4 May 2020
Russia in "perfect storm", says economist Grigory Yavlinsky

Russia in "perfect storm", says economist Grigory Yavlinsky

Alexei Nikolsky / Getty Images

The Russian government's coronavirus aid package has been criticised as insufficient and mistargeted - multiple economists have called on the state to tap into the National Wealth Fund (NWF), initiate cash handouts to the public to stimulate demand, and expand support of small and medium-sized enterprises (SMEs). Politician and economist Grigory Yavlinsky joined Marianna Minsker and Yan Melkumov in the latest edition of Hang In There to discuss Russia's economic response to the COVID-19 crisis. A partial transcript of the interview is available below.

The titles of your recent articles speak for themselves: "Greed or Foolishness", "The Imitation of Help" and so on. What are you demanding from the authorities and what would you do in such a situation?

I'm not offering anything special - [the government] needs to keep the economy afloat so that it can recover more quickly. Demand is falling very sharply. Supply is holding on, more or less, which is more than can be said for demand. Production is suffering. Production levels in developed countries have fallen from 15% to 25%, which is highly significant. All efforts have to be directed towards supporting [supply] chains on the one hand, and supporting workers on the other, enabling [all companies] to retain their teams and their staff. People need to be paid a percentage of their monthly salary - 80% [is optimal], according to my calculations.

80% - you're advocating for European levels of salary support, which is far from Russia's [declared support of] one minimum wage. It's just over 12,000 roubles, which is clearly not enough.

I need to make a small clarification here - I meant 80% of the average salary in the region where it will be paid out. We [live in] a very large country, and [different regions] have very different salaries. In either case, you summarised the point quite well.

Why isn't this being done?

There are several forces at work here, all of them significant.

Firstly, those who call the shots are underestimating economic logic by believing that they can decide everything by a team or order.

Secondly, [the government] cares about preserving the current system, by which I mean state capitalism - large state monopolies, large state enterprises. They're inefficient - there are no examples of them running efficiently - but that's just how Russian economy works, and it's been intentionally set up that way. It's state corporation, both politically and economically. According to the Federal Antimonopoly Service, the state's share [in the economy] is 70-75%, while the the World Bank puts that figure at around 35-36%. These are all tentative figures. This economic expansion of the state has been a trend for many years now. That's why [Russia's economy] is limping.

The third reason is that the current system selects the worst personnel, and that's putting it mildly. There is no competition, no social lifts, no natural political advancement - the system, competition, and elections do not choose the best. These mechanisms have been discarded, they're not in place in [today's Russia]. The system in Russia is set up in a different way - former security guards and acquaintances are appointed governors. They appointed a technocratic Prime Minister [Yavlinsky is referring to PM Mikhail Mishustin - Ed.] - he didn't even dream that he'd get to be in that position. He wanted to create computer networks to collect taxes, and here he is dealing with the real economy. In order to do that, you need to understand how [supply] chains work. Pipettes and masks disappeared from the economy - why, you may ask? Because a small link falls out, and huge enterprises come to a standstill.

There's a lot of debate about whether money should be handed out to the population. If the state does decide in favor of that, where should it get the funds - borrow them from the Central Bank, or tap into the National Wealth Fund? Do you think the government should resort to cash handouts?

The answer is absolutely clear - yes, it should, because it is essential to support demand. By the time the quarantine is over, the economy needs to be able to breathe, teams need to be held together...

Does it really have the money? The state's social obligations are still in place - promises have been made to raise salaries for doctors, along with multiple other measures. Will there be enough money for everyone?

When things are going well, [the government] always says that we have a large safety net, huge gold and currency reserves, and the National Wealth Fund. When we have to pay up and help people, we have suddenly have nothing, we're miserable, and everything has to be left for later.

Russia is in a perfect storm: oil prices have fallen, gas prices in Europe are now lower than in Russia, it's now unprofitable to export gas. This is happening to all raw materials, and exporting raw materials for Russia is incredibly important. There will be big problems if oil prices stay where they are.

If everything stays the same, if the state keeps funding the arms race, maintaining its gigantic bureaucracy, carrying the huge cost of funding enforcement agencies [Yavlinsky is referring to the so-called siloviki, or "institutions of force", which include the military, police, and national security organisations (the FSB, SVR etc.) - Ed.], and funding huge construction sites, which are mostly for show. If we continue as we were, if we continue the fighting in Syria and Ukraine, then the fall in oil prices places us at a crossroads facing big problems.

[The state] wants to use the National Wealth Fund to compensate for the fall in oil prices, and keep the budget unchanged. We only a rough idea of the state's expenses - it's very difficult to say what's actually going on.

If we cut all those costs, will we then have money for cash handouts?

Imagine that you're running a household, and money suddenly stops coming in. You will restructure [your family's] expenses to protect the children and the elderly, you'll make sure that you have enough for medicine and food, some expenses will be cut entirely, some will be postponed, and funds may be borrowed to cover what remains.

We must now prioritise people, workers, small and medium enterprises, and the economy in general, if we want it to recover. If we want the economy to get back on its feet in the fall, we have to help it today, and that includes helping people and supporting demand. We need to make sure that the economy recovers as soon as possible.

The state doesn't seem to understand this, and [the economy] will keep falling. In these conditions, it will continue maintaining expenses that are completely counterproductive for our country.