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Putin and the Crisis by Boris Nemtsov

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This is the third installment in the White Paper series by Boris Nemtsov and Vladmir Milov, translated by the Russia blog La Russophobe. This installment exposes the failures of the Putin regime in responding to Russia's catastrophic economic crisis.

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An independent expert report
Translated from the Russian by Dave Essel

Moscow 2008

Boris Nemtsov
First Deputy Prime Minister of the Russian Federation 1997-1998

Vladimir Milov
Deputy Minister of Energy 2002

Members of the Bureau of the Solidarity United Democratic Movement Page 1

0 1 2 3 4 5 6 7 8 9 10 11 17 Introduction The Crisis Came from America and the West The Development of the Crisis in Russia Collapse of the Financial Markets Capital Flight The Banking Crisis How Putin is Helping the Oligarchs The Budget Raising the Tariffs of the Natural Monopolies The Crisis and Press Censorship Our Proposals What Next? About the Authors 3 3 4 6 7 7 8 9 10 11 11 14 14

Translated from the Russian by Dave Essel
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The authors have provided this White Paper to Novaya Gazeta and for publication. Putin and the Crisis will also be published in brochure form. The authors are Boris Nemtsov (First Vice Premier of the Government of the RF 1997-98) and Vladimir Milov (RF Deputy Minister of Energy in 2002). Both are members of the Bureau of Solidarity, the united democratic movement. This is the authors’ third White Paper. The first two – Putin: The Bottom Line and Putin and Gazprom are well-known both in Russia and abroad.

Because, notwithstanding all the propaganda about the Russian government’s supposed might and all-powerfulness, it was in fact completely at a loss in the face of these events and totally unprepared to act to overcome them. What is the Russian government hiding when it tells us about the crisis and what it is doing about it? Are there alternatives to the policies being pursued by Putin? We will answer these and other questions below.

The Crisis Came from America and the West
When referring to the crisis, the Russian government tries to present matters in such a way that it appears the USA alone is to blame for it, evading by all possible means any talk of its own responsibility for what is happening. True, the crisis did start in the USA. It first appeared in the mortgage world. In their rush to win customers, many Western banks issued massive numbers of mortgages to people who did not even have jobs, money, or property as collateral – almost depositfree and with little chance that the credits would be repaid. The credits themselves were low-interest, too. Throughout Bush’s presidency, the Federal Reserve’s policies designed to stimulate the economy were aimed at lowering interest rates, thus making credit cheaper. So what had to happen – did happen. People stopped repaying on their credits and banks became strapped for cash and went bankrupt. A serious banking crisis ensued and this in turn became a crisis of trust. The crisis of trust led to a slowdown in lending which immediately provoked stagnation and an economic downturn. The downturn caused a reduction in demand, including demand for oil and petrochemicals. In the space of 3-4 months, the price oil dropped to between a third and a quarter of peak.
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Official propaganda would have it that this crisis is a “made in the USA” event and that the mistaken economic policies of the American government are the root cause of all our misfortunes in Russia. It is true that the origins of the crisis lie in America; however the crisis that has developed in Russia is far more serious and painful than in the West. We are facing a deep devaluation of the rouble – over 50%, the collapse of our stock markets where the indices have dropped 75% (40% in the USA), a budget deficit of 20% in December 2008 (not equalled even during the collapse of the USSR), a 36% drop in rail transport volumes in early 2009, a fall in ferrous & non-ferrous metals output, a rise of over 1 million unemployed, a sharp reduction in real salaries, rising poverty and the destruction of the middle classes. Why did the crisis virus hit Russia’s economy so hard?

On top of this, the Fed’s low interest rate policy encouraged speculators to dream up all sorts of investment bubbles – in the stock markets, real estate, raw materials futures, metals, etc. There was no reason other than speculation for $140-oil: demand remained stable at 85 million bpd; supply was not outstripped by demand; cost of production, too, did not exceed a worldwide average of $10/barrel. The bubble had to burst sooner or later. And that’s what happened. Yet another reason for the crisis was the greed of management in the financial sector, banks included, who in their lust for bonuses handed out risky credit in volumes great enough to endanger the whole financial structure. The causes of the current crisis lie in cheap money, risky credits, management greed, living life on credit without assessing the risks, and unrestrained consumption (and the consequent overproduction). Anyway, the virus made its first appearance in the USA and other Western countries, first and foremost the United Kingdom, and then spread rapidly across the world. The way the virus affected countries’ economies varied. It turned out that some countries had greater economic immunity than others. Some countries suffered less from the disease, while others, like Russia, were cursed with economic immunodeficiency syndrome. It was therefore here that the economy began literally to unravel.

investors fled (there was a record outflow of capital), the Russian economy faced a massive shortage of cash and this led to the devaluation of the rouble and a collapse of production, investments, and incomes. Let’s begin with the devaluation of the rouble. It has lost half its value between summer 2008 and early February 2009, going from 23.5 to 36 roubles to the dollar. The reasons for the rouble’s fall in value are easy to pinpoint: Russia is an oil-exporting country and the value of its national currency syncs with the price of oil. The cheaper oil gets, the cheaper the rouble. On top of this, Russia economic dependence on raw materials has increased sharply under Putin. Back in 2008, oil and gas made up 30% of Russia’s exports – in 2007, it was 65%. In 2000, oil and gas generated about 25% of the country’s income – in 2008, it was 50%. The rouble found itself totally unbuffered when raw materials prices dropped sharply and all attempts to prop it up turned into costly adventures. Even a non-specialist can understand that when less foreign currency flows into a country, such as when oil prices fall like a stone, hard currency becomes scarce and consequently costs more in roubles. However, the Russian government with Putin at its head decided to defend the exchange rate at any cost. Astronomical sums from the country’s gold and currency reserves were frittered away on this – over $200 billion. And what did we get for this? The money was as good as thrown away, the rouble’s still falling, and the economy is going under. Who is to be held responsible for the fantastic harm done to Russia by Putin & Co.? Who will held responsible for the fact that in just 4 months the Central Bank’s gold and currency reserves were bled of more than $200 billion, one third of the total?
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The Development of the Crisis in Russia
The crisis is hitting Russia harder and causing more pain than in any other country. It turned out that our country’s wealth in the years preceding the crisis was built for the most part on the influx of cheap money from abroad. When the price of oil fell and

Who will be held responsible for the shameless lie disseminated from our televisions that our people would be wise to keep their deposits in roubles? Here are just a few quotes from speeches by top Russian bureaucrats, at the height of the crisis brazenly deceiving the people about the prospects for devaluation: 1 August 2008 • A dollar gets you 23.42 roubles. 18 September 2008 A. Zhukov, First Vice Premier of the Russian Government: “Unlike 1998, Russia is very well prepared this time. There is no risk of the rouble devaluing; it will hold up.” – from speech at an investment forum in Sochi). • A dollar gets you 25.52 roubles. 22 October 2008 Prime Minister Vladimir Putin states that it would not be wise for people to convert their roubles into currency. “It’s doubtful that it would be advantageous; no one knows what will happen to the dollar,” the PM declares. • A dollar gets you 26.44 roubles. 22 October 2008 Igor Shuvalov, first vice-premier: “We have no such plans. We think that devaluation would be harmful.” – from an interview with The Financial Times. • A dollar gets you 26.44 roubles. 29 October 2008

Dmitri Medvedev, President of Russia: “I have kept all my bank accounts. I haven’t taken any money out and haven’t converted roubles into dollars... I’m confident that my savings, like those of other Russian depositors, have nothing to fear.” – from answers to questions of the weekly Argumenty i Fakty. • A dollar gets you 27.30 roubles. 19 November 2008 Arkadii Dvorkovich, presidential aide: “Even given low oil prices, there are no grounds for devaluation. There will be no devaluation, even if certain quarters would like to see one.” – from a United Russia press conference. • A dollar gets you 27.43 roubles. 18 December 2008 Minister for Economic Development E. Nabiullin predicts the median dollar-rouble for 2009: 30.80 to 31.80 roubles. • A dollar gets you 27.52 roubles. 26 December 2008 Alexei Ulyukayev, First Deputy Chairman of the Bank of Russia, states on News24 TV programme that the Central Bank has no intention of sharply devaluing the rouble and called “nonsense” rumours that the Central Bank might sharply devalue the national currency just before the New Year. • A dollar gets you 28.67 roubles. 11 January 2009 Alexei Ulyukayev, First Deputy Chairman of the Bank of Russia, in an interview with Vedomosti newspaper: “The actions we are taking are not a devaluation.” • A dollar gets you 29.39 roubles.
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28 January 2009 German Gref, head of Sberbank in an interview with Vesti TV news: “The main stage of the devaluation has been completed. I think that we should now maybe expect other currencies to devalue, though not to the extent of the rouble. • A dollar gets you 32.99 roubles. And now, at 5 February 2009, a dollar gets you 36.31 roubles. The rouble has lost 55% of its value against the dollar since 1 August 2008. And all this time, the country’s top leaders have brazenly lied to the people that there would be “no devaluation”. The drop in the price of oil is only part of the reason for the collapse of the rouble and the banking crisis. Throughout 2008, capital flight from the country reached the astronomic figure of $130 billion. This is nearly twice has much as came into the country in 2007.

fallen many fold – today they’re worth about 14% of their issue price. The distribution of vouchers [TN: in the first post-USSR collapse privatisation] was a paragon of honesty compared to these hoaxes. At least people were given their vouchers free. Plenty of folk made nothing out of it but some earned from it. But what do we have here? Believing Putin, hundreds of thousands of folk shelled out vast sums, and got taken for a ride. The collapse of the Russian stock market has been catastrophic, losing 75% of its value over the duration of the crisis so far. The total value of all Russia’s quoted companies is now less that the value of Gazprom in May 2008! In the crisis’ homeland – the USA – stock market indices fell by 40% in 2008. That’s a lot, but half as bad as in Russia. And what does Putin do in this situation? He allocates 175 billion roubles – an astronomical sum – to Vneshekonombank, of which he is Chairman of the Board of Trustees, supposedly in order to help the stock market. But what happens next? The stock market falls harder and faster than it had been before. From mid-September, when it was announced that state funds would we allocated to supporting the markets, the RTS index fell by more than half – from 1300 to less than 550 points. Where did the allocated money go, who controlled the spending, why was it done in the first place?? Who will be held responsible for the waste of vast sums of your money and mine?? The National Wealth Fund was relieved of 175 billion roubles. This fund is the holy of holies. It was sent up to finance pensions in case there was a shortage of funds for the purpose – see the website of the RF Ministry of Finance: nationalwealthfund/mission/: “The aims of the National Wealth
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Collapse of the Financial Markets
Just very recently, Putin encouraged the citizens of our country to buy shares in Russian companies. First people were wound up to buy shares in Rosneft. On 27 October 2006, Putin announced in Novo-Ogarevo that 115,000 Russian citizens had taken part in the Rosneft IPO of July 2006 and that this was, in his words, “one of the foundation stones of the company’s solidity”. In the 2½ years since the Rosneft IPO, the value of its shares has fallen by 55%. Every rouble invested by people in Russia in that company has lost them 55 kopecks. Next people were wound up to buy shares in Sberbank, and after that in VTB. Tens of thousands placed their trust in the authorities and bought Sberbank and VTB shares, the value of which has

Fund are to provide co-financing of the voluntary pension contributions of the citizens of the Russian Federation and to ensure a balance (cover deficits) in the budget of the Pension Fund of the Russian Federation”. What sort of incompetence, thievishness, and cynicism must reside in people that they should spend this money on market swindles? Where are our brave and true law enforcement organs who should be keeping a beady eye on the expenditure of pension money, where is the Accounts Chamber of the Russian Federation? Misuse of of funds such as these falls under Articles 2851 and 286 of the RF Penal Code (Misuse of Government Funds and Abuse of Office, respectively) and should entail criminal prosecution of officials found guilty of wasting government funds intended for the payment of folks’ pensions.

fresh reminder that the aim of the Putin régime is to confiscate entrepreneurs’ property by force and pressure. Capital began to flee the country in July. 2. The situation got sharply worse after the Russo-Georgian war and the recognition of of Ossetian and Abkhazian independence. Russia so confronted the West, so failed to protect business, and played so fast and loose with the law that the money started to leave. And when the crash came, money left even faster. Who would be fool enough to keep money in so hostile and unpredictable a country? 3. Business does not trust the Russian government, which has lied throughout about the crisis, continues to relieve entrepreneurs of their property, and favours financial support for “favourites” only.

Capital Flight
As we have already pointed out, $130 billion fled Russia in 2008. That’s an awful lot of money. It more than half as much again as the amount of capital invested into Russia in 2007 ($82.3 billion), about which Putin boasted in a speech to the State Council on 8 February 2008 that it was one of his main achievements. $130 billion is also 1½ million jobs, decent pay, and economic growth. The money could have been invested in industry, agriculture, roads, transportation, and high tech. Why is money fleeing the country? 1. It all began with yet another of Putin’s attacks on business, this time against Mechel, TNK-BP, and the take-over raid on [mobile phone company] Evroset. Investors, who had in vain awaited a thaw after Dmitri Medvedev arrived in the Kremlin, instead got a

The Banking Crisis
The media provided only meagre information on the problems some banks were having. First the authorities rescued Globeks, Svyaz-Bank, Sobinbank... Then the problems in the banking sector started to get really severe ad the authorities initially decided to help the banking system with 1.5 trillion roubles to be shared out among three banks known to be close to Putin – Sberbank, VTB, and Gazprombank (noting furthermore than while the first two banks are state-owned, Gazprombank is controlled by Putin-friend Kovalchuk while Gazprom has for a long time now not even had a majority holding in it (for details, see the authors’ White Paper Putin and Gazprom, 2008). I leave it readers to guess why Putin chose to help just these banks. The banking crisis arose as a result of Russian banks’ high level of dependence on foreign credits, obtained at low interest on long terms.
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The way Russian banks worked the system was this: get cheap Western credits and re-lend to Russian citizens and companies at high interest. Millions of consumer loans and approximately 1 million mortgages were issued in this way. When the Western banks started having their own troubles, they stopped giving credits to Russian banks and our internal banking system suddenly found itself in a big hole. The credits had been issued, repayments were not coming in, and there was nothing to fill the deficit with. The bankers went to Putin and cried “Save us!”. Fairy-tale amounts amounts of money were handed over to the banks – something in the order of $200 billion. This money was supposed to create stability in the banking sector and bring credit back to the economy. But of course that is not what happened. No sooner had they got hold of the money than the banks there and then used it to buy foreign currency and no one got any credits. Why? Because with a falling rouble, forex operations were good for annualised 1000% profits! A den of depravity was fully formed by JanuaryFebruary 2009: the Central Bank credited Russian banks with roubles, the banks then used the roubles to buy forex and in this way the Central Bank effectively threw away $10 to $30 billion a week from the country's reserves. The rouble fell, so did the economy, and reserves melted away.

banks preferred to keep it for their forex deals instead of issuing credits to enterprises. Without credits, building comes to a halt, blast furnaces are allowed to go out, goods cease to be carried by rail, factories close. Industrial production fell by 10.3% in December 2008. Metallurgy has been hit worst of all. Furnaces have been shut down in Magnitorgorks, Lipetsk, Cherepovets, and Nizhny Tagil. Movement of goods by rail fell 30% in December 2008 and 36% in January 2009. The building industry recorded zero growth in December 2008. New housing availability is down fourfold compared to 2007. Falling production of course means rising unemployment. Over a million Russians have lost their jobs since the crisis began. According to well-known social policy specialist Yevgeni Gontmakher, there will be 10 million unemployed in Russia by end-2009 (there are 5.8 million today). So what does Putin propose? To set unemployment benefit at 4900 roubles. This is simply to take the mickey and needs no further comment. On the other hand, some people are getting some serious help from him – the oligarchs. You be the judge: one of Putin’s first postcrisis innovations was to sharply reduce tax for the oil companies. The oil companies’ tax saving for 2009 will amount to about $6.5 billion. At the same time, Putin’s proposal is to increase the Unified Social Tax from 26% to 34%. This is a tax on our salaries. These are getting smaller as it is and the government has decided to increase the tax on what we earn. There is no getting around the fact that this is a grossly inappropriate action that will hit most of the country’s population where it hurts.
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How Putin is Helping the Oligarchs
Worst hit were the building, metallurgical, and heavy industries, along with trade – in other words all the areas where it is not possible to pursue business without credits. Most of the 5 trillion roubles allocated by Putin to support the economy since the crisis began has gone to help the banks. The real sector and production have not had a taste of this money: the

At the same time, quietly and without explanations being given, Putin has allocated $4½ billion to loyal oligarch Deripaska to enable him to take personal control over Norilsk Nickel. Not a kopeck of this money was seen by any of Norilsk Nickel’s workers. Next in line for largesse were his Rosneft friends Sechin and Bog danchik who received help from state banks to the tune of $4.6 billion, this despite the fact that Rosneft made $13 billion profit last year. Then it was time for Putin to help his friend Roman Abramovich, whose company Yevraz received $1.8 billion. In line after him stood national leader S. Chemezov of Rostekhnologii, who asked for over $7 billion. All in all, Putin has funnelled 1.3 trillion roubles via Vneshekonombank to cover the foreign debts of banks and corporations in 2008-2009. This mountain of money was taken from the National Wealth Fund, a fund – let us say it again – specifically set up to pay pensions and not provide financial support for bankrupt oligarchs. And the money which is going to pay off the debts of these large companies and banks is yours and mine. One of the most scandalous and harmful steps taken by Putin was to increase import duty on foreign cars and the introduction of prohibitive duties on second-hand ones. The purpose behind these measures was to protect the businesses of Putin-friends Chemezov at Avtovaz and Deripaska at GAZ. They are also directly against the interests of the overwhelming majority of Russians. This is because firstly, they will lead to a rise in car prices; secondly, the quality of Russian cars will never improve without competition; thirdly,this will cost the Far East 100-150,000 jobs; fourthly, there will be a sharp drop in customs

receipts. In January alone, there was a 20-fold decrease in car imports in the Far East, down from 1000 to 50 per day. Meanwhile, back in Russia truck-maker Kamaz announced 3000 job losses while GM-Avtovaz made 400 workers redundant. Calculations show that federal budget will loose up to $1 billion in income from customs dues at the Vladivostok border and there will be a general reduction of 40% in income from customs dues – this at a time when there will be a budget deficit anyway. The government’s strategy is patently obvious: help friendly oligarchs at the expense of the overwhelming majority of the population and of the country’s entrepreneurs. It’s not the rouble that Putin is supporting, but the Rublevka [TN: Moscow millionaire’s housing row]. The result is that people’s incomes are getting smaller and the number of poor and unemployed is rising. The number of unemployed rose from 4.74 million in September 2008 to 5.8 million in December. Real disposable incomes fell 12% in December and real wages by nearly 5%. Cases of late payment of wages rose 80% between 1 August 2008 and 1 January 2009. Meanwhile, Putin’s oligarch bankrupt friends are rolling in it. Their businesses are being saved with money from you and me. That’s the real truth at the centre of the government’s anti-crisis steps.

The Budget
It all began with official statements by Putin and other high officials that there was no crisis. “We are experiencing some difficulties but not a crisis,” said Putin last autumn while other officials called Russia “an island of stability” against the background of world economic problems.
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The apotheosis of the government’s incompetence was the passage of the 2009 budget last autumn, when the crisis was already raging, based as it was on completely unrealistic predictions: • inflation for 2009: 8.9% (the figure for 2008 was 13.3% and the prognosis for 2009 is more of the same – 13%); • rouble exchange rate: 24.7 roubles to the dollar!! • GDP growth of 6% (it is already now being admitted that there will be a fall in GDP in 2009); • oil price: $95 per barrel (!!!); • budget surplus of 3.7% of GDP (we’re now talking of a budget deficit of at least 7-10% of GDP). The obedient Duma passed the budget as presented without much fuss. When the Council of the Federation ratified the budget on 12 November, oil actually stood at $50 per barrel and it was already clear that the budget was riddled with lies and needed to be reviewed. No-one had any intention of implementing this budget and for the first time since 1991 Russia entered a new year without a budget. The new draft is based on somewhat more realistic figures and projects for a budget deficit of 2.5-3.5 trillion roubles and a pension fund deficit of 500 billion. So it is that all the reserves ($200 billion as of early February 2009) accumulated in recent years from expensive oil will be spent away in 2009. We have standby reserves for 1 year and if the crisis goes on for longer than that, then Russia will not have the financial wherewithal to pay folks’ pensions and wages. That is the reality of Putin’s stability and the price we having to pay for his unalloyed power and that of his clan.

Having turned out to be incapable of finding the right measures to resolve the crisis, the government got tied up in a gas war with the Ukraine over the new year. This led to still further losses. Directly loss of income alone for Gazprom as a result of the three-week shut-off amounted to no less than $2 billion (the yearly budget of an average Russian region!), with losses to the state budget adding up to another billion to that. More important still was the loss of reputation: the building of pipelines to bypass Russia will be speeded up (in particular, Nabucco) and LNG terminals will be built in Croatia, Poland, Lithuania, and Rumania, so losing Gazprom some of its traditional customers – this after having lost market in the CIS in recent years: gas exports to the CIS in 2007-2008 were down 10% on previous years and some countries such as Georgia and Azerbaidzhan have ceased completely to buy Russian gas. These and other similar actions of Putin’s have directly caused budgetary losses totalling billions.

Raising the Tariffs of the Natural Monopolies
Standing firmly by his intention to support the oligarchs and the monopolies, Putin decided to raise the tariffs for the services of the monopolies. Electricity prices will go up by 27.5%, gas – by 25%, rail transport – by 18-20%. Increased gas and electricity prices will inevitably leading to higher housing charges. These will rise by at least 30% over the year, jumping up each quarter along with gas and electricity prices, thus feeding inflation. Inflation amounted to 2.4% in January 2009, a good deal higher than the already high inflation of the previous year.
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The Crisis and Press Censorship
At the beginning of the crisis, there was a strict rule that the word ‘crisis’ was not be used. as in Soviet times, they had a crisis while we were an island of stability and prosperity. Later, as autumn progressed, the government admitted that Russia was in crisis and began providing carefully dosed information. Nonetheless, the most important and corrupt decisions took place behind a full censorship blackout, particularly of television. The main decisions we are referring to were: 1. $200 billion thrown away on supporting an unrealistic rouble exchange rate. 2. The allocation of $175 billion for the National Wealth Fund to support the stock markets – which lost 75% of their value anyway. 3. Aid given from the National Wealth Fund to oligarch groups (Deripaska, Abramovich, Rosneft, the state banks). 4. Aiding the banks and the consequences of this aid (lack of money in the real sector, flight of funds into hard currency). 5. Concealment of the real problems in the Far East arising from the decision to impose high import duties on cars. 6. Concealment of the real situation in single-industry towns when the town’s lifeline industry shuts down. 7. Censorship of questions about the budget, the collapse of the pension and social security systems, and in particular of the benefits for the purchase of medications.

8. The consequences of the gas war with the Ukraine. The lack of wide public discussion of the steps being taken to combat the crisis led to the wasting of immense amounts of public money and to the taking of self-evidently corrupt decisions that were wrong for Russia.

Our Proposals
Our distressing conclusion is as follows: The closed, authoritarian and corrupt mode of government created by Putin has turned out to be impotent when it comes to dealing with the crisis. Not a single one of its aims has been achieved and vast sums have been spent in reaching this failure. A corrupt system has proven to be powerless in battling the crisis. It is evident that the part played by government should be greater in times of crisis. However, when that government is weak and corrupt, when laws don’t work, when decisions are taken behind closed doors, then any results are bound to be pitiful if not downright negative. Our recipe for combating the crisis is therefore that we should: • abolish censorship, including on matters to do with the crisis; • restore political competition with a view to having public discussion of the strategies for moving out of the crisis; • restore elections for governors and parliaments in order for government to be responsible to the people; • ensure the separation of the law courts from the executive in order to combat corruption and obtain rule of law;
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• make an about-turn in our foreign policy with a view to restoring the trust of foreign investors. Dismantling Putinism and restoring democracy will be the most important steps in fighting the crisis. We believe that the Putin régime will be quite unable to deal with the economic and financial crisis. Consequently, it has to be removed. We need to begin with the resignation of Vladimir Putin’s government which has already in this crisis demonstrated its complete impotence and scandalous incompetence. The resignation of Putin’s government is the best anti-crisis measure that there is as no other steps are possible until that has happened. Without it, it will not be possible to put a stop to massive and widespread corruption in the distribution of state aid to combat the crisis, to get capital to return to the country, and to use the state’s wealth – your money and mine – to best effect. It follows therefore that dismantling Putinism and restoring democracy in the country is integral to the performance of any anti-crisis measures and that if this is not done, nothing will be achieved. In other words, Russia desperately needs full-scale political reform today. As for the concrete economic steps which need to be taken today, we list below the concrete proposals of Solidarity, the United Democratic Movement, the gist of which is as follows: 1. We need a complete change of ideology and a model for our measures to combat the crisis. The government’s main strategy at the moment is to exclusively allocate resources to large corporations and projects and this is wrong from the ground up. In order to resolve such issues as maintaining internal demand and reviving business activity, the need is not to privilege large

companies but rather to support small and medium businesses (including by the partial return of tax paid in previous years) and people (in the same by by the return of previously paid income tax, preferential credits, or direct financial assistance). This would make it possible to minimise the risk of the money being spent unwisely, reduce corruption in the distribution of state aid, and increase the chances that money so allocated would stimulate supply and demand in the economy and not capital flight and the purchase of foreign currency. We need to take real measures to have inefficient oligarch corporations with enormous accumulated debt, which the the state is today having to pay for, declared bankrupt. These would includes the domains of Deripaska, Abramovich, Chemezov and Gazprom as well. Throughout the world, declaring inefficient banks and corporations bankrupt is one of the most important tools used to cleanse economies of “bad” assets, relieving us of their failed owners and managers. In Russia, the state is doing all it can to protect oligarchs in the first place, even if it means spending taxpayers money to do so. This must be stopped: bankrupt oligarchs should be held responsible for the inefficient management of their companies. We list the concrete proposals put forward by Solidarity, the United Democratic Movement, to combat the crisis below: 1. Allocate state financial aid directly to individuals, not corporations. Instead of allocating government money to support large corporations and selected banks (which stimulates the purchase by these lobbyists of foreign currency after which they lobby for still more money) and to buy back bonds (using taxpayers’ money to
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cover the risks taken upon themselves by individual creditors and borrowers), we should allocate funds directly to people in the form of credits, return of income tax, or direct financial assistance. This would help support people’s purchasing power (create internal demand) and put a stop to the theft of state aid by lobbyists. 2. We should sharply decrease expenditure on the apparatus of state, the special services, and aid to enterprises in order to be able to reduce the value-added tax. The planned increase in the Unified Social Tax should be scrapped. Small businesses should be given a tax holiday. We should stop continually increasing state expenditure and budget deficits and initiate a policy of supporting entrepreneurial activity and internal demand through lower taxation. Today’s high government spending is the main reason that taxes cannot be lowered. Increasing the Unified Social Tax from 2010, as announced by the Putin government, will strike a mortal blow against entrepreneurial activity, in particular against small and middling business in Russia. 3. Stop pulling the wool of people’s eyes about “preventing a devaluation” of the rouble and wasting the Central Bank’s reserves on artificially maintaining the exchange rate. Artificially maintaining the exchange rate leads to cheaper imports and waste of central reserves. We need to go over to a floating exchange rate, i.e to let the rate establish itself without Central Bank intervention (except for preventative measures by the bank to smooth speculative shifts when the rate changes sharply during a single day). This will better protect the economy from external shocks (falls in the price of oil and so on) and help retain the Central Bank’s reserves for other purposes: it would be better to used funds for directly supporting people during periods of devaluation than burn the same money in doomed attempts to support the exchange rate on the currency markets.

4. Combat rising prices. Reduce government spending (see above). Cancel planned utility price rises. Demonopolise important market sectors. Inflation remains high in Russia, with food prices, utilities, and the charges of infrastructural monopolies rising sharply. The monopoly market in petrochemicals does not make for lower petrol prices that reflect the drop in the world price of oil. Excessively high prices and continuing inflation make it harder to get out of the crisis and eat up higher wages for the bureaucracy and increased pensions. 5. Refuse to engage in the protectionism that is turning Russian enterprises into “offices for the obtention of state aid”. Cancel the proposed increases in import duty on foreign cars. 6. Develop real infrastructure projects – build roads and airports instead of issuing “infrastructural bonds” to finance the construction of an ineffective pipeline to the Pacific Ocean. Implement political changes conducive to stronger popular control over spending on infrastructure projects. Among these should be the return of elections for regional governors and popular representatives at all levels in single-mandate districts. 7. Implement a series of measures to develop local agricultural production in order to negate the effects of higher-priced imports. Create conditions for free access by agricultural producers to urban food markets and food processing companies, combat monopolists in the purchasing and sales chains, develop competition by supporting farmers large and small and creating consumer and sales cooperatives.
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What Next?
Putin’s actions during the crisis have in reality been directed at supporting a small circle of oligarchs, to whom massive resources have been allocated. This money is not going towards reanimating the economy, financing new projects, paying salaries and wages but instead fleeing the country, being used to purchased foreign exchange, and saving Putin’s oligarchs from bankruptcy. Meanwhile, the rouble continues to lose value, GDP, industrial production and incomes continue to fall, and unemployment rises. Russia does not need “anti-crisis” policies such as these. We need to save the economy, not the oligarchs. And that is precisely what the Solidarity movement’s proposals are designed to do.

In 1997, Nemtsov defended Gazprom in a fierce battle against Vyakhirev and Berezovsky and prevented the corporation from being privatised for a pittance. In 2000-2003 Nemtsov led the democratic party and Union of Right Forces in the State Duma. He left politics in 2004, when he did not make it into the Duma, but in 2007 returned to them as one of the leaders of the pre-electoral list of the Union of Right Forces. Boris Nemtsov was categorically against the dissolution of the Union of Right Forces and its participation in the Kremlin-initiated Pravoye Delo. The Solidarity democratic movement that he and like-minded activists have founded is the only opposition force in Russia, uniting as it does representatives of all the surviving remnants of the country’s notable democratic forces. Vladimir Milov is a representative of the new generation of Russian liberal politicians. Only 36 years old, he already has serious experience of government behind him: between 1997 and 2002 he worked in the executive, in just 5 years rising from senior specialist in the Federal Energy Commission to Deputy Minister for Energy. V. Milov was one of the leading authors of Russia’s energy reforms, of the new legislation on electrical energy resources which for the first time established a legal basis for the development and reform of the industry. He was also the author of the 2002 concept for the reform of Gazprom, designed to overcome the growing gas deficit and stop the galloping rise in internal gas prices to consumers. This concept was given short shrift by President Putin and as a result Russia today suffers from a
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About the Authors
Boris Nemtsov is one of Russia’s best-known democratic politicians. He brings with him unique experience of government and public politics. In the 1990s he was an effective governor, in 1997-1998 he was vice-premier of the Russian government and Minister for Fuel and Energy. Many of his proposed reforms to turn Russia into a modern democratic state with an effective economy were key in the government’s 2000 social and economic development programme that was latter ripped to shreds by President Putin.

shortage of gas that is being felt ever more strongly while prices are rising rapidly towards European levels. After he left government of his own accord in 2002, Milov became an independent expert on matters of energy and gained worldwide recognition in the field. In 2003-2008, V. Milov came out as a public figure and publicist. He writes regular columns for Russia's Vedomosti business newspaper and the internet-based Gazeta.Ru. Starting in 2008, V. Milov has become active in politics, joining the organisational committee that prepared the unification conference of the democratic forces that took place in St. Petersburg on 5 April 2008. In December 2008, the constituent assembly of the Solidarity democratic movement elected Vladimir Milov to its political council and the movement’s bureau.

Boris Nemtsov

Boris Nemtsov, Vladimir Milov 20.02.2009

Vladimir Milov

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