A word from the translator: Having translated both Milov/Nemtsov white papers, I have developed a respect for Milov’s way of thinking and am always on the look-out for more from him. This exposition of his appeared in Novaya Gazeta last week and is, as always, interesting and self-evidently right. The sad thing, of course, is that what is self-evidently right to LR readers and anyone with an inkling of good sense, is a тёмный лес (dark wood) to most Russians. It seems to me that if we could discover the reason why this is the case, we would be able to “cure” Russia instantly. Dream on.
We Will Be Last In Line
Why Russia will not be able to rise up from its knees
without help from Western capital
by Vladimir Milov
October 31, 2008
Translated from the Russian by Dave Essel
It is quite evident that the growth model followed by Russia in recent years has now collapsed and that there is nothing around that can take its place, at least in the foreseeable future. Because the 7-8% GDP growth of the last four years derived exclusively from the inflow of foreign capital.
Bear in mind that, unlike the three other countries forming the BRIC [Brazil, Russia, India, China], where capital inflow consisted in the main of direct foreign investment, the money that came into Russia was mostly in the form of foreign loans. These were the engine of our development to an even greater extent that oil and gas were. And these loans were not ‘our money’ coming back home, as some assert, but real foreign money. And then, this money was not spent on modernising the country in any way but was instead mostly frittered away: for example, most of the borrowing by the Russian companies which held IPOs in the last few years was spent on buying shares and real estate while only 20-30% went into the implementation of genuine development projects.
This gave Russia an out-of-kilter structure: last year’s 8% GDP growth came for the most part from the building industry, trade, and financial services. All the real productive industries showed a growth rate in their value-added tax that was lower than GDP growth – considerably lower. This leads us to understand clearly that no source of finance of economic growth beside inflow of foreign capital has developed in recent years.
Today’s capital flight situation ($25 billion in September alone) is killing the mainstay of our economic development for now and the years ahead. Our own financial system cannot replace foreign capital as a source of funding for economic development. Its share of the capital investment market amounts to 12% while half of all capital investment is self-funded by enterprises.
This means that it is a near-foregone certainty that we will never see such growth rates again – at least not until the large-scale inflow of foreign capital resumes. And when will that be? No one can say: we’ll just have to sit and wait, watching for the weather to change. Furthermore, foreign capital will start coming back to our market only on the tail-end of global economic recovery. Estimates of the Russian political risk have become far more pessimistic recently and, when capital does at last begin to flow into the developing markets, it will start returning to Russia last of all. It is not, in my opinion, realistic to expect that this will all be over in a year or two.
More worrying still is that our other source of growth – raw materials exports – is also in the doldrums. In the near perspective, oil prices will, I think, completely cease to be based on the play of the financial markets; speculative capital will stop being the driver of oil prices. Demand for oil had clearly been on the wane since the beginning of this year, yet prices rose right up to $145 per barrel. Since it is now realistic to expect a world recession, I think oil will move towards a more sensible price that reflects supply and demand. I therefore think that we may well see oil at $40-50 a barrel for quite some time. In any event, for Russia raw materials exports will not be anything like the source of funds for modernisation that we had come to rely on in the last 2-3 years from looking at world oil prices.
The steps being taken by the Kremlin show that they do not have the tools they need for the job and that those tools that they do have, they use badly. What they are doing is only making matters worse.
So, no light at the end of the tunnel. In one way or another, we’re going to spend away all our reserves, using them to prop up the corporate sector, which in turn will not use the funds for good causes but will more likely either get them out of the country or use them to buy up their competitors. Symptomatic of this is the fact that $100 billion of the corporate sector’s total debt comes from just two state-owned corporations – Gazprom and Rosneft.
As for the prospect of revival after the crisis, there the main problem is that we will lose out to other countries in the competition for money. Despite the massive problems the financial system faces in the West, I am completely confident that they will be overcome, thanks to the three Western principles of entrepreneurial spirit, the dominance of the private sector, and the immutability of its institutions – defendable property rights, open politics, freedom of the press, and so on. We don’t even have the glimmer of any one of these in Russia and that means that in a situation of competition for limited investment capital, we will always be last in line when it comes to distribution.
I can see no way out of this situation other than a cardinal change of not just political and economic course but of the country’s whole course – an about-turn and a completely new direction. We need to build a more modern, civilised, free society capable of reacting adequately in the event of such crises.