EDITOR’S NOTE: This is the fifth and final installment of our series from Dave Essel translating the latest issue of the Nemtsov White Paper condemning the Putin years. The first installment is here, the second is here, the third is here, the fourth is here and the prior issues are here. The full document is now online as a PDF here. In our next issue we will make the full document available as HTML that can be cut and pasted. Video of Nemtsov and Milov at the press release is here.
PUTIN: What 10 Years of Putin Have Brought
An independent expert report by
Vladimir Milov and Boris Nemtsov
Translated from the Russian by Dave Essel
CHAPTER SEVEN: Pensions Breakdown
One of Putin’s greatest failures was the mess he made of pensions reform. When he came to power, Putin promised that he would give the country a modern pensions system that would provide the elderly with a decent income and at the same time not make for too great a burden on the budget.
This was achievable – if the country had gone over to a funded pensions system under which pensions are paid not from the contributions of the currently employed and the general budget but from accumulated contributions and the income derived from investing them.
The pensions reform has been a catastrophe. Despite the oil price windfall, pensions have stayed under the official subsistence level throughout Putin’s rule.
The distribution pensions system is cracking at the seams. Back when we published our first report on Putin, we predicted that Russia’s pension fund deficit would hit 1 trillion roubles by 2015.
But our gloomy prognosis was not gloomy enough: the deficit reached 1 trillion 166 billion roubles – 3% of GDP – in 2010! Funding pensions is one of the main drains on Russia’s federal budget today.
Since the budget was catastrophically short of the fat to pay pensions by the old system, Putin, in 2009, decided to:
a) freeze further salary hikes for government employees;
b) raise the unified social tax (UST), as Russia’s social security contributions are called, to 32-34% from 2011 while simultaneously abolishing the previous progressive scale for contributions.
This will obviously seriously hurt the pockets of all Russian taxpayers, to the detriment of the country’s economy. In this time of crisis, Putin has decreed that government employees will earn less (freezing salaries while inflation continues apace is equivalent to a pay cut). Internal demand will fall.
Another painful blow has been struck against business. Small and medium businesses not involved with natural resources will feel the most pain, along with those involved in innovation. (There’s your “building an innovation-based economy” for you!). Unlike in the raw materials business, in these spheres salaries are a major cost element and paying the increased UST will be particularly burdensome.
Raising the UST will leave Russia with one of the most burdened payrolls in the world. Does anyone remember Russian boasting back in 2000 that the country had “the lowest income tax in Europe”? Well, forget that now!
In order to deal with its pension fund deficit, in spring 2010, the possibility of raising the pensionable age was mooted. Of course, the idea of increasing life expectancy was something best left ignored.
The pension fund deficit is not the only problem that Russia faces in this field. The current distributive system (under which contributions by those in employment go to pay pensions to those in retirement) means that it is simply impossible for the pensions to be of a decent level. This can only be achieved when the ratio of actively employed to pensioners stands at about 3:1. In Russia today, that ratio is 1.7:1 and is set to drop to 1:1 around 2020-2030 as the population inexorably ages.
The situation could be saved by a quick and effective transition to a savings scheme. These schemes exist in all the developed countries of the West and have proved to be very effective. There, pension funds are built up and invested, forming large mountains. In Switzerland, for example, the fund so accumulated amounts to 122% of GDP, in the Netherlands, it’s 130% of GDP and even in the UK it over 70% of GDP.
The size of accumulated and invested pension funds in Russia is just 2% of GDP.
The creation of a savings scheme here resulted in a total failure, drowned in a sea of empty talk and sabotage. One of the main figures responsible for this failure was Mikhail Zurabov. He’s nonetheless doing fine himself, being currently Russia’s ambassador to the Ukraine.
In 2009, the authorities resorted to outright fraud in their attempts to fill the fund: a programme of state subsidy of pensions savings was announced under which people who contributed 1000 roubles of their salary to the pension fund would have another 1000 added to it by the state (with a maximum of 12000 a year). To the uninitiated, this sounded quite nice.
However, had the thousand roubles contributed by the employee been deposited in a bank account, the money could have earned twice as much as it did under this “government co-financing” scheme! [Source: a detailed description of the fraudulence of this scheme was written up in an article entitled “Who’s Co-Financing Whom?” which appeared in Vedomosti on 6.11.2009]. Those who joined the scheme simply lost hundreds of thousands of roubles as the whole thing was dreamt up in order to get people to pay 1000 roubles a month into the pension fund and so help it out somewhat.
And all the above is besides the corruption in the fund itself. In late 2008, former pension fund head Gennadi Batanov was charged with abuse of authority causing the fund to lose over 43 million roubles. The following year, a series of arrests on corruption charges was made in regional departments of the pension fund.
Thus instead of decent pensions we are witness to failed pension reform, an underfunded pension system, tiny pensions, and a Pension Fund that is corrupt through and through. At the same time, the workforce’s pockets are being plundered under a so-called programme of “state co-financing of pensions” even while it is likely that the pensionable age will will be raised.
Those are the true results of what a decade of Putinism has done to our pensions.
CHAPTER EIGHT: Crooked Billions
The pensions’ fund deficit, the degradation of the roads, and howling poverty (see previous chapters), all go to make Putin’s megamillion projects look all the more obscene. Let us look at three of these in greater detail: the 2014 Sochi Winter Olympics; the North Stream, South Stream, and Altai pipelines; and the APEC-2012 (Asia-Pacific Economic Cooperation) Leaders’ Summit in Vladivostok.
Organising a Winter Olympics in the Subtropics
Nikita Khrushchev is remembered as the communist party general-secretary who tried to grow corn (maize) around Murmansk, in Siberia, and in the Far East. This earned him the nickname of Cornflakes Nick.
Russia is a winter country. It takes some searching to find places in Russia that never see snow or ice. Putin found one such, however – the subtropical resort of Sochi. And then he decided that a Winter Olympics should be held there. One wonders what nickname Russians will invent for him: Summer Snow Vlad maybe, or something else? One thing no one doubts, however, is that these winter olympics will linger long in popular memory.
The initial euphoria at the IOC’s award of the Olympics to Sochi was rapidly replaced by dismay in general and serious grief in particular for many of the town’s inhabitants. Because the town’s very existence as a resort suddenly became uncertain, as did the futures and lives of thousands of its citizens.
Let’s take things in order:
• Expenditure on the Olympics will exceed $15 billion. More than half of this will be found from the federal budget. For the sake of comparison, the Vancouver Olympics cost $2 billion. Salt Lake City and Turin cost about the same. Almost half of the spend – 227 billion roubles – will go on the construction of a 50-kilometre highway from Adler (the airport) to Krasnaya Polyana, a road that will cost $150 million per kilometre!
• Most of the Olympic events will take place in the Imeretinsky lowlands [TN: called the Imeretinsky Riviera in Putin-speak], not far from the Black Sea shore, where six ice palaces and their attendant infrastructure are due to be built. This will require the eviction of over 4000 people from 400 private houses and 32 apartment blocks. Rehousing them has turned into a nightmare: new homes were erected for them in the village of Nekrasovka, using cheap and poisonous PVC building materials (the same stuff that caused the death of 150 people in the Khromaya Loshchad nightclub fire in Perm). The charge for these new homes was about $1 million each. However, the houses the relocatees had been forced to leave were valued at $300-400,000 at best and that was the only compensation they were offered. So not only are people being thrown out of their own homes where they and their parents before them had always lived, they are expected to pay for the privilege.
• The Olympic venues will have seating for 200,000. Sochi’s total population is 400 thousand. The venues will never be filled again after the 2 weeks of the Olympics. Sochi’s only stadium today – the Metreveli Stadium – has 10,000 seats and has only even been filled to capacity twice in the 40 years since it was built: the first time was for its opening ceremony and the second and last time was for an Elton John concert. Putin’s idea that three of the six venues will be dismantled and moved elsewhere after the Olympics resolves nothing. Sochi has no tradition of playing ice-hockey, skating, or skiing. As a result, venues that are much needed in central Russia will stand unwanted and unused in Sochi, left to decay or be turned into flea markets. Maintaining ice palaces and other winter event venues in a place as warm as Sochi will be an extremely expensive business. The small ice skating rink near the Riviera Park in Sochi costs $1 million a year to run. One can expect the running of the much larger ice palaces and their infrastructure to cost hundreds of millions a year.
• Sochi as a town suffers from a shortage of energy. It currently needs about 300 megawatts. The Olympic venues will eat up about 600MW, twice the town’s requirements. Who is going to pay for this, especially once the Olympics are over? Sochi’s and the Kuban region’s budgets can’t even cover the maintenance costs of these stadiums. The federal authorities will forget about the Olympic site as soon as the games are over. We will surely witness the creation of a true and long-lasting memorial to Putin’s wilfulness and spendthrift ways.
• The Olympic preparations are taking place with gross disregard for the environment. The Adler-Krasnaya Polyana highway is being laid through the unique Western Caucasus nature reserve and will lead to the extinction of some unique tree varieties and the destruction of the left bank of the Mzymti river. Complex geology (the many Karst faults) has made for difficulties in building tunnels and creating the track for the road. Mountain rockfalls have dogged the construction throughout. Nature itself is fighting back against this mindless and destructive project: in mid-December 2009, a storm washed away away the freight port that Deripaska had just built and the rapid Mzymti river flooded and engulfed road-building machinery.
• The influx of migrant workers, untold quantities of equipment, and incoming materials by the million tons are making things still worse for the town’s already overloaded transit system, which consists of little else besides a main road along the coast. The collapse of the transport system, overcrowding, and poor ecology are keeping holidaymakers away from Sochi, depriving the town of its sole source of income and the people of the rest of Russia of one of their favourite summer resorts.
The authorities prefer to maintain silence when asked what will happen to the Olympic venues after the event, what will be done for the people evicted from the Imeretinski lowlands, and why the environment and Russia’s last summer resort are being ruined for the sake of the Olympics. Butthe day will come when they have to provide replies and answer for what was done. We believe that it is perfectly possible to organise an Olympics without horror stories, to do things in a human way. Our detailed plan for holding the Olympics in Krasnaya Polyana and transferring certain parts of the games to other venues across Russia may be read in our report Sochi and the Olympics [available on http://www.nemtsov.ru and http://www.milov.info].
For over 10 year of his rule, Putin has been trying to make us believe that building transnational pipelines is a matter of strategic and geopolitical importance. The official propaganda would have it that the new pipelines will make Russia still mightier and Europe and China still more dependent on our hydrocarbons.
Look at them more closely, however, and it becomes apparent that these projects are swindles plain and simple.
Take, for example, the North Stream pipeline. Its first-stage capacity is 27.5 billion cubic metres a year and this is due to rise later to 55 billion. The officially stated cost of the project is $11.5 billion, though it will in fact cost no less than $15 billion. Putin’s reasoning for the pipeline is that it will help rid Russia of dependence on the unpredictable Lukashenko and the Belarus-Poland transit issue. Let’s turn now to South Stream. It has a first-stage capacity of 30 billion cubic metres a year, rising to an eventual 66 billion. It will cost no less than $25 billion to lay – across the bottom of the Black Sea through the territorial waters of Russia, Turkey, Bulgaria (while bypassing the Ukraine). This however will still not take away our dependence on Ukrainian transit, since 130 billion cubic metres a year are pumped to Europe through that country. So even if South Stream is used to its maximum capacity, that will still leave at least 60-70 billion cubic metres being pumped through the Ukraine.
The 2,300-kilometre-long Altai pipeline is to run through the mountains of the Altai nature reserve. Its capacity has been set at 30 billion cubic metres a year and will certainly cost no less than $10 billion.
All three pipelines are irresponsible acts of adventurism. First and foremost because production at Gazprom has stagnated for the last 8 years (2001-2008) at 540-550 billion cubic metres annually and actually fell sharply to under 500 billion (462 billion cubic metres, to be precise) in 2009.
The only major gas field to go into production under Putin is the Zapolyarnoe field. Old gas fields – Urengoi, Yambur, Nadym – are reaching the end of their useful lives. Delays dog the opening of the Yamal and Shtokman deposits. Not enough is being invested for anything real to happen soon.
The situation is therefore that pipelines are being built when there isn’t the gas to fill them, either now or in the foreseeable future. It’s quite conceivable that billions of dollars worth of pipeline will be left to rust, empty of gas, and no return earned on the money spent.
A second problem is that Gazprom is in financial difficulties. Inefficient and corrupt management and Putin’s incompetent interference in the company’s activities have led it into massive debt – about $50 billion, the equivalent of 1 year’s turnover. Diverting funds to pointless pipelines is only making Gazprom’s financial state worse.
Bypassing Belarus is not just super-expensive: it’s completely pointless. The fact is that Gazprom already owns 50% of BelTransGaz (Belarus’ gas transport system) and is therefore quite safe from any political risk connected with gas transit.
Gas transport projects involve colossal price risks. The pipeline to China provides a particularly clear example. China is unaccustomed to paying, and has never paid, European prices for its gas. The competitiveness of China’s economy derives not just from cheap labour but also cheap energy, derived in the main from coal. That China will pay more than $200 per 1000m3 is just not credible. Yet at that price level, the Altai pipeline will never be profitable. It should be recalled at this point that Gazprom is actually short of gas and has to buy it in from Turkmenia, to whom it pays $250-300 per 1000 cubic metres.
Sending gas to Europe also involves financial risk. Three of these are particularly important:
1) In Europe, more and more gas is being traded on the spot market, at prices considerably lower than those of Gazprom’s long-term contracts. If Gazprom tries to insist on long-term contracts at high prices, it risks losing the European market.
2) Cheap shale gas, as now being produced in the USA, has driven the price of gas down sharply there and the same is bound to happen sooner rather than later in Europe. Large deposits of shale gas in Poland mean that gas prices will inevitably drop in Europe and quite soon.
3) Gas consumption is being brought down by the introduction of new energy-saving technologies.
And so we have a situation where Putin is proposing to spend $50 billion on gas pipelines when firstly there isn’t the gas for them; secondly, they don’t actually resolve the transit-country problems; thirdly, they aggravate Gazprom’s already serious financial problems; and fourthly, they are far from likely to pay their way.
The APEC-2012 (Asia-Pacific Economic Cooperation) Leaders’ Summit in Vladivostok
A meeting of the APEC countries is scheduled to be held in the city of Vladivostok in 2012. That a prestigious event of this kind should take place in Russia would seem to be a good thing. If only there weren’t a “but”…
According to the Ministry of Fiance, the cost of preparing for this summit has reached an astronomical 284 billion roubles, of which 202 billion will be disbursed by the federal budget with the rest of the money coming from the Primorsky Region (of which Vladivostok is the capital) and private investors.
The budget for this summit is greater than Russia’s total annual spending on roads for the whole country. It is also 4 times greater than the Primorsky Krai’s total annual budget.
We have a question: how is it that a summit can cost nearly $10 billion dollars or 5 times as much as the Vancouver Olympics? The answer is that Putin has decreed that the summit will be held on Russky Island – which is completely lacking in infrastructure, needs a bridge to be built to it, and then needs power stations, hotels and so on to be built on it. This furthermore is being done when Vladivostok itself could do with an upgrade, suffering as it does from a decayed infrastructure, inferior roads, broken-down utilities, and worn-out housing.
Two bridges to the island will span the Zolotoi Rog Bay and the Vostochny Bosfor Straight. These alone will cost over $2 billion even though the two together will not be more than 3 kilometres long. Note for comparison that China built its 35.6 kilometre long Hangzhou Bay Bridge for $2 billion while a bridge of similar length to ours was built in France for €394 million.
The forthcoming summit has furthermore become a major problem for the citizens of Vladivostok and the region as a whole. The regional authorities have had to cut back on social programs, pay rises for teachers, school meals, housing projects for young families, and more in order to finance this expensive venture. It’s obvious to all that the main beneficiaries of projects such as these are Putin’s corrupt bureaucracy and the businessmen allied to it, who stand to gain fat government contracts. There’s no other way to explain why building for the government always involves stratospheric prices.
The projects described above will cost about $75 billion. But there are more: Putin has a number of other costly and totally ineffective projects in hand. Any list would include the hastily built multibillion Western Siberia-Pacific Ocean oil pipeline. In just a few months from its commissioning, it has suffered three accidents and leaked hundreds of tonnes of oil. The project will never pay for itself and the damage it has done and will do to the environment is incalculable.
The mooted science city of Skolkova is yet another crooked deal in the works. For those who may not be aware of it, Skolkovo is a country place favoured by oligarchs. R. Abramovich owns quite a lot of land there. Land prices in Skolkova are on a level with Rublevka’s (from $150,000 to $200,000 per sotka (TN: 1 sotka = 100m2 = $6-8 million per acre!] and real estate starts at $15,000 per square metre. We should ask how many engineers, programmers and IT managers will be be able to afford to come and live on Russia’s most expensive real estate. We should also ask how small and middle businesses will be able to afford the rents there?
CONCLUSION: Medvedev and his “Results”
We have frequently been asked why we write about the results of Putin’s rule and say practically nothing about the results of Medvedev’s although we are nearly two years into his presidency. Leaving aside articles such as “Forward, Russia!” penned by the president, video clips on his blog, and sound bites such as “freedom is better than non-freedom” and concentrating on concrete matters, there would appear to be only three things to say:
1. The Constitution was amended to increase the presidential term from 4 to 6 years. Since our presidents usually manage to get 2 terms in the Kremlin, this means that we are looking at 12 years of rule by one person. This will obviously result in increased corruption and further stagnation.
2. The recognition of the independence of South Ossetia and Abkhazia. This was, in our opinion, a big mistake since it incites further separatist feelings within Russia itself, to the detriment of the country’s unity. One cannot but be struck by the fact that the number of terrorist incidents rose sharply after the independence recognitions – half as many again such incidents were recorded in 2009 compared to 2008. Our home-grown separatists were inspired by the recognitions – if the Abkhazian and the Ossetians get such treatment, why shouldn’t they too?
3. The Gas / Black Sea Fleet deal. Under this deal, Russia will pay the munificent sum of $4 billion a year to rent the Sevastopol naval base with the Ukraine getting paid in cheaper gas. (The Americans pay $800 million for their largest naval base on Okinawa and $660 million for their base in South Korea). And it is not Gazprom that loses from this but rather the Russian budget – the gas monopolist will be compensated by being freed of export tax on these deliveries. This represents a loss of $40 billion to the Russian budget over 10 years and will without fail lead to higher taxes (in particular a rise in the unified social tax) for ordinary Russians. So while gas prices drop in the Ukraine, Russians will have suffer sharp hikes in their utility bills.
It cannot be denied that some cosmetic changes were made in the Federal Prison Service’s top brass following the death in custody of Sergei Magnitsky and that some generals in both the Ministry of Defence and the Ministry of the Interior were fired. All in all, however, these changes cannot be considered to be of major import.
The man whose job it is to defend the Constitution has in no way restored the civil and political rights that Putin did away with. Political competition within Russia has been reduced to nil. Censorship is more than harsh. Elections have become a farce. “Basman court justice” remains the rule of the day*. Medvedev’s babblings about modernisation and innovation or creating a second Silicon Valley in Skolkovo are quite divorced from reality.
Thus we can see that 10 years of Putin have brought:
1. A catastrophic level of corruption. Russia numbers among the worst African offenders in this sphere, ranking 146th in Transparency International’s rating.
2. Russia is losing approximately 500,000 citizens a year as a result of its excessively low life expectancy and to supermortality from alcoholism and poor public health.
3. Dependency on raw materials has increased over the last decade. Raw materials made up 44% of exports in 2000. In 2010, they will account for 65% of the total.
4. The road network is crumbling. Massive corruption in the road-building industry has resulted in a cut of 50% in roads commissioned during the last 10 years.
5. Acts of terrorism have sextupled in a decade. Reliance on the Caucasus’ corrupt clans has led to all intents and purposes to a complete loss of control over the North Caucasian republics while at the same time the federal authorities subsidise them to the tune of $5-6 billion a year.
6. Social divisions within the country have risen by 15% in the last 10 year under Putin. The number of billionaires in the country doubled in the crisis year of 2009, a year which also saw 18.5 million citizens living below the poverty line, unemployment of 9%, and civil servants’ salaries frozen.
7. Multibillion crooked deals are initiated against a background of budget deficits and howling poverty: winter Olympics in the tropics; the North Stream, South Stream, and Altai gas pipelines; the APEC 2012 summit on Russky Island.
8. A bankrupt pensions fund. Its deficit now exceeds a trillion roubles. With an ageing population and a drop of 1 million a year in the number of employed, prospects are miserable in the extreme. The authorities want to raise taxes and increase the pensionable age.
This report has not mentioned many other practically no less important issues: crime, affordable housing, the state of the armed forces, the environment. The situation with these is dreadful as well. Despite a near tenfold increase in spending on law enforcement (from $2.8 billion in 2000 to $31.3 billion in 2009), the crime rate has failed to drop. On the contrary, corruption is up and there is more robbery and fraud. The total number serving in the various arms of law enforcement is 2,140,000. The armed forces only have half that number. Law enforcement is directed primarily against the opposition and engages in illegal business, protection rackets, and corporate raising.
Despite the loudly proclaimed “Affordable Housing Program”, homes have become still more expensive under Putin. The average price for a square metre of living space has gone up ninefold in this time. Back in 2000, a standard 50 square metre apartment cost on average 6 average annual incomes. In 2008, such a flat cost 15 average annual incomes.
In early 2010, the authorities, spoken for by Head of the General Staff Makarov, announced the failure of the programme to transform the army into a professional force. The programme was sabotaged by the government itself. Contract soldiers were paid miserable salaries (8-10,000 roubles a month) and were unable to buy their own homes.
In 2001 Putin passed and signed a law to permit the import of highly toxic nuclear waste (spent nuclear fuel) into Russia. Following this, thousands of tons of spent fuel were imported from Poland, Serbia, Kazakhstan, the Czech Republic, Latvia, Vietnam and other countries. The nuclear dumps are located in the Chelyabinsk Region (PO Mayak), at Krasnoyarsk-26, and at Tomsk-7. Russia is now storing 19,000 tonnes of spent fuel and 400 million cubic metres of nuclear waste.
In early 2010, Putin issued a decree allowing the Baikal Pulp and Paper Plant to reopen. It had previously been shut down for environmental and economic reasons. The reopening led to loud protests across the country because the plant’s toxic waste pollutes Lake Baikal.
The answer to the question “What does Putinism mean?” is clear. Putinism means corruption, censorship, raw materials dependency, social inequality, and the depopulation of the country.
De-Putinisation is Russia’s only way out of this dead end.
* TN: Basmanny District Court. Infamous for conducting trials in which it hands down politically motivated decisions in contradiction of the facts of the cases before it. Drew criticism from Russian human rights activists, the liberal press and the international community, particularly in the case of Mikhail Khodorkovsky. “Basmanny Court” or “Basmanny justice” is commonly used as a negative term when speaking the justice system in Russia.
Of course the pensions break down. The energy monopoly is gone because of new shale gas technology so all that is left is a sound economy. Corruption prevents a sound economy from developing so the Putin model must fail.
They are becoming weak to the point that Hillary could insult them with impunity in Georgia. Now what Putin?? Got any ideas???
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