''Not to spend earnings in an underinvested country looks weird''

Economist Dmitry Kuvalin about ''big bosses' failures in Russia

If the country doesn't know how to rationally use earnings, it should hire smart managers. Though it's a no-brainer, Russia has a safe bet — to develop infrastructure and build houses, thinks Deputy Director of the Institute for National Economic Forecasts the Russian Academy of Sciences, head of the Laboratory of Analysis and Economic Processes Forecasting Dmitry Kuvalin. In an interview with Realnoe Vremya, the expert told how it turned out that the Russian president's May Decree had one number, while other economic departments' forecast had another.

''It's impossible to understand why financial authorities hold the dollar rate firm though they say it's floating''

Mr Kuvalin, let's start with possible sanctions of the USA. Can they bring to a refusal to purchase Russian state bonds, what many people fear?

Theoretically, it's is possible. Practically, it's unlikely. It will probably be a double-edged decision – if you anyway start behaving like a hooligan in the financial market and impose sanctions against somebody, you also start to be trusted less, and your business also starts expressing discontent by spontaneous decisions.

What about the possible imposition of sanctions against Russian state banks?

Almost the same thing.

Anyway, what are the consequences for our banking system?

Then the consequences will be serious – we will need to look for internal banking activity fronting, solve problems with cross-border capital flows. But it won't be a tragedy. Russian financial infrastructure isn't bad, and it can be developed further, while there will be economic losses during the interim period, of course.

How can this decision influence the dollar rate? Will the US currency go up?

It can strongly influence at a moment, but everything depends on how macrofinancial authorities of the country will behave. In addition, much will turn on economic growth: if its paces are high despite sanctions, nothing bad will happen to the ruble.

Maksim Oreshkin expressed a thought last month that the dollar's price was 55 rubles in fact (and some say about 45 rubles). Is the dollar really overestimated?

It's lyrical statements.

The dollar is as much expensive as it is in the market. Another thing is that absolutely any person in Russia can fix the dollar rate with such a foreign exchange reserve and restrain it.

In addition, all these artificial dollar measuring tools, the same principle of purchasing power have the right to exist, of course. In real life, the dollar rate is the exchange rate.

What does the dollar cost 65 rubles when oil is about $80 per barrel?

Now the dollar rate to the ruble is a result of our authorities' macrofinancial politics. Remember we had rate spikes in August-September, while the ruble is very firm now. Why did it jump in August-September? The Central Bank hasn't provided any clear explanation in this respect yet, neither has done the Ministry of Finance. It's impossible to understand why financial authorities hold the dollar rate firm though they say it is floating, while they don't give any clear explanation in this respect. Of course, oil price, perturbations in the world economy and our economy's low growth paces still influence the dollar. But short-term fluctuations are explained by the financial authorities' politics.

''Russia has foundation for higher economic growth''

Let's go back to sanctions, more precisely to their possible consequences. Head of the Russian Accounts Chamber Aleksey Kudrin has recently claimed at a meeting of the Russian Union of Industrialists and Entrepreneurs: ''We need to clearly realise that if sanctions grow, the goals set by the president become almost unachievable in many indicators''. It seems that we're talking about the Russian president's May Decree, which means it's impossible to reduce poverty in Russia and include it to the top 5 most developed economies in the world. Do you agree with such an estimate?

Yes, in general, those forecast corrections that were published don't correlate with the goals set in the president's May Decree. And with those economic growth paces we have now, most indicators linked with a rise in growth paces, higher GDP, better level of life of the population aren't achieved, indeed.

What for could Kudrin say these things?

Federal departments made forecasts, did calculations, they had some numbers. These numbers show GDP won't rise by 2024. It's not so difficult to calculate what will happen to the income dynamics of the population, it won't be possible to increase social expenses. Yes, it's a paradox – the decree has one number, the economic departments' forecasts have another. And here big bosses should be asked how they accept such double consciousness.

But it's too naïve to hope sanctions will be lifted. And there is a question: is it possible to accomplish the tasks given by Putin in another way, with sanctions?

I support the opinion that in the current conditions economic growth can be higher than it's now. And for this purpose, Russia has foundation and all resources, it has room and such an advantage as dissatisfaction with the population's basic needs.

Look, we have a dissatisfied state of road infrastructure, people don't have enough good quality dwelling. Consequently, with investments in housing development and road construction, we can grow. Russia has a labour force, natural resources, it has idle production capacities, it has land to grow agricultural products. And Russian has many things it doesn't use to the full. This is why we have low growth paces.

''The volume of these reserves shouldn't exceed reasonable needs''

What measures need to be taken for the economy to reach the positions claimed by Putin?

Loans need to cheapen, the volume of investments in the economy needs to increase, we need not to allow the population's income to fall (they account for the volume of domestic demand for products of Russian manufacturers), we need to reduce the tax burden on producers. And we also need to make up how to use surplus incomes Russia receives from feedstock exports: collecting them into a money box isn't the most effective way of using these incomes.

You know, when the same expenses are collected in one place and aren't spent, that's to say, they don't turn into investments to create production capacities, develop infrastructure, it's direct deduction from economic growth. I agree the country needs reserves, but the volume of these reserves shouldn't exceed reasonable needs. Otherwise, these reserves start shrinking.

We often hear: ''We will spend the reserves in a critical situation, and the fall, the crisis won't be so deep! And now it's better accumulating until it's stolen or spent purposelessly!'' But as we made sure, more is spent purposelessly or these resources are stolen during a crisis.

This is why the argument ''let's accumulate, otherwise it will be stolen'' doesn't work. We need to think about how to effectively use earnings. All in all, if you ask somebody: ''Doesn't your family need the earnings, even if you earned much?'', they will twist a finger at a temple – a family will always understand how to spend the money it earned. But this rule doesn't work in this country. It's considered to be impossible to spend some money of the country reasonably. Such an approach in a poor, underinvested country looks weird!

In the end, you don't know how to rationally use money yourself, hire other managers for it. Though, to tell the truth, one doesn't need deep thoughts there, there is a safe bet – to develop infrastructure and build houses. Of course, it needs to be considered these roads go in the right direction, and those who really need accommodation got the dwelling, and it doesn't need to be a gift of fate. It must stimulate the population and business for further development.

Does it mean it must be state investments, first of all, when you're talking about investments?

State investments are a kind of fuse for firewood – matches or birch bark! Why did I say about the reduction in tax burden?

The logic is simple: if you are a country and have spent much time without knowing how to spend this money correctly, leave it to the economy. Leave it to businesses, if not the population – the population will purchase more commodities, it will buy a dwelling, businesses will start investing in the country more. If you invest more, there must be less tax burden on such a business!

''The country needs trillions and even tens of trillions of investments to provide necessary growth paces''

Isn't it perhaps better testing these ideas with loans and investments in some regions? Or do they need to be tested across the country at once?

I formulated the ideas generally. They anyway need elaboration and a clear explanation of details: the same increase in investments is explained in specific projects and in specific regions. And, for instance, we still need to think and work on what we will develop in Kuzbass, mining or machine engineering. Regarding if these measures need to be taken everywhere and at once or do some pilot projects, both options can be used. We can try to take the obvious measures, for example, tax burden across the country. For instance, to cut some tax for three years. You probably remember that natural persons' income tax was reduced in the early noughties, and this led to a sudden rise in this tax collection, salaries became declared widely. And it was a successful step. This is why I think such universal steps can be spread now too.

Approbation attempts are also allowed. For instance, to approve a project financing scheme that was declared several years ago and meant that the state gave money to co-finance some big projects initiated by private businesses with concessions. Mainly it was infrastructure or development of some industrial sector. And a private business can get access to very concessionary borrowing in this technology.

The Industry Development Fund uses the same technology but another scheme. As experience shows, if someone receives this financing, then it's quite successful – concessionary loans are concessionary loans, this is why everything develops successfully there. But investment scales in the industry didn't become popular, they are measured in tens, hundreds of billions of rubles there, while the country needs trillions and even tens of trillions of investments to provide necessary growth paces. Ministries say ''we will unbalance the current economic model if we give some sphere more money'. But it's rubbish by default.

As the current economic model brought the country's economy to stagnation, it should certainly be substituted, and I wouldn't worry about its well-being. Our economy's model needs to change, so that investment flows and the population's spending dynamics will be higher.

By Sergey Kochnev