Nostalgic Reformers

The Yegor Gaidar Fund hosted an event earlier this month to commemorate and discuss the 25th anniversary of the “start of economic reforms in Russia”.

Participants in the first government of Yeltsin – Gaidar recalled how they made decisions about economic reforms during the collapse of the USSR, and reflected on the reasons for the successes and failures of their activities.

The meeting was led by Gennady Burbulis, President of the Russian Union of Industrialists and Entrepreneurs, Alexander Shokhin, and Higher School of Economics’ Yevgeny Yasin. Anatoly Chubais, Petr Aven, Andrei Nechayev, Boris Saltyakov, Stanislav Anisimov, and other members of the first “Gaidar government” also participated.

burbulis-et-al-15-nov-2016
Burbulis speaking. There are more photos of the event here

“The participants tried in hindsight to discuss not only the results of their activities for transforming the country… but also the mistakes they made and which could have been avoided. In particular, Andrei Nechayev said that their main mistake was that they gave all their attention and energy to the economy and did not engage in politics.”

But on the other hand, “…Gennady Burbulis said that Yeltsin immediately rejected the idea of establishing a party of power and put greater attention on propaganda because he wanted to be a president for all Russians.”

The excuse that “we just didn’t explain what we were doing well enough” also made an appearance at the discussion.

President Putin’s former economic advisor, Andrei Illarionov, called the participants out on both claims. He reminded his readers that these people did in fact take part in politics: participating in parliamentary elections, creating the political party SPS etc. And that they did in fact do a lot of PR work to “explain their actions”, writing articles and books, giving interviews, doing lecture circuits, and so on.

Nevertheless the former members of the reform government tend to evaluate their activities for the most part as a success.

Petr Aven said:

“We in the reform government wanted the best, but it did not work out as usual, but in a different way. Despite all of our errors we managed to change the country, and now it has become completely different.”

The group concluded that “…the modernization begun in the 90s remains unfinished, and the economic agenda of the first government remains partially relevant.”

Academy Reforms

Last week Russian President Vladimir Putin publicly called out the Academy of Sciences for allowing high-ranking bureaucrats to join.

“Speaking on Wednesday at a meeting of the Council for Science and Education, President Vladimir Putin said that late last year he asked officials to abstain from elections to the Russian Academy of Sciences… and he appealed to the head of the Academy, Vladimir Fortov.”

However, according to Vzglyad, when the elections to the Academy were held in October, “many of the civil servants disobeyed the President.”

Sergei Leskov writes in Rosbalt that what happened was “an unprecedented event and its underlying causes require analysis and interpretation.”

“The immediate reason for the conflict situation was the fact that… a half dozen [high-ranking] officials were elected to the Academy. A few months ago, Putin gave a written order that officials were not to run for the RAN… that is we are talking about direct disobedience.”

And, as we found out yesterday, the president followed through on his threat, and signed a decree dismissing four of the officials who had violated the ban.

“Putin, as the builder of the power vertical cannot understand how officials openly violated his will, which cannot be misinterpreted. In this sense, the president’s decision to dismiss officials from the civil service… to an academic path is quite logical.”

There seems to be some mass movement of civil servants into the Academy, a position that is for life once a person is allowed entry. The process to gain a seat in the Academy is a rather long and arduous one.

“Each applicant must be nominated, must go through six rounds of interviews, and voting is always secret. The procedure is consecrated in a century of tradition, and, by design, should serve as a barrier to entry into the ranks of the Academy the unworthy public. This ensures the independence of the Academy from the authorities, but on the other hand, it strengthens the state itself, which out of short-term motives in every era tends to dictate its will onto the Academy. There are examples where the independence of the Academy saved her prestige.”

But that’s a rather idealistic view of the situation, Leskov continues.

“…of course you do not have to be a professor of human nature to guess that a secret ballot can be controlled and regulated…. It is necessary to conclude that not only the conceited officials, but also the management of the Academy took a risk in going against the president.”

So why did the Academy decide to go through with this dilution of its ranks by adding new members from the bureaucracy?

“Following the recent ruthless reform [that took place in 2013], when officials deprived the Academy of its rich assets, it [the Academy] felt a threat to its existence. We must fight for survival! According to the laws of Darwinism, social mutations have become inevitable. The strong devour the weak. So we must be strong. One of the coping mechanisms – to attract the alpha male.”

So the Academy added these officials for protection, he alleges.

“Some colleagues of [Academy President Vladimir] Fortov told me: “How could Putin humiliate the president of the Academy?” But we must admit that from the start the Academy itself and its president humiliated himself by swallowing the joke of a reform… When you yourself are willing to be humiliated, do not be surprised when others humiliate you.”

And, Leskov concedes, “…in our country the scientist has always been dependent and humiliated…. it is no coincidence that in our history there are practically no examples where a scientist has become an independent and wealthy man like Watt, Edison, Sikorsky, Gates, Jobs, Musk…!”

If in the Soviet era, it was rare for the elite to become members of the Academy (“it was a violation of party modesty”), then “in democratic times, habits have changed. Nobody has taken statistics, but there is a sense that the current election to the Academy has turned into a promenade show for VIPs.”

“The Academy of Sciences is often criticized for its lack of innovation. This is slander. A striking innovative achievement of the Academy is the trade in academic status…. But today the issue of the professional dignity of the scientist… is not necessary.”

What is happening in the Academy is a microcosm of what is taking place throughout academia in Russia, Leskov concludes.

“Russian academia is gradually and inexorably turning into a citadel of scientific nomenclature. And this leads to further brain drain. Young scientists, instead of living in Russia and moving up the career ladder, are forced to flee in search of the best scientific niches in the West. Youth… sees no prospects. It is characteristic that the Academy did not name [2010] Nobel Prize winner Konstantin Novoselov, who is a Russian citizen, but strengthens the rear of policemen, oilmen, and counterintelligence agents.”

“Once the Academy of Sciences was the most robust repository of moral and spiritual values of society. Today there are no intellectual and moral leaders, like Sakharov…  and none are visible on the horizon.”

*For more details on the “reforms” forced on the Academy by the Kremlin in 2013, see this article from the Institute of Modern Russia.

We Deserve a Flat Tax

Many are claiming that the introduction of a progressive tax would help the poor and put additional funds in the budget, but this is false, writes Grigory Yavlinsky. In fact, it is just the opposite.

“In the current [economic] environment, with the introduction of a progressive tax, the amount of tax revenue would be reduced, “gray” [off the books] salaries will rise, a significant portion of businesses will seek to go into the shadows, people with high incomes will create a scheme to reduce tax payments with the help of legal tricks. But the middle class, professionals, small and medium businesses will pay in full. As a result, the incentives for increased efficiency and productivity will be reduced. We will have to work nearly 6 months to pay for the personal income tax, the insurance premiums… and fees. All this will lead to… a huge amount of people choosing to withdraw into the shadows.”

Another reason people don’t want to pay is that they are not sure that the government is being responsible with the money they are giving it, Yavlinsky continues. “”No taxation without representation.”  This is a political question: if people believe their government and can influence it, they will calmly pay high taxes.”

“In the meantime, if it [the government] really wants to fight poverty and inequality through the tax system, please – promote a non-taxable minimum income, exempt single parents, large families, and people under 25 from paying taxes… not to mention the change in the direction of the budget expenditures: only one day of the war in Syria in 2015 cost taxpayers about 170 million rubles, or thirteen thousand average pensions. Direct the money to pay pensions, and increase the minimum wage.”

Of course, some will argue that if you make exemptions for certain groups, then people will use them. And you will have more single parents, etc. “And as for budget spending, there is the argument: “it is necessary to save Bashar Assad!”

“That is why, because of the distrust of the state and [an environment] conducive to fraud at all levels… we are only fit for a flat tax. Because the flat tax is a tribute to the low level of economic and political culture in our country.”

And this can only change if Russia’s economic and political cultures change, Yavlinsky concludes.

“In the meantime, it’s too early to talk about it.”

Sacred Flat Tax

Ania Dorn wrote on her Facebook page yesterday regarding government claims that Russia has a 13% flat income tax. Yes, she acknowledges, a person’s gross salary is taxed 13%. But another 30% is paid by employers: 22% goes into the pension fund, 5% for health insurance, and 3% for social insurance. So, for example, she explains, for you to receive a net salary of 1000 rubles, your employer is actually paying 1643 rubles.

Then there is the housing and communal services tax, and the new tax for capital repairs (“which most of us can hardly expect to see in our lifetime”), and “taxes on real estate and cars…”

“And then miracles begin. Because in addition to this, we pay excise taxes on fuel, alcohol, and cigarettes…” and VAT (which is 18%) is included in the price of goods. Of course, she says, VAT is paid by the seller to the state, but it is included in the price of goods purchased, so that the buyer bears the burden of this, and the 43% tax the employer pays for their workers, and the 20% tax on profit. And then there is the “Platon” tax that truckers are paying to deliver the goods to the vendors.

Dorn concedes that small and medium sized businesses could file for refunds for the VAT but that the process is so cumbersome that most of them prefer to avoid it.

As a result goods and services cost at least twice their actual cost.

And meanwhile, she continues, “the average salary in the country is recorded as 64.3% higher in official statistics, than what citizens actually get their hands on – with the result that the president is surprised when a regional teacher runs to him with complaints that she is receiving 15,000 rubles rather than the 25,000 ruble [official salary]”.

“But… the king-father – the great economist with a PhD…” still thinks that the salary is 25,000 and believes in the “sacred” 13% flat tax (“nowhere in the world is lower”). And instead he blames the “fifth column”, calling those who complain “provocateurs, spies, SBU [Ukraine’s security service] agents, and State Department collaborators.”

State Fire Sale

Vedomosti reports today that the Federal Property Management Agency is debating new ways to dispose of its assets in order to get the best deal.

According to the law on privatization, the state’s shares in companies must first be put up for auction. And if that process doesn’t work, then they move to a public auction where there is a minimum set price, and anyone can bid above that. This year, 90% of the auctions did not take place, and they moved to public auction. Meaning that the State did not get the market value or even as much as they had anticipated for the stakes they sold. For example, the sale of a stake in the state diamond corporation, Alrosa.

As a result, the Federal Property Management Agency is discussing options to rectify this.

One option, Vedomosti reports, would be an auction without naming a minimum price. But this is complicated by the fact that you would need some minimum set of people or companies bidding, otherwise you could potentially have issues with collusion, as happened with the loans-for-shares auctions in the 1990s. Yukos, for example, bid against itself by creating shell companies that appeared to have no connection with Khodorkovsky’s bank. Thus guaranteeing that they would be the only ones bidding on the assets, and keeping the price low.

But this option is slow and cumbersome because what happens is that you have to keep going to auction if you don’t have enough companies to meet the requirements.

So officials recognize that it is necessary to simplify and speed up the process. One idea that is being considered is “declaratory privatization – when the asset is sold at the request of the investor”.

How would this work? “…any organization, without waiting for ads [by the Agency], can apply for privatization; an investor can pay for an audit and evaluation [of the company].” The Agency would then have to “…notify the public about the application, [and] wait, for example, three months…” If there are no opposing applications, the asset would go to the initiator.

“Experts have suggested this method for a wide range of assets.” But the Agency wants to tread carefully because they think this is really only appropriate for smaller assets, and not larger ones.

“According to the Federal Property Management Agency, in the first half of 2016, the State was a shareholder or had the right to participate in the management of 1627 joint-stock companies.”

But “state-owned companies are active in the acquisition market” (see, for example Rosneft’s purchase of the Bashneft shares and its plans to purchase a stake in itself next month).

640 JSCs are under the control of the State, and of those, 83% are up for sale, according to the Agency.

“Since the 2000s, the government has contributed to the charter capital of some state-owned companies [e.g. Rosnano, Rostec, etc.], but the law forbids the 100% ownership of the company… therefore the State wasn’t given 100%, but 100% minus one share. And these are the shares now hanging in the balance. Another 19% of companies are in the process of bankruptcy.”

Meanwhile, the Agency is attempting to improve its marketing strategy, in order to widen the pool of buyers. They have begun “posting information on websites, and in news agencies, buying advertising in the mass media and billboards, and print booklets.

It is unclear what President Putin actually thinks about all of this, Vedomosti concludes.

“On the one hand, large-scale privatization has shown that it is very difficult for the authorities to part with state property…” an official told Vedomosti. They would prefer to keep going round and round until they get the best price. At the same time, Putin said this week that there are other considerations besides money.

In other words, the Regime is anxious to get these assets off their hands, and collect what cash they can, rather than wait to get the best price. This is even more necessary now as the 2017-2019 draft budget anticipates draining both of the Finance Ministry’s reserve funds.

Tax “Reform”

Russia’s government is developing plans to introduce a progressive personal income tax, reports the Russian media. Russia currently has a flat tax of 13% that was introduced during the first Putin administration.

Deputy Prime Minister Olga Golodets said that she thought that creating a progressive income tax scale would help to alleviate poverty, by exempting a certain portion of low income earners (similar to the US system).

Russia’s Finance Minister Anton Siluanov is opposed to the plan of reintroducing a progressive income tax, but told the State Duma last week that the government has held talks about “the pros and cons of this decision”. He pointed out that in the current economic environment with “falling real incomes, [and] no sustainable growth”, that businesses would move underground.

Dmitry Abzalov, of the Centre for Strategic Communications, told Rosbalt that “…a progressive tax is perceived by citizens as more equitable.”

“At one time the flat rate was introduced in order… to return citizens to pay taxes. Now, we must understand that there are some taxpayers, such as the employees of state-owned and large private companies. For them it will be very difficult to move their salaries into offshore companies. Accordingly, the payment of the tax will fall exactly on this segment. But some entrepreneurs will go offshore because it would unprofitable for them to pay this tax.”

He compared the situation to what happened when France “reformed” their tax system. “…some of the private companies simply left the country…” because the tax burden was too high. And, Abzalov notes, “…some Russian companies, large businesses, can also be re-registered within the borders of the Customs Union, Kazakhstan and Belarus.”

Former MP Dmitry Gudkov, reminded his followers on Facebook that while the income tax is 13%, the actual percentage is closer to about 43% if you factor in pension and health care contributions, etc.

And what will happen if this is implemented, Gudkov asks rhetorically. More jobs will be paid under the table. And for the “very rich”, it “…will be an added incentive to carefully leave, as Alisher Usmanov recently did.”

And where will that extra money the government hopes to get from this proposal go? Not to help the ill and the poor, but to finance the Regime’s imperial ambitions, to pay for the war in Syria, “and to line the palace floors of the corrupt”, Gudkov concludes.

Stagnation

The Moscow Times reports:

“The decline of the Russian economy has slowed, according to the State Statistics Service.”

However,

“The Economic Development Ministry has forecast that GDP would drop by 0.6 percent in 2016 and increase by 0.6 percent in 2017. At that rate, the Russian economy would rebound to the level of 2014 no sooner than 2020. The baseline scenario for long-term forecast assumes stagnation…”

Meanwhile:

“…former Finance Minister Alexei Kudrin said that the macroeconomic situation has improved and that the focus has shifted to the microeconomic level where reforms are needed.”

In separate comments, Kudrin “…compared the situation in today’s Russia to the late Soviet period. According to him, Russia is now facing the same risks – decentralization and the regionalization of the country…”

“The USSR collapsed not due to a weak army and not in connection with a weak KGB. It collapsed because it was an inefficient, bereft economic model.”

Kudrin also said that “…the main risks [for Russia today] are economic inefficiency and the inability to be technologically advanced.”

According to the Economic Development Ministry’s target scenario, economic growth will exceed 4 percent annually as early as 2018 — but only if Russia makes the transition to an investment model by which companies achieve increased revenues through lower costs, an improved business climate, and support from non-raw materials exports.

“One federal official points out, however, that effective investment does not consist of simply laying pipes in the ground or building bridges that go nowhere. The problem is that the crisis is affecting actual projects that under way, and fiscal policy is skewed away from supporting investment in infrastructure and human capital and toward social and defense spending.”

And that is exactly what Russia’s 2017-2019 budget is proposing:

To put that in context:

In a poll published last week, 48% of Russians said the economic situation has worsened in recent years. This is compared to 37% who said they thought so when asked the same question in September.

Almost 32% of respondents thought that the situation in the country will get worse in the next year or two. And another 13% of those polled thought the crisis will last more than two years.

3/4 reported that they were affected by the crisis, and more than 27% of respondents stated that they have been hit hard by the recession. An increasing number of Russians are afraid of losing their jobs, and complain about pay cuts and wage arrears. Rosstat says that total wage arrears in Russia increased by 3.6% between 1 Sept & 1 Nov, reaching 3.79 billion rubles.

Russians continue to save money on food, clothing, & shoes, as well as entertainment. 24% said they have reduced spending on medication. Saving on consumption remains the main form of adaptation to the crisis. People have begun to stockpile food. Nearly 31% said they are gardening more at their dachas. But only a few Russians have said that to combat the crisis, they have found a second job or some part-time work.

People have adapted to the weak economy and are prepared for a long life under poor conditions. But a sociologist told Vedomosti that the crisis would not have a negative impact on the government, as “the population resides in apathy.”

Clan War

Everybody is making much of what has happened with Ulyukaev, and calling it “a decisive turn in the fight against corruption…” former MP and KGB man Gennady Gudkov wrote on Facebook. But this is all just the “wishful thinking” of “naive fools”.

He says that a week ago he had a conversation with a friend who, he implies, is well-connected. According to Gudkov, the friend said,

“”You… cannot even imagine what terrible bickering has started at the very top! Soon there will begin a war between the clans the likes of which we have not seen before!” And he named some very famous surnames in Russia, warring with each other for live and death, including in the government and in the Kremlin.”

He continues:

“All that we see today, is not a fight against corruption (it is inseparable from the “vertical”…) but a fierce… struggle for influence, financial flows, and positions.”

And every method will be used in this clan conflict. From blackmail to corporate raids to physical violence. Gudkov also implies that more assassinations are likely.

Ulyukaev, he says, “was never part of the inner circle of “untouchables””.

“But not everybody has understood that the situation has changed dramatically… the rules have changed…”

Gudkov concludes:

“Describing the tensions in the highest levels [of power], my informed source said: “It will soon come to the point that Putin’s entourage will begin to blame each other for the most deadly sins on live TV… so that the opposition can sit back and relax: the snake will start eating its own tail.””

Anti-Corruption Sideshow

Alexei Ulyukaev appeared in court last night and was placed under house arrest until the middle of January. Prosecutors said he posed a flight risk. At about the same time, it was reported that President Putin had sacked the Minister for “loss of confidence”.

This is reportedly the highest ranking arrest since Beria was ousted.

Most of the opinions in Russian circles are still based on speculation. Most people seem to think that Ulyukaev is not even guilty of the crime he has been accused of, that of taking a $2 million bribe to make a decision that likely wasn’t even his to make.

Political analyst Gleb Kuznetsov told Rosbalt:

“This is a demonstration of the determination of the state in the fight against corruption. It demonstrated that we have no untouchable class. That not only a provincial governor of a region can be detained, but also one of the most influential government ministers. He can be prosecuted in the same way as any other person.”

Rosbalt also talked to the director of the Institute for Contemporary State Development, Dmitry Solonnikov:

“It is a hallmark of our time. The heads of regions, and security officials with the rank up to General, are not simply dismissed, but publicly and openly sent into custody. So in that sense, the detention of Ulyukaev seems logical and is not surprising.”

Solonnikov added that it was clear that Ulyukaev was not the only one who was being monitored. “…the control of policymakers is not a secret.”

His speculation was likely correct as the Russian media reported today that four other high-ranking officials were being monitored. They were named as Deputy Prime Minister Arkady Dvorkovich, Presidential Aide Andrei Belousov, another official at the Ministry of Economic Development, Oksana Tarasenko, and Marina Romanova, who is an aide to First Deputy Prime Minister, Igor Shuvalov.

Others saw this as a continuation of the fight over an ever-shrinking pie of assets.

Political analyst Yevgeny Negrov told Rosbalt that he thought the fight was not over ideology but rather that “the ultimate beneficiary was some kind of “financial-industrial group”.

The President of the “Center for Political Technologies” Igor Bunin thought the conflict was of a more personal nature between Ulyukaev and Rosneft chief Igor Sechin.

But, as I said yesterday, this seems to be mostly about the continuation of the Kremlin’s faux anti-corruption campaign that they have co-opted from Alexei Navalny.

People are fed up with the corruption they see around them. And performing show trials for TV is an effective way to show people that the authorities are doing something, even though nothing will change.