need to be patched up. Hidden tax hikes (through fines and harsher enforcement) also raise doubts about the government’s upbeat plans for budgetary consolidation. These are the problems that should be worrying us—not the fate of the reserve funds, which were made for times like this.
The government’s plans to try to widen its tax base are fantasy at best. Given the option, most businesses will just go underground. And money will continue to seep out of the Russian economy into offshore zones. The Reserve Funds which Tabakh touts are finite, they will eventually run out. Whether that happens in 6 months or two years is not really the point. I just cannot be as upbeat as Tabakh claims he is.