Tag Archives: Aleksey Kudrin

Innovation Locomotive or Brake?

Maksim Blant

Newsru.com economics commentator Maksim Blant wrote on an interesting subject this week:  is spending on the OPK an engine or drag for Russia’s innovation economy?

Blant has two primary arguments against military Keynesianism in Russia’s context.  First, more money for the OPK will further tighten an already taut market for certain labor.  Second, OPK spending’s multiplier effect will benefit raw materials producers more than consumers.

His article appears against a backdrop of questions about Russia’s ability to meet increasing pension obligations over the next 2-3 years without raising taxes, and former Finance Minister Kudrin’s contention that it could, but for the 20 trillion rubles going to the military’s rearmament program.

The problem, Blant concludes, is not that President Medvedev intends to rearm by depriving pensioners of their last bread crusts.  No, Medvedev defends rearmament as a means of stimulating growth in manufacturing, and turning the defense sector into an innovation development “locomotive.”

Blant allows that a majority of experts are inclined to agree that increased military spending can stimulate economic growth, and large defense industry orders can have a multiplier effect causing expansion in other sectors.  The argument is familiar.  State orders lead to job creation and greater consumer demand.  Defense enterprise orders to suppliers spur the process in other sectors.  The jolt causes the economy to turn around.

Blant says there are cases where military spending has brought an economy out of crisis, but asks will it work in Russia? 

He doubts creating jobs in the defense sector will increase consumer demand.  Even discounting how much procurement money will be stolen in the military or OPK, he says relatively little of the trillions will go for wages.  It would be easier to increase consumer demand by raising pensions.

Blant says this job creation effort will occur in the midst of a demographic crisis — not an excess, but rather a relative shortage of labor.  With state orders in hand, defense enterprises will compete against private businesses for engineers and skilled workers.  Faced with this, civilian producers can either raise wages and lose competitiveness, or “escape” to countries where the labor market isn’t so tight.  This, concludes Blant, makes the OPK not a “locomotive” of innovation development but rather its gravedigger.

Blant turns to the multiplier effect in adjacent sectors.  Yes, OPK money supports them, but raw materials suppliers and processors most of all.  Together the two sectors form a “closed loop,” only weakly connected to other industries.  In the end, he foresees a repeat of the 1980s, where the USSR’s defense sector, heavy machinebuilding, and raw materials producers sucked up the lion’s share of labor and other resources, leaving nothing for the consumer sector.

Medvedev Signs Pay Law

Medvedev's Meeting on Pay Law

Monday President Medvedev met an unusual group — the Defense Minister, General Staff Chief, and MD / OSK commanders (but no service CINCs or branch commanders) — to announce he signed the long-discussed law on military pay that becomes effective on January 1, 2012.

The increased military pay in this law was a key goal for Anatoliy Serdyukov when he arrived at the Defense Ministry nearly five years ago.  Premium pay was just a stopgap.  So this is a success for his reform program.  His idea was to cut half (or more) of the officer corps and raise the pay of those remaining.  Of course, he had to back off somewhat on cutting down to 150,000 officers.

Why did it take so long to enact an increase in military pay?  Was it hard to find the money?  Maybe, given the global financial crisis of the late 2000s.  Was it hard to overcome former Finance Minister Kudrin’s resistance to higher defense outlays?  

Newsru.com, Svpressa.ru, and others see the pay increase as timed to coincide with Duma and presidential elections, and designed to engender the military’s goodwill toward the current leadership at the ballot box.  It’s worth noting the reduction in conscription from two years to one came in the context of the last national elections in 2008.

According to Kremlin.ru’s account, Medvedev indicated he wanted to congratulate those assembled on their long, hard effort to raise military pay to its new level, on average 2.5 or 3 times above today’s pay.  RIA Novosti provides the standard example of lieutenants rising from 19 to 50 thousand a month. 

In addition to higher base pay, the usual supplements will remain in effect, including additional pay for special duties, class qualifications, and difficult service conditions.  Premiums of up to three times base pay for outstanding performance will also continue.  Military pensions will increase at least 50 percent to 17,000 on average.  Read more about pay calculations here.

Addressing his small audience, Medvedev said:

“In such a way, servicemen have a very serious stimulus to carry out their service duties well and improve their professional training.”

He was careful to say those without duty posts (the so-called распоряженцы) won’t be left behind:

“It also includes important provisions, which, in principle, allow us to prevent worsening of the material situation of different categories of servicemen, citizens, dismissed from military service, their family members, if the amount of pay given them is reduced in connection with introducing the new system, then here there is an established mechanism of compensation and balancing out of these payments that is also an important guarantee of financial stability for our servicemen.”

Not reassuring.  But those guys won’t vote for United Russia and Putin anyway. 

The president continued:

“I won’t conceal that many drafts were ripped up around it, there were many discussions about whether we were prepared to raise pay to such a degree, whether the state had the resources for this, whether this wouldn’t drain our budget, wouldn’t create some kind of problems in the future?”

“I want to tell those present and, naturally, all servicemen of the Armed Force to hear me:  it won’t drain us, everything will be normal, and all required payments by the government will be made because this is the most important guarantee of raising the professional preparation of servicemen and improving the quality and effectiveness of the Armed Forces.  Therefore, the decisions, proposed several years ago, are being executed and put into action by this law.”

Thanking Medvedev, Serdyukov said:

“For us, in a complete sense, this resolves all earlier problems:  this is manning with both officers and contractees; this is serving; this is the attractiveness of military service, the fact is this is the entire complex of issues which weren’t practically resolved for us.”

Medvedev completed his remarks with this:

“But the main thing the state, by adopting this law, its signing and, accordingly, its entry into force, shows is that decisions once given voice are subject to unconditional fulfillment, whether someone likes them or not, if depending on them is the social condition of a huge number of people:  these are servicemen and their family members.”

“And further, we will do this so that our Armed Forces will be highly effective, and service in them will be prestigious and highly professional.”

So Medvedev declared it a test of governmental capability, and swiped at dear departed Kudrin who opposed the extent of defense budget increases in view of priorities like education and health (not to mention the pension fund).

It takes capability to implement a decision, yes, but it takes even more to stick with it over the long term.  Will the Russian government be able to continue the new level of military pay when the elections are over, economic conditions less favorable, oil prices and revenues lower, and budgets tighter?  That’ll be the true test of capability.

P.S.  We shouldn’t forget that the Defense Ministry has also semi-obligated itself to paying 425,000 professional enlisted contractees 25,000 rubles or more a month in the future.  That will probably equal the bill for paying officers.  Let’s estimate this total cost at 500 billion rubles a year.  The non-procurement defense budget in 2009 was only 670 billion.

MER and SP Doubt GOZ Prospects

Andrey Klepach

Yesterday the Ministry of Economic Development (MER) and the Audit Chamber (SP) expressed serious doubt about the government’s ability to fulfill the state defense order in 2011 and 2012.  Speaking to a Duma hearing on the draft budget for 2012-2014 covered by RIA Novosti, Deputy Minister Andrey Klepach said:

“Our Gosoboronzakaz won’t be substantially fulfilled this year and it’s highly probable it won’t be fulfilled next year.”

Deputy SP Chairman Valeriy Goreglyad also told the parliamentarians that expenditures on the army and national defense are:

“. . . not only the least transparent, but also the least effective from the point of view of using state resources, particularly those connected with the Gosoboronzakaz.”

“Therefore, in the first place, a different system of contracting is needed in this area, like in no other [area], a transfer to a federal contracting system where the entire technological cycle [planning to contract fulfillment] is supported.”

Other media outlets largely repeated RIA Novosti while adding a little background.  They reviewed President Medvedev’s comments on the failure of GOZ-2010, and on GOZ problems this spring, as well as repeated government and industry failure to meet Prime Minister Putin’s deadlines for completing all GOZ-2011 contracts.

These outlets also mishandled Defense Minister Serdyukov’s statement from last week about having only 20 billion of 581 billion rubles in GOZ-2011 funds remaining to obligate.  Several news sources inaccurately called it GOZ-2012 money.  As ARMS-TASS reports, the government’s Military-Industrial Commission won’t start reviewing the draft GOZ-2012 until mid-November, and no contracts for next year have been negotiated or placed.

To make things just a bit worse for the government, ex-Finance Minister Aleksey Kudrin repeated his budget priorities to a U.N. Millennium Development Goals conference yesterday in Moscow.  According to Utro.ru, Kudrin said:

“I already expressed my position that the increase in military expenditures in Russia is creating a threat to increasing and supporting programs in the area of health and education.  I would give less of an increase in money now for military needs than for health.”

Is the GPV Doable?

This post is dedicated to a friend and mentor who highlighted the source material . . . .

Do I Look Happy About the GPV? (photo: RIA Novosti)

Is Russian Finance Minister Aleksey Kudrin on-board with plans for increased military spending contained in the State Program of Armaments, 2011-2020?  The economic press seems to think he’s not, and his reticence leads one to ask if the new GPV will fit Russia’s economic and budgetary realities in coming years.  One thing’s certain (if you read on), 2011 is the first year of this GPV, and already, for a variety of reasons, many new arms will be bought with state-backed credits and loans.

The GPV came into the headlines last spring when Kudrin and his ministry offered 13 trillion rubles, and the uniformed military replied that 36 trillion would be about right.  Not much was heard about negotiations over the GPV until mid-July, when First Deputy Defense Minister Popovkin announced the figure would be about 20 trillion.

Then, President Medvedev described the GPV in his annual Federal Assembly address (Poslaniye) on 30 November:

“Today the fundamental task of creating a new high-technology mobile army stands before us.  We are setting out to spend more than 20 trillion rubles on these aims.”

The same day, Moskovskiy komsomolets published Kudrin’s reaction from RIA Novosti:

“The country is living with a deficit . . . .  The redistribution of expenditures from other areas is required.”

And from a television interview:

“The task of strengthening defense capability was set down very seriously, and a figure of 20 trillion rubles was named, and it will need to be directed at strengthening defense capability over the course of 10 years.  This is a new task, financial sources still haven’t been considered sufficiently, this could be an additional burden for the economy.  In this case, the president believes it’s essential.”

Kudrin didn’t mean new as in news to him, but in the sense that it hasn’t been factored into the federal budget. 

On 3 December, in MK, Nikolay Vardul critiqued Medvedev’s explanation of the GPV.

Vardul said we’ve heard about the high-technology army and using defense industry as an economic locomotive before, but this no longer fools anyone.  Large military expenditures ruined the Soviet economy, although falling oil prices were the coup de grace.  He continues:

“And here again is Medvedev talking about how investments in military technology will pay for themselves in the production of ‘dual-use products.’  Stepping on the same rake, as if we didn’t have sad experience.  The army passage in the Poslaniye is generally contradictory.  Medvedev drew an alternative:  either Russia and NATO manage to agree on joint missile defense, or a new arms race.  And then how do expenditures of 20 trillion rubles on military-technological needs by 2020 present themselves?  Is this just a running start?  In order to understand the scale of the spending, the entire Russian GDP in 2010 is on the order of 51 trillion rubles, and all federal budget expenditures for 2011 should be 10.8 trillion. There you have it.  But the questions continue:  who is now the potential enemy?  Can it be NATO again?  Too many questions and very few answers.”

“There is, by the way, one clear answer.  From the point of view of the economy, the main threat to its relative equilibrium is precisely inflated military, not social expenditures.”

“And there’s no doubt:  the higher the state expenditures, the greater the chances of inflation.  But military expenditures are distinct from investments in education or health care by the fact that the path to recouping them is more thorny and tortuous, if it’s even possible.  On the other hand, the road leading from them to inflation is as straight as a pipe.”

He concludes it’s true Russia’s economy needs a more modern engine to replace oil and gas revenues, but: 

“Instead of this, huge resources  are diverted to military spending, even though armaments not only won’t lift the economy, but drain it further.”

On 10 December, Nezavisimaya gazeta’s Anatasiya Bashkatova addressed Kudrin’s comments that redistributing federal budget to the regions and increasing the country’s defense capabilities will be very difficult to do simultaneously.  As Bashkatova put it, “there isn’t enough money for everything,” and “a high-technology defense sector interferes with regional development.”

Kudrin also said: 

“This program [GPV] is now being prepared.  It will soon be adopted, and the main expenditures will fall not in 2011, but in subsequent years.”

NG chief military correspondent Viktor Litovkin explained that it was simply too late for changes in the defense budget for 2011 with expenditures already starting according to the adopted budget law.

Then President Medvedev met with Kudrin meeting on 13 December.

Medvedev and Kudrin (photo: Kremlin.ru)

Medvedev told him his priorities are economic modernization and social spending, and regarding the latter:

“I consider that this is very important for preserving social peace and stability in our country.”

But with his very next breath, Medvedev said:

“And, of course, we must devote attention to issues of guaranteeing the security and defense of our state.”

And, of course, after wishing it weren’t necessary, he said:

“Therefore, the corresponding state program of armaments, and the Armed Forces modernization program need to be fulfilled in the specified parameters.”

The same day, Prime Minister Putin conducted a government conference in the submarine-building capital Severodvinsk to review the GPV, and even he confessed:

“For me it’s terrible even to say this amount [20 trillion rubles].”

Later in December, Vedomosti quoted one of Kudrin’s deputies who said, many expenditures which have “already been announced – and first and foremost these are defense expenditures” have not been figured into the 2011-2013 budgets, and it’s “still unknown” how these obligations will be financed.

Dmitriy Butrin in Kommersant quoted Duma Defense Committee Chairman Zavarzin to the effect that, in 2011, 30 percent (about 500 billion of 1.5 trillion rubles) will be financed by state-guaranteed credits rather than by budget funds.  Butrin went on to repeat Kudrin’s warning that the GPV can’t be covered by the projected budget income level, and the 20 trillion could make increased taxes unavoidable.

The Kudrin deputy also said that, without growth in the income portion of the budget, new budget obligations – like the APEC summit, Sochi Olympics in 2014, Skolkovo, World Cup soccer in 2018, and the State Program of Armaments – appear unrealizable.  He concludes, “We’ve set out on a trajectory for higher taxes.”

So where does this leave the GPV.  These economic commentators describe the same general picture . . . the GPV is extra spending for which financing has not been identified, at a time when key categories of budget income (i.e. oil and gas revenues) will decline (from 17 percent in 2009 to 13 percent by 2020) and the prospect of higher deficits already looms.

Russia also faces lower receipts and more payouts for pensions and health care over this period.

Kudrin and company are looking at possibilities, mainly increasing some taxes, but also maybe raising the retirement age.  None of this will help economic growth or make people happy.

No wonder the Finance Minister has resisted extra military spending to the extent that he can.

This GPV, if implemented, will impede the economic modernization President Medvedev wants.

But history says this GPV’s not likely to happen.  Even its most recent predecessor, started under favorable economic conditions, was superceded rather than completed.  And now is definitely not a favorable time like that.