2018/08/25 – Last weekend marked the 20th anniversary of one of the key events that shaped Russian modern history—the 1998 financial crisis and the government’s default. Another major discussion in the Russian political discourse this week revolved around a proposal by Putin’s economic aide to “seize” over 500 billion rubles from industrial companies to relieve the country’s tax burden. Finally, Russian experts try to explain the Kremlin’s expansion into Africa.
- Russian Default: 20 years later
- The story: August 17, 1998, marks an important milestone in modern Russian history. In the midst of the global financial crisis of 1997-98, a series of Russian government decisions led to the country defaulting on its domestic debt, devaluing the ruble, and introducing a temporary ban on foreign debt payments. The cascade effects of this crisis can still be felt today.
- Then Russian Prime Minister Sergei Kiriyenko (currently First Deputy Chief of Staff of the Presidential Administration) oversaw the most turbulent period for just a week, only to be scapegoated, fired, and eventually replaced by Yevgeny Primakov.
- Dig deeper: 20 years on, Kiriyenko discusses the crisis and his role in the decision-making process with journalist Yevgenia Albats [New Times].
How the crisis shaped Russia
- Konstantin Sonin, economist: The key lesson of the 1998 default for the Putin government is the conservative fiscal policy. Payments on the foreign debt and restraining inflation became his economic priorities.
- 1998 marked the collapse of a number of major private banks, and although they were bailed out by the Central Bank and the majority of their clients were reimbursed, it was done with great delays resulting in people losing lots of money due to 30-50 percent inflation. It was also back then that the public image of the “oligarchs with outsized influence on the government’s policies” was shaped in the public mind. [Vedomosti]
- Dmitry Prokofyev, economist: The key element of the default story is why those in power made such irrational decisions when it was clear they would crash the economy. In early 1998, the crisis was not inevitable. Russia’s economy had grown in 1997, the ruble appeared stable, the number of poor people was decreasing. The real story lies in the political conflict between conservative factory directors who were losing their competitive advantage due to rising consumer standards and the reformers in the government. The former won, and the people paid the price.
- It is a myth that the 1998 default eventually boosted Russia’s economic growth in the 2000s. The growth was due to a global rise in commodities demand (Russia’s key exports) and devalued wages that gave factories additional money. [Novaya Gazeta]
How to Seize “Superprofits”
The story: Earlier this August, in a letter to the president, Putin’s economic aide Andrei Belousov recommended that he withdraw nearly 514 billion rubles from metallurgical, mining, and chemical companies—additional revenue that Belousov refers to as “superprofits,” which he believes could be used to equalize the country’s tax burden.
- Belousov’s explanation is that in 2017, companies in the metallurgical, mining, and chemical fields earned more than 1.5 trillion rubles in profit before interest, taxes, and depreciation, but that the tax burden on these industries was also lower than on oil and gas. [RBC]
- Belousov has stressed that the money isn’t about a lack of funds to realize Putin’s May Decree (which requires 8 trillion rubles), but rather about withdrawing some of the additional revenues that commodity exporters have received from the weakening of the ruble and the growth in world prices for their products. [Kommersant]
- Putin has yet to consent, but the government has prepared a list of companies that could be affected. On August 17, the Russian Union of Industrialists and Entrepreneurs (RSPP) met with First Deputy Prime Minister Anton Siluanov, Belousov, and representatives of big business to discuss the issue. [Vedomosti]
- Some company representatives have spoken out against Belousov’s proposal, arguing that the withdrawal of these funds will remove the incentive for companies to increase efficiency and productivity. If the proposal went into effect, some companies could default—it could also reduce tax stability, which could hurt investment activity.
- This would directly conflict with the stipulations in Putin’s May Decree on industrial development and increasing exports of non-commodities—the government has adopted a plan to raise the level of investment to 25 percent of GDP.
- Russian Economic Development Minister Maxim Oreshkin suggested shifting the discussion of Belousov’s proposal from changing tax legislation to increasing investment activity, with a focus on how companies can free up cash flow. [Vedomosti]
- Alexei Panin, consultant: If the plan is realized, businesses will be forced to reduce investments and understate profits, and their own efficiency will decrease. To remove what companies have earned through good business, the state must guarantee that it will support the business or return funds if the economic situation deteriorates. [Vedomosti]
- Oleg Buklemishev, economist: The dominant reason for the ruble’s weakness is sanctions—and since the sanctions regime will become tougher, the ruble’s devaluation will only increase. Right now, the “superprofits” stemming from the ruble’s devaluation are more than compensated for by Russian corporations’ sagging share prices, the deterioration of conditions for raising capital, and increased investment in imports.
- It’s not clear why additional revenues are being sought out now—is it to start programs for health and education immediately in the new year? Or to implement large-scale infrastructure projects? It seems that economic policymakers are looking for funds for something that has yet to be uncovered. [RBC]
Russia Moves Further into Africa
What happened: This week, the Russian Ministry of Defense struck a deal on military cooperation with the Central African Republic and Burkina Faso. The agreement states that Russian specialists will help train the Central African military—both on the ground and in Russian military schools. In Burkina Faso, Russia will cooperate on the joint training of troops, peacekeeping, and the fight against terrorism.
- The agreement comes just weeks after three Russian journalists were murdered in the CAR while investigating the Wagner Group, a Russian private military company.
- Russia currently provides military assistance to the CAR with the consent of the UN Security Council. A UN military contingent is stationed in CAR, and U.S. and French military bases exist in Burkina Faso.
- In March, the Russian Foreign Ministry announced that it was sending five military and 170 civilian instructors to train the armed forces in the CAR, as well as ammunition to its army—it has also struck military agreements with other African nations, some of which have continued since the nineties. [RBC]
What it means
- Dmitry Bondarenko, Institute of African Studies: Russia is unlikely to earn money by selling weapons to these countries, which can’t afford Russian arms. But Russia can benefit from access to natural resources, particularly uranium and precious metals.
- There is also an international embargo imposed on the CAR, meaning that Russia must gain special permission from the UN in order to send military property to the country. [RBC]
- Vadim Zaitzev, Andrei Maslov, Yulia Timofeeva, Africa experts:The murder of the Russian journalists in the CAR raises questions about what Russia is doing in the country and what its objectives are. But Russia has no major business interests and isn’t playing a “geopolitical game” there yet.
- The CAR is one of the poorest countries in the world, marred by political instability, and lacking in strategic importance as a landlocked country, though its diamond and gold mines have attracted foreign companies.
- Russia’s role is exaggerated because it is convenient, especially for Western nations, to paint the country as an opponent. While in the long term, Russia’s presence in the CAR could transform into a political project in the context of BRICS, for now, it’s a simple business story. [Carnegie.ru]
Other stories that mattered this week (in Russian)
- “Native Tanks: Changing Russian Attitudes Toward the Prague Spring”: Political scientist Alexei Makarkin discusses how Soviet public support for the crackdown on the Czechoslovakian liberalization changed to atonement in the 90s, and how today old Soviet stereotypes are being restored. [RBC]
- “Navalny vs Vedomosti: Who said they have to write about him?”: Journalist Oleg Kashin analyzes the recent feud between Russian opposition leader Alexei Navalnyand a business daily that refused to cover his recent investigation into the luxury apartment of the mother of Duma speaker Vyacheslav Volodin. Navalny accused the Vedomosti owner and journalists of cowardice, triggering a heated discussion in social media. Kashin argues that Navalny is not a “special newsmaker” to be always covered by the daily. [Republic]
- “To Berlin, on Business, Urgently. Why Putin needed an unplanned meeting with Merkel?”: Expert in international affairs Vladimir Frolov weighs in on Putin’s sudden and impromptu trip to Germany and analyzes various theories that could explain this move. It is likely that post-war restoration in Syria is Moscow’s number one foreign policy issue, and given Angela Merkel’s political vulnerability in the light of the refugee problem, the Kremlin may try to pursue its interests with Berlin’s help. [Republic].
Institute of Modern Russia / Sahel-Elite Photo: Presidential aide Andrei Belousov came up with a creative plan to relieve the country’s tax burden. Photo: Vyacheslav Prokofyev | TASS.