Kudrin Says: Drink, Smoke and Pay to Make Babies!
Although by some measures (such as debt-to-GDP and deficit-to-GDP ratios) Russia’s fiscal situation appears favorable relative to that of the United States, for a variety of reasons, and for now, the US can finance its massive and burgeoning spending in a way that Russia cannot match. The fiscal strain in Russia, with a deficit of 5.4 percent of GDP, is forcing Finance Minister Alexi Kudrin to search for ways to plug the gap.
For one, he is encouraging bad habits–like cigarette and alcohol consumption (H/T S/O):
Smoke and drink more, Russia’s finance minister Alexei Kudrin urged citizens on Wednesday, explaining that higher consumption would help lift tax revenues for spending on social services.
“If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates,” Kudrin said, quoted by the Interfax news agency.
“People should understand: Those who drink, those who smoke are doing more to help the state,” he said, offering unconventional advice as the Russian government announced plans to raise excise duty on alcohol and cigarettes.
In present value terms, this is definitely a loser, even when evaluated from the narrow perspective of government funding, and ignoring the total costs to the Russian population. The present value of the future costs to government revenue resulting from greater consumption of these goods, in terms of early mortality (and the consequent loss in earnings–and hence taxes) and greater health care expenditures almost certainly exceed the value of the short term revenue jolt this higher consumption would provide.
It is also sad to see Kudrin sink to Orwellian arguments like: “If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates.” Translation: kill yourself so we can pay others to have babies!
Huh? And come on: these measures are necessary to pay for existing programs, not to pay for new initiatives.
But the financing constraints of the Russian government (which reflect, in large part, the nation’s perceived unreliability as a political risk) and the relentless presentism of the government (which I’ve written about before, and which arises from a variety of causes) mean that Kudrin has to let the future care of itself.
How nice. It’s also interesting to note how Kudrin has learned his lesson from Gorbachev and Perestroika. Gorbachev cratered the USSR’s already shaky financial condition (with oil revenues down due to plunging prices and plunging production, and imports up due to agricultural failures) by cracking down on vodka sales. Less vodka sales, less taxes. Another nail in the Soviet coffin. Kudrin isn’t going to repeat that mistake!
Moreover, the fiscal crunch is also driving the prospects for the sales of stakes in Russian state companies, like bank VTB, and Rosneft. This initiative is on the slow track, however, with an announcement that there will be no sales in 2010, and no decisions have been made about what firms, and how much of them will be sold in in 2011 and beyond.
Here Russia’s reputation again is hurting it. The Russian government will retain control of the corporations, and given protections for minority shareholders, and the prospect for re-nationalization (on dictated terms) at some future date, mean that the price the country would get is likely to be discounted heavily. Put differently, this is not a conviction privatization, driven by a recognition that reducing government ownership and control would improve efficiency; it is a desperation sell-the-family-jewels-gambit where the buyer realizes that he doesn’t get them free and clear and may have to sell them back at an unfavorable price later. Thus Russia is unlikely to get the price that it wants, but may be forced to sell anyways even at a big discount to meet its pressing fiscal demands.
Some folks have pretty much figured this out:
Troika Dialog economist Anton Strutchenevsky said the lack of certainty in the government’s position is evidence of the fact that the government sees privatization as an ad-hoc measure, necessitated by the need to fill the black hole caused by the shortfall in budget inflows of oil money. “If, hypothetically, the price of oil jumps to $100 per barrel today, the government will trash all these privatization plans,” Strutchenevsky said. He pointed to another “weak point in the program,” which he said makes the whole scheme looks like half-measures. “The state will continue to control and manage most of the enterprises and corporations slated for privatization, since it will retain some 50 percent plus share in most of them,” he said. “You cannot privatize without transfer of some ownership and control. Few investors want to sleep in bed with a government that makes all the investment decisions.”
So, Russia is in the situation where its fiscal choices include inducing the population to kill and incapacitate itself more quickly in order to raise more taxes today, and selling shares in state companies at big discounts that reflect its inability to credibly protect the buyers. With the price of oil drifting lower the pressure to make these unpalatable choices have only increased.
The best BRIC. Ha!