Russian finance ministry officials and leading economists are urging the Medvedev-Putin team not to yield to forceful lobbying to spend chunks of the state’s sovereign wealth funds onshore.
They have warned of dire inflationary consequences, in the wake of VTB president Andrei Kostin’s call to free up at least 20% of Russia’s offshore national wealth fund to help the banking system, and other proposals to dip into the cash to boost industrial “national champions”.
Political commentators believe that finance minister Aleksei Kudrin is holding the line against colleagues who want to spend more of Russia’s oil wealth faster.
Prime minister Vladimir Putin last week reappointed Kudrin as his deputy, and brought another liberal reformer, Igor Shuvalov, over from the presidential administration to be deputy prime minister for foreign economic relations.
The question is whether the balance between their market-oriented economic policies and advocates of state-led modernisation, over which Putin has long presided, can hold.
Finance ministry official Pyotr Kazakevich has reiterated in stern terms the dangers of onshore investment from Russia’s National Wealth Fund – one of two offshore funds created out of the stabilisation fund in March – in an Emerging Markets interview (see page 20).
“You have to be very cautious with investments on the domestic market”, Kazakevich warned. “We have no right to treat the Russian market simply as a promising and interesting target for investments.”
The macroeconomic consequences of investments in Russian companies or bonds – and the possibility that it might have to be withdrawn – would have “an adverse impact”, he said. “The outcome would be even more disastrous at a low point in the market.”
Economists at leading investment houses concur. Evgeny Gavrilenkov, chief economist at Troika Dialog, told Emerging Markets that there was “no rationale” to Kostin’s proposals to inject funds into the banking system.
Budget expenditures rose by 40% last year, Gavrilenkov pointed out. “No economy can tolerate such an incraese without succumbing to inflationary pressures. The Russian authorities have probably forgotten how damaging high inflation can be.”
Gavrilenkov is also critical of the government’s decision of October last year to inject 1.1 trillion rubles into the economy, 640 billion of which went to state corporations. “This is substitution. The state sector flourishes, the statistics on investment activity are great, but the private sector suffers.”
Putting money from the offshore funds into Russia’s state pension system is also “a big mistake”, Gavrilenkov insisted.
Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow, told Emerging Markets: “There are pitfalls associated with using the oil windfall to boost liquidity.
“It’s not the government’s job to provide liquidity. Banks who receive such injections will be inclined to make more and more risky investments.
“And if this money is put into one sector of the economy, other sectors will put on pressure to get a share.”
The public debate in Moscow about bringing some of the money onshore is believed to reflect an increasingly bitter dispute within the government.
Kudrin’s former deputy, Sergei Storchak, who was in charge of the sovereign wealth funds, was arrested in November on corruption charges – and analysts believe this may have been either part of a clampdown on misuse of state funds, or a means of putting pressure on Kudrin. “Such an interpretation is not without foundation”, observed Mikhail Delyagin of the Institute of Globalisation.