The Russian government’s industrial strategy, outlined by a top finance ministry official in London yesterday, may be wrecked by political indecision, market observers believe.
Analysts warned that disagreements in the Russian cabinet are paralysing the next stage of reform and could slow economic growth for the rest of this decade. The opportunities provided by Russia’s fabulous oil riches may be squandered.
Christopher Weafer, chief strategist at Alfa Bank in Moscow, told Emerging Markets yesterday: “It’s good that oil revenues are being put in the stabilization fund and not being frittered away. But it’s bad that they are not being spent on the urgent items related to the next stage of transition.
“We see a slowdown in the next few years, and insufficient willingness in government to tackle it.” Assuming an oil price of $70 per barrel in 2006-07, falling to $40 in 2009, Alfa forecasts Russia’s growth rate falling from 6.2% in 2006 to 5.8% in 2007, 3% in 2008 and 2% in 2009.
The Russian cabinet remains split over how to use the stabilization fund, Moscow sources say.
The reformers, led by economic development minister German Gref and finance minister Aleksei Kudrin, have pushed through a decision that the entire fund will be invested in financial instruments overseas and will remain as a cushion against future economic shocks, but this could still be changed. Some of those politicians who represent the growing political influence of the security services (the “siloviki”) want access to the cash.
An investment fund, paid for from the budget, will be used to stimulate economic restructuring and the diversification out of oil and gas that is so urgent for Russia’s future. The problem here, say experts in Moscow, is that factions in the government are at odds with each other about which projects merit support. The list of industries deemed “strategic” and consequently eligible for funding constantly changes.
Svetlana Ganeeva of the economic development ministry’s investment department said that the investment fund would spend at least $2.5 billion annually for the next three years. Infrastructure development and project co-financings will be prioritized. The fund will be used along with special economic zones and a new law on concessions to foreign investors.
Sergei Storchak, deputy finance minister, said that the “long-drawn-out discussions” on the stabilization fund, which now stands at close to $70 billion, are over. It will be used only as a “safety cushion” and not for current outgoings of any kind.
Storchak told Emerging Markets that the finance ministry remains opposed to enlarging the role of the state in the economy. Proposals for reducing the tax burden on investments in new oil and gas production are winning acceptance, he said.
Events in Moscow suggest otherwise, however. The trend for the state to increase its control over profitable companies, begun in oil, continues in other sectors: in recent weeks state-owned Vneshtorgbank has upped its stake in the diamond producer Alrosa to 11% and state-owned Gazprombank has increased its representation on the board of United Heavy Machinery, one of Russia’s two leading machine builders.
Much of the accent at this year’s EBRD annual meeting was on its plans for a substantial expansion of its operations in Russia. Alain Pilloux, a senior EBRD banker, said that its priorities will be infrastructure and power sector reform; energy efficiency projects; and investment in public-private partnerships together with the investment fund. The bank will also intensify its activity in the corporate sector and seek equity investments in banks.
Some sceptical voices were raised about the bank’s plans at a presentation of its Russia strategy. “Why is the EBRD going into municipal projects in Russia when the government itself has more than enough money to do this?” one questioner asked Pilloux.