One hundred and fifty billion dollars is a lot of money. Ninety percent of all revenues above $20 a barrel go into the fund, inflating it by around $171 million per day in 2007 alone.
But could $150 billion be enough to destabilize the country's economy and its political structures? That question has come to the fore, because the Stabilization Fund will formally cease to exist on February 1, to be replaced by a Reserve Fund and a smaller National Welfare Fund.
The former will start off with some $139 billion and will perform essentially the same function as the old Stabilization Fund. That is, it will accumulate energy profits and hold them in conservative investments to buffer the economy if energy prices fall. The National Welfare Fund, which will hold $11 billion, will be used to fund shortfalls in the pension system. In addition, some funds from it have already been allocated to the State Investment Fund, the state's Development Bank, and the state Nanotechnology Corporation.
The Stabilization Fund was created at the urging of then-presidential economic adviser Andrei Illarionov, Finance Minister Aleksei Kudrin, and then-Economic Development and Trade Minister German Gref. Since that time, Kudrin's ministry has been in charge of the fund and has doggedly insisted that spending its wealth domestically would spur inflation. As a result, the only significant spending from the fund since its creation has been to pay off some $80 billion in Soviet-era debt, something that has been touted as one of the main achievements of Vladimir Putin's presidency.
To be sure, pressure to spend the fund has been building from the start. The Communists and some regional leaders -- back in the days before the regional leaders were cowed by the Kremlin -- spoke out in favor of boosting pensions or social benefits. Moscow Mayor Yury Luzhkov in December 2005 criticized the policy of "accumulation for its own sake."
Business leaders also proposed schemes to dip into the fund, including setting up investment-guarantee funds or boosting domestic lending resources. In 2005, Arkady Volsky, then the head of the Union of Russian Entrepreneurs and Industrialists, dismissed Kudrin's conservatism as "some kind of blockheadedness." While Luzhkov accused the government of "supporting the foreign producer," Volsky said the money in the fund should "work for the country instead of for foreign banks."
Bigger And Badder
Such debates were already shrill back when the fund held a mere $16 billion and was solidly under Kudrin's control. They could become deafening now that there is $150 billion at stake and the post-Putin political transition could be seen as an opportunity to test the government's resolve. Illarionov is gone -- and has been sounding the alarm on the ruling elite's potential efforts to abscond with the fund. Gref is gone. Kudrin now seems isolated at the very moment the Stablization Fund is being divided and looser rules established for using the new National Welfare Fund.
The populist calls haven't changed much since 2005. Although governors rarely speak, commentators in the regions often remark on how useful the funds could be. "Tverskiye novosti" wrote this month that the Stablization Fund represents "the means we need to resolve crucial problems plus the start-up capital for a leap into the future." The paper added that "the people think the Stablization Fund has already been completely or partially pillaged." Federation Council Chairman Sergei Mironov claimed this month that the funds could be used in part to finance the construction of new subway systems in regional cities. Calls to use the funds for roads construction also rarely fall silent.
Economists, however, almost uniformly reject such proposals. For one thing, experts argue that such spending would produce inflation, leading ultimately to the evaporation of the fund itself. Perhaps more importantly, they note realistically that massive construction projects are nests of corruption and mismanagement. They like to point to the Moscow-St. Petersburg high-speed railway, which was supposed to be completed in 2000, but which in reality is nothing but a large hole in downtown St. Petersburg that cost tens of millions of dollars. Economist Yevsei Gurvich told "Izvestia" that before spending the fund, "we must first raise the quality of the management of state spending."
Big business is also repeating its claims on the money. On January 15, the government daily "Rossiiskaya gazeta" printed a long article by Russian Chamber of Industry and Commerce President and former Prime Minister Yevgeny Primakov that echoed Volsky's 2005 assertions. Primakov noted that while the state's debt has been reduced in the last three years, corporate debt -- particularly debts owed by state companies like Gazprom, Rosneft, and Vneshtorgbank -- has skyrocketed to over $300 billion. Furthermore, the interest on these debts is far higher than the interest the conservatively invested Stablization Fund is earning. Therefore, Primakov concluded, the state should develop mechanisms for expanding access to affordable domestic credit.
Although Primakov could not make the argument explicitly, everyone knows that much of the debt of these state companies was racked up pursuing the Kremlin's political goals at home and abroad. Gazprom, for instance, spent millions to buy the money-losing Zenit soccer team in St. Petersburg and to fund a ski resort in Sochi for the 2014 Winter Olympics, to say nothing of its voracious appetite for pipelines and other energy resources in Europe and the former Soviet Union. It also took over and props up the loss-making quasi-private NTV television network and is buying up key portions of the power-generating sector that supposedly is being privatized. In the event of a global economic downturn, companies that have been so helpful to the Kremlin would have powerful arguments for demanding relief. The anti-Westernism inherent in big business's arguments from 2005 has been boosted by the Kremlin's rhetoric during the current political transition.
Regulatory Nightmare
The biggest shift in Russia's landscape since 2005, however, has been the creation of sector-spanning state megacorporations. Such structures have been set up in aviation, shipbuilding, nuclear energy, nanotechnology, and machine building, and all of them have powerful political lobbies within the highest levels of the Kremlin, within Putin's inner circle.
In April 2007, prominent economist and presidential adviser Arkady Dvorkovich leveled a damning critique of the state megacorporations, arguing that they had so much political clout that not even the Audit Chamber could monitor them. Dvorkovich noted that, because the president personally names these corporate heads, even the government has no oversight. He documented cases in which Kudrin was forced to appeal to Putin directly to forestall their efforts to gain major tax concessions. Dvorkovich argued that these companies are unable to compete under open-market conditions and will not hesitate to use their overwhelming political advantages.
In an editorial about Dvorkovich's declaration in May 2007, "Nezavisimaya gazeta" wrote: "Our economy is fragile. Our institutions are weak. The quality of the state apparatus is low. Corruption is high. In these conditions, burdening the economy with state spending is perilous." In his end-of-the-year assessment from December 2007, Illarionov -- the father of the Stabilization Fund -- named its "death" as the most important domestic-policy development of the year. He also named the creation of state corporations as the "bad decision of the year," claiming that the government had "found the most ineffective way of spending 600 billion rubles."
Putin and his anointed successor, First Deputy Prime Minister Dmitry Medvedev, have voiced their support for limiting the role of the megacorporations, reducing the role of the state in the economy, and -- most importantly -- maintaining the course of Deputy Prime Minister and Finance Minister Kudrin. Kudrin got another small boost this month when he was named to head the government's working group on inflation. However, with Illarionov and Gref out of the picture, Kudrin looks increasingly isolated. In December, a key member of his team, Deputy Finance Minister Sergei Storchak, who oversaw the Stabilization Fund and foreign-debt negotiations, was arrested in an opaque case that many have seen as an effort to pressure Kudrin to change his policies. Storchak remains in custody.
The next few months will be a stern test for a government that has ironically eliminated all the institutions -- an independent judiciary, empowered auditors, independent journalists, a legislature with effective means of oversight, and so on -- that could bolster it in the conflict that seems to be on the horizon. One hundred and fifty billion dollars is a lot of money.