||This article appears in the March 2, 2001 issue of Executive Intelligence Review.
The Ishayev Report:
An Economic Mobilization Plan for Russia
by Jonathan Tennenbaum
[PDF version of this article]
There presently exist, at the highest level of the Russian government, at least two, widely divergent economic programs for the coming decade. The first is the program drawn up by Minister of Trade and Economic Development German Gref, which has been revised and amended countless times over the last year, but never given explicit approval by Russian President Vladimir Putin. The second was authored last year, at the request of Putin, by a group of leading Russian economists under the auspices of Khabarovsk Gov. Viktor Ishayev and presented by Ishayev on Nov. 22 at the first full meeting of President Putin's newly formed State Council, a top-level policy body bringing together representatives of the central and regional governments of Russia.
The Ishayev program is summarized in a 100-page document entitled "Strategy for Development of the State to the Year 2010." This document, although widely circulated in Russia and the subject of heated behind-the-scenes debates, remains unpublished, and very little of substance has been written about it in the West until now. Given its obvious importance, and the likelihood that it will exert a significant influence on the economic policies of the Russian government in the coming period, we present below a fairly thorough summary of its key points, followed by some comments from our side; at the end of our article we provide extensive excerpts from the original, in our translation.
The Ishayev Program vs. Gref's
Officially, Ishayev's program is supposed to "complement" but not contradict the Gref program, which at least pretends to represent current government policy. In its introduction, the Ishayev paper characterizes itself as "an important supplement, and a new basis, for the current and medium-term macroeconomic program, which the federal government is developing and carrying out in practice." In reality, the axiomatic principles underlying the Ishayev document, are fundamentally and irreconcilably opposed to those embodied by Gref and the rest of the neo-liberal group dominating the government of Prime Minister Mikhail Kasyanov. This fact was emphasized in public by one of the main contributors to the Ishayev program, the noted opposition economist and head of the State Duma (lower house of Parliament) Committee on Economic Policy, Sergei Glazyev.
Where the Ishayev report bases itself implicitly on a notion of the "general welfare" of the Russian population, Gref's outline emphasizes "the rights of property." In the former, the state has the immediate responsibility to launch a forced recovery of physical production and consumption, mobilizing the resources of the nation to that purpose, and channelling investment in a dirigistic fashion into infrastructure, agriculture, and industry. The latter, on the contrary, would degrade the state to the status of legal arbiter, setting and enforcing rules of competition among private businesses and leaving the rest to the supposed magic of the "invisible hand." The Gref program is oriented toward attracting foreign investment, the Ishayev program toward expanding the nation's own productive forces.
In a word, Gref's conceptions embody the axiomatics of the "British System," while the Ishayev document reflects, in a certain approximation, the standpoint of what the great 19th-Century economist Friedrich List termed the "American System"--a tradition historically best represented in Russia by Sergei Witte's Lectures on National Economy. That said, the Ishayev program does not address issues of principle per se, but rather sets forth a series of concrete policy criteria and practical measures to be implemented by the Russian government, starting at the earliest possible moment, in order to realize an economic mobilization of the country over the years immediately ahead. With this limitation, it is doubtless the most competent document of its kind to have emerged so far in the internal economic debate in Russia.
The document has particular significance, not only for its intrinsic merits and for the obviously considerable support it now enjoys--including, notably, among many liberal circles in the country--but also because it reflects the problems and viewpoints of Russia's vast regions. The latter aspect is exemplified in the person of Ishayev himself, who represents a strategically important region bordering on China along the Trans-Siberian Railroad, and who has been associated with efforts to develop the Eurasian Land-Bridge system of infrastructure corridors stretching from Europe through Russia to the Pacific. Ishayev's presentation to the November 2000 State Council meeting, presided over by Putin personally, occurred in the wake of several breakthroughs in Russian's eastern diplomacy, including the President's visits to China, India, and Japan. It was these and related developments, coming in the context of the growing evidence of an ongoing collapse of the Anglo-American-centered world financial system, that provided the context for Putin to, publicly at least, entertain the possibility of a radical shift in economic policy in Russia.
Unfortunately, according to press reports, President Putin has now called for the Gref and Ishayev programs to be "harmonized" into one--an axiomatic impossibility!--reflecting once again Putin's well-known tendency to maintain ambiguity and avoid decisive actions as long as possible. But time is running out for Russia. The catastrophic collapse of energy and other infrastructure in the Far East and other regions of Russia, leaving tens of thousands of Russians to freeze in their homes, is one of many signals, that the country might not survive another year of vacillation. The time has come for an all-out economic mobilization.
We now turn to the content of the Ishayev report.
The introduction to the paper emphasizes the need to define not only the quantitative but also the qualitative characteristics of economic growth. The criterion for growth is improvement in the concrete well-being of the population--an implicit polemic against the use of merely nominal or monetary measures of growth by the so-called liberal reformers. The key to high rates of real growth is investment in the technological modernization of the economy.
The first chapter, on "Social Consolidation as the Basis for the State's Development," is a thoroughly worked-out argument to the effect that the consolidation of a strong Russian state--a declared goal and evidently main policy criterion in the mind of President Putin--is possible only on the basis of an economic policy which guarantees the well-being of the majority of the population, and not simply a minority class of entrepreneurs and businessmen.
The paper notes the growing split within Russian society, not only in terms of income and living standards, but also in values and perceptions. This gap is undermining the very basis of the state. Russia has taken on a "two-tier" social structure, typical of a Third World country. A large part of the population is now living in permanent poverty and without motivation. Without a strong middle class, there can be no basis for stability.
Two approaches to resolving the problem of the two-tier social structure are reviewed. The first is basically for the state to increase overall social expenditures in order to alleviate the hardship of the population. But even apart from the scarcity of budget resources, this by itself would hardly eliminate mass poverty. The second approach (favored by Gref et al.) is for the state to cut back on many categories of social expenditures, concentrating on ensuring a bare existence for the most needy, and leaving it to the citizens to pay the rest themselves. But this approach is illusory, the paper points out, because there is no broad middle class able to pay for the services now covered by the state.
Echoing the concept of "harmony of interests" put forward by Abraham Lincoln's economic adviser Henry Carey, the Ishayev paper proposes still another alternative: the realization of high rates of real economic growth oriented toward improving the life of the majority of the population, creating a "mass middle class," as a new basis for social solidarity. This requires close cooperation among the citizenry, the state, and entrepreneurs.
As opposed to the idea of a minimum, subsistence level of existence, this means to ensure that a majority of the population can achieve a normal or standard consumption level corresponding to decent living conditions, including quality housing, consumer durables, the traditional summer cottage, an automobile, education, and health care. Making such a living standard attainable by the majority would provide a major stimulant for the economy, as well as an urgently needed increase in the motivation of the labor force.
Reaching the proposed level of consumption, however, dictates the need for high rates of growth of the real, productive sector of the economy, which in turn depends on achieving a "break-out" in terms of investment. This means a "forced increase in capital investment" on the order of 8-9% growth per year, as well as state support for key sectors, including agriculture and infrastructure areas such as electricity, which are not able to generate the required rates of investment themselves.
The key to high rates of real growth, the paper emphasizes, is the domestic capital goods (machine-building) sector.
A Three-Stage Economic Mobilization
In a chapter on "The Concept of Development," the Ishayev paper makes very clear, that the modernization and development of domestic manufacturing and processing industries are the key to the nation's future--and not the mere export of energy and raw materials. Only the development of industry can provide a decisive improvement in the life of the citizenry.
Not raw materials, but the manufacturing sector, including the export-oriented branches of industry, constitutes the most important material resource of Russia.
Especially important, in a period of economic recovery, is a mobilization of existing technological potentials in industry, construction, and transport. Besides exploiting those potentials in full, it is crucial to stem the flow of capital out of the country, estimated at $15-20 billion per year, and to recycle all available capital in a mode of expanded reproduction of the economy as a whole.
The paper goes on to "inventory" the potentials still existing in the country, which could be tapped in an economic mobilization. These include:
- Unused production capacities, especially machine tools and infrastructure, which could be brought on line as soon as demand is created.
- Energy supplies, metals, raw materials, and transport capacity will not present major bottlenecks for an economic mobilization. The only really serious limitation is insufficient amounts of qualified labor, especially in the manufacturing sector. Industry has lost a major part of its workforce as a result of the last ten years' economic collapse. Recovering the labor force will take resources and time.
- The increased income in some traditional export sectors of the Russian economy (for example, petroleum and military technology).
The main task of economic policy is to assemble these growth factors. With proper policy, the physical output of the Russian economy could be increased by 25-30% in the next two to three years alone.
There are also limitations, however. These include insufficient internal demand, and the extreme scarcity of financial resources in the real sector. Furthermore, the increased income of export-oriented sectors over the last year has mainly fed into the capital flight. A large percentage of companies in the real sector operate at very low (or negative) profit.
Apart from the issue of foreign debt, there are serious internal obstacles standing in the way of rapid expansion of investment. Chief among these is the loss of strategic development orientation in most branches of production, which have been forced to operate in a mere "survival mode," at best, over the last ten years. The worst affected is the technological core of the machine-building and capital-goods industries, and agriculture. In addition, large amounts of resources are not readily available for internal development, because they are "tied up" in the consumption and investment cycle of the exporting sector, which, because of the crisis, has a structure unfavorable to the development of Russia's economy.
All of this means that in an economic mobilization, the scope for expansion of production without large-scale capital investment is limited to the first two to three years; after that, available margins of unused productive capacity will have been exhausted. The mobilization could not be continued, at that point, without large-scale investment, above all in the capital-goods sector.
Only the state is capable of initiating the required investment process, on the basis of a long-term program.
One aspect of this is the necessity of state regulation of prices charged by the "natural monopolies" (including energy). The Ishayev paper states in no uncertain terms, that the task of these companies (including Gazprom) is to "provide a foundation for the economy of the Russian Federation"; their right to profits is a function of fulfilling that task. In other words, the natural monopolies have no right to loot Russia's economy; instead, their interests must be subservient to those of the national economy as a whole.
A key bottleneck for increasing investment in the real economy, according to the Ishayev paper, is the lack of development of the financial sector. The financial system of the country must be built anew, it states. More broadly, it is necessary to restore the basis of trust, which is needed in financial and other agreements, including guarantees on bank deposits and measures to ensure the honoring of contracts. (These aspects are developed more extensively below.)
Provided the required policies are implemented, an economic recovery in Russia will occur in three successive stages.
In the first stage, existing idle production capacity would be brought on line and fully mobilized. During this stage, lasting not more than three years, a yearly growth of 8-10% will be realized. Decisive for the success of economic recovery, is to set into motion, parallel with the mobilization of idle capacities, a huge wave of new capital investment into the productive sector of the economy.
The second, transitional stage is marked by the exhaustion of margins to increase production on the basis of existing capacities. Emphasis shifts toward developing new capacities. Nominal growth slows to 2-4% per year, but the quality of the growth improves with the influx of higher levels of technology. Provided the investment process has already been properly initiated during the first phase, the second stage should last two to three years.
The third stage, which might begin in 2005, is a transition to a "steady trajectory" with solidly sustained growth of 5% per year.
The Responsibility of the State
The Ishayev report puts forward an axiomatic standpoint directly opposed to that of the Gref program and the so-called liberal reforms of the 1990s. Noting the disastrous effects of the "illusions of the 1990s" concerning the supposed benefits of deregulation and privatization, the report lays out the urgent requirements for intensifying and expanding the scope of state intervention into the economy and social spheres, as the precondition not only for the economic recovery of Russia, but also for the creation of any truly functional market structures. The key areas of intervention must include not only "traditional" spheres such as defense, education and scientific research, essential social services, etc., but also an increase in the scope of state responsibility for the economy as a whole. This includes exclusive state responsibility for the military-industrial complex, and the agricultural and infrastructure sectors.
Notable is the emphasis on state support for the development of "dual-use" technologies (i.e., technologies with important civilian as well as military application), including "new means of transport" in the context of state support for a thorough modernization of the military-industrial complex. Development of basic physical-productive infrastructure--heating and electricity, pipelines, electricity, road and railroad transport, water transport--should be the central focus of the attention of the state. The rights of the population to essential infrastructural services and the basic unity of Russia's vast territory must not be sacrificed to irresponsible plans for privatization of infrastructure. State financial support for rural electrification, gasification, road-building, and education and medical facilities is proposed as a key method to promote the rural economy which involves one-third of Russia's population.
In addition, it is necessary to draw up an appropriate strategy for developing the state sector itself, which includes much strategic industry and infrastructure. The state sector is crucially important, not only because of the commercial goods it produces, but above all for its role in the formation of strategic markets, in generating employment, and expanding the tax base. At present, it is important to make an inventory of the state sector and to draw up strategic investment plans for its development.
In this context, the state is a very special sort of investor. It judges investment projects not only in terms of their direct profit, but in terms of the overall benefits of their realization for the economy as a whole. For this reason the state has a special interest in projects for development of infrastructure. This point is further developed in another section of the paper.
The report also calls for the formation of a "civilized market for land" (at present, sale of most land is prohibited), but only once a broad infrastructure of land banks under state patronage has been created in the country.
Under the heading "Basic Elements of Economic Policy," the Ishayev paper addresses a number of basic problems affecting the productive sector of the Russian economy, which must be resolved if the economic recovery policy is to be successful.
A key problem is the lack of a financial and investment structure able to meet the needs of large-scale industrial development. Industrial investment is crippled by the crisis of confidence in the economy, and by the excessively high risks in the investment cycle, especially in the science-intensive branches of industry.
It is proposed that the state create several new financial institutions and instruments, including institutions for evaluation of debt quality and of investment projects. These would have the included function of reducing financial and economic risks of investment and increasing the reliability of cooperative agreements; mediating between entities participating in the investment cycle; providing banking, insurance, and commercial information and technological support needed to reduce the losses in investment and production in the real sector of the economy; and restoring a "system of confidence" in the economy.
The legal system has a major role to play in restoring confidence in business agreements, including by providing for appropriate sanctions in case of non-fulfillment of contractual obligations. This can only be effective, however, if the state itself provides a positive, rather than a negative example. Unfortunately, through its too-close-to-direct involvement in business activity (in plain words, corruption), the state has become a major violator of business ethics and responsibilities. Therefore, restoring confidence must begin with the state itself, including meeting budget obligations.
The state also has a crucial role to play vis-à-vis the entire investment cycle of the economy. The Ishayev paper emphasizes that there is at present no way to achieve a real increase in investment activity in the productive sector, without state intervention to reduce risks in the basic sectors of investment. In particular, the large amount of excess liquidity which has accumulated in the banking sector, cannot be channelled into project investments without active participation of the state. In addition to the unused surplus liquidity, another major source of financial resources would be provided by a further reduction of capital flight, which could be realized by strengthening the role of the Ministry of Taxes, in close coordination with the Central Bank, in the domain of capital control and liquidation of fictitious banking operations.
On the one side, companies must be pushed to initiate suitable investment projects. On the other side, big banks are in principle ready to finance projects in the productive sector, but are held back by lack of mechanisms for searching out and evaluating suitable projects. This is particularly the case for Sberbank, the state Savings Bank, which holds 75% of the savings of the population and is ideologically oriented toward supplying credit to the real sector. But of the 80 billion rubles of savings deposits held by the Central Bank, three-quarters belong to Sberbank, which is not able to use them.
In the past, pressure by the government on banks to provide credit to the real economy has led, in the opinion of some banking experts, to a significant worsening of the quality of bank assets, particularly those of large banks with state participation, including Sberbank. No mechanisms are functioning to channel excess liquidity into economic activity.
The main cause of lack of credits to the real sector is the high level of micro- and macroeconomic risk. The main reason for the high investment risk is overall lack of confidence in the economy and in the state, as well as in potential business partners. Thus, supplying confidence in the future is key to everything else. These risks must be reduced by intervention of the state. The state must take upon itself directly a part of the investment risk, while at the same time increasing investor confidence through suitable institutional measures.
The Ishayev paper elaborates its case for developing the banking system, as opposed to capital markets, as the main vehicle for supplying credit to the productive sector.
Two alternative types of credit systems are compared: one employing financial markets as the main sources of credit, as prevails in the United States today, and the other, a system based on the dominant role of banking, as exemplified by the French or Japanese models. The latter is judged more suitable for Russia under present conditions. One reason is, that an economy based on bank financing provides much greater scope for regulation and--provided the Central Bank is actively involved as a "creditor of last resort"--places no limit on the mobilization of resources.
However, the Russian banking system in its present form is not able to perform the necessary functions, and the positive economic tendencies of 1999-2000 have been based essentially on self-financing of real-sector companies, under conditions of chronic under-financing of the productive economy in general.
A key problem is the high systemic risk in banking operations, which has led to interest rates that are beyond the reach of the real sector of the economy. Eliminating the systemic risks is therefore a crucial task for the state, which has so far exploited only a small part of the many instruments potentially available to that end. These include a series of institutional measures to restructure the debt obligations by the productive sector, and to increase the quality of real-sector debt; creation of a system of guarantees, including state guarantees, to limit credit risks; and use of refinancing by the Central Bank to offset the risks of liquidity imbalances.
A particularly important role is seen for the creation of new institutions for financial and credit rating, with active participation by the state. A crucial proposed element would be an institution to provide expert evaluation of commercial projects, which might operate as a hierarchically structured network including licensed financial experts in banks and other institutions. This institution would play a key role in the investment cycle.
The Flow of Credit to the Real Economy
At present, an array of factors impedes the flow of credit into the real economy, including excessive interest rates, lack of an adequate repertoire of ruble-based financial instruments, companies' low revenues, speculation, lack of adequate refinancing of commercial bank loans by the Central Bank, high systemic risks, and lack of cooperation between banks and clients.
These problems cannot be solved locally. However, a fully workable approach does exist at the level of the banking system as a whole, with the active participation of the Central Bank, and large commercial banks under state control. Among the measures proposed are, most notably: expansion of refinancing of commercial banks; providing credit to the productive sector through a system of discounting and rediscounting of promissory notes and bills of exchange by companies included on a Central Bank list of those with the highest credit rating; reduction of interest rates to levels not exceeding the real rate of profitability of the economy; and creation of channels to direct the flow of monetary emission into the needs of production.
These measures are to be combined with the overall process of restoring the role of money in the economy, reducing that of non-monetary payments and transactions (i.e., barter and payment with goods) which have become rampant in the crisis-torn economy.
The suggested approach is essentially as follows:
The state, through the Central Bank, allocates a portion of the surplus reserves, to be given out as credit via commercial banks to companies in the real sector on the basis of a system of "credit auctions." Companies submit business plans and projects to the commercial banks, which choose the most viable proposals for submission to the "auction," which in turn provides for a competition among the business plans. The result should be, that the most viable projects win out. Interest rates for such credits should be regulated in accordance with overall economic policy, taking account of inflation and the expected rate of return for the projects.
While emphasizing the role of banking credits, the Ishayev paper also calls for developing the capital markets, including a market for corporate bonds. It notes the ironic fact, that precisely the so-called market reforms have failed to create the kinds of healthy, regulated markets needed to service real economic growth. In this context, the popular talk about deregulation is misplaced. What Russia needs is debureaucratization, not deregulation.
For example, in Russia there is no effective market for commercial credit. Without state intervention, there is no way to get such markets functioning in the short term.
The state should ensure a concentration process of capital markets, from small, dispersed investments characterizing the present-day pattern, to large-scale projects, thereby increasing the efficiency of investment. The state should further stimulate the creation of investment banks and investment funds, as well as developing the insurance market.
Raising Wage Levels and Demand in the Economy
State policies to stimulate end-product demand in the economy are regarded as a key instrument for the economic recovery of Russia. Without more demand, production will remain on dead center. A priority for government economic policy is to increase the scope of possibilities to expand and direct final demand, which are presently quite limited and restricted mainly to the purchasing powers of the state itself. The experience of developed countries shows the ways they influence the consumption demand of households and the investment demand of corporations.
Special attention is given in the Ishayev paper to a state-controlled increase in wage-levels as an instrument to expand demand. It is noted that the setting of minimum (or normative) wages provides a means to exert a "soft" influence on the entire income scale and to influence household demand. Such an approach is different from an artificial pumping of monetary demand, but rather provides a mechanism to distribute already created surplus value.
Besides this, it is well-known that the present low general level of wages presents a major barrier to raising the competitiveness of industry. A healthy market economy is only possible when the worker values his employment.
The state must dictate to the private businesses that level of wages, which is judged suitable from the standpoint of society as a whole. This cannot be a mere subsistence minimum, but rather a standard wage providing an appropriate living for a worker of standard qualification.
However, given the enormous differential of income of the population between different regions of Russia, it is practically impossible to define a uniform standard of real income (i.e., in terms of consumer market baskets). Under present conditions, a reasonable approach is to define standards for a given region and branch of the economy.
Naturally it is not possible to raise wages suddenly overnight, without bankrupting companies. The state must synchronize the raising of wage levels with the rate of economic growth.
Consumer credit is another major instrument to improve the material standard of living of the population and stimulate demand. The paper proposes a major development of consumer credit to households, particularly for purchase of domestically produced, long-lived household goods, automobiles, and housing. This will generate demand and additional income in the economy, and stimulate the motivation and growth of productivity of labor.
It is proposed that the Central Bank open a special credit line to Sberbank for this purpose. At first, a major role would be played by guarantees provided by employers of persons receiving consumer credits. Companies and local entities could be tapped as additional resources for credit to purchase automobiles and homes.
Tax and Fiscal Policy
Here we merely note some of the most important points.
The tax burden on the real productive sector is today so heavy, that it does not even permit simple reproduction. Furthermore, a substantial part of the economy, especially the shadow economy and financial sector, essentially does not pay tax at all.
The tax rates for productive businesses must be reduced to a level which allows for expanded reproduction of the real sector. The paper notes that a well-planned and executed reduction of taxes can lead to an increase in tax revenues not only in the future, but also immediately, through reducing the extent of non-collection and non-payment of tax.
In the case of reinvestment of profits into fixed and working capital, investment tax credits and exemptions should be granted, having the effect of reducing the tax rate to zero. These provisions should be maintained for at least two years.
Another important proposal is to exploit state contracting and requisitions of goods and services as an instrument of economic policy. State contracting should include not only quantity, but also the prices and the qualitative characteristics of the products to be purchased by the state. The fixing of the price level of government contracting will be a most crucial stabilizing factor limiting inflationary expectations. The state must dictate prices to the suppliers, and not the other way around. On the other hand, this will work only if the state meets its obligations to pay suppliers.
Overcoming Regional Inequalities
A chapter on "Regional Structures" focusses on how to address the growing gaps in income and economic development among the regions of Russia. At present, 10% of Russia's regions account for 48% of GDP. The effect of increasing impoverishment and emigration out of the poorer regions, is to turn these increasingly into economically "empty spaces"--a process which is dangerous for such a huge country as Russia and could ultimately lead to its disintegration. At the same time, the different regions practice very different economic policies, a fact which undermines relations between the regions.
The paper notes, that some liberal economists are pointing to the lack of economic competitiveness of strategically crucial regions, such as the Far North, the Far East, and parts of Siberia, as an argument against trying to develop them as integrated economies. But "commercial arguments are not a sufficient criterion for state policy." The state must take an active role in promoting development of these regions to reduce the income gaps.
Only a regulated market can ensure a redistribution of non-fixed resources between the regions, whereas "globalization" and "open competition" between regions (in the world market) would have disastrous consequences for many regions and accelerate the centrifugal tendencies in the country. This dictates the need for a special policy, permitting regions to achieve a certain degree of economic self-sufficiency, while at the same time intensifying the economic interactions between the regions.
The paper sets forward a principled position on Russia's external debt. To pay the present obligations as presently structured would mean an outlay of $16 billion per year for ten years. This could only be achieved at the cost of a stagnation of production and a further drop in living standards. There are only two ways out for Russia and its creditors: restructuring of debt, or a default, the latter being in the interest of neither side. The paper emphasizes that renegotiation of the debt (and writing off of half of the debt carried over from the former Soviet Union) should take account of the facts that 1) the Russian economy itself is liquid and viable, having a positive trade balance of $50-60 billion per year; 2) the stopping of capital flight would greatly enhance the payment potential of the Russian state; 3) Russia's creditors have no interest in a conflict with a country that represents an enormous future market.
It is proposed that Russia negotiate a solution, by which one-half of the former Soviet debt would be written off, and for the next three years Russia would pay a total of $8 billion per year on its external debt. It is also proposed that the portion of the state debt, which originated in credits that were granted for purely political reasons, rather than commercial ones, should be written off.
Short-Term Measures for Economic Expansion
In a section on the priorities for economic policy in the short term, the Ishayev paper begins with an analysis of developments in the Russian economy over the period following the August 1998 financial collapse. Several factors (which will not be summarized here) contributed to a substantial recovery of industrial production and household income during October 1998-October 2000, albeit from the very low level reached as a result of the disastrous so-called liberal "reforms." However, from the middle of 2000 onward, the growth of output slowed dramatically, and the economy threatened to go into stagnation or worse. Investment stopped growing, inventories began to be run down, and the physical volume of exports stagnated.
The perspective of launching a new wave of growth in the immediate period ahead is closely linked to the restoration of money's role in the economy, reducing the relative importance of barter in the settling of inter-business accounts, which had taken on huge proportions in the regime of "survivalism" of the last ten years. Up to now, the re-monetization of the economy has mostly been linked to foreign export activities, via the activity of the Bank of Russia, which emitted rubles to purchase foreign reserves earned by exporting companies. The banking system must now play a crucial role in continuing the restoration of the function of money.
Several policy parameters are identified as key to a resumption of strong physical growth in the short term (one year ahead), including: mobilizing existing capital reserves, above all the surplus reserves of businesses and the savings of the population for reinvestment into the productive sector; reducing prices on other products and services of the natural monopolies; restoring the practice of businesses making payments in money; and, increasing the volume of bank credits to non-financial companies.
Naturally, the injection of financial liquidity into the economy can have inflationary effects. The state has the task of channelling financial flows in such a way, that the effect on economic growth is maximized, while inflation remains under control. Practically speaking, this means organizing the flow of financial resources into the real sector, which in turn depends on the extent to which the state reduces the systemic risks of investment. The instruments described above, particularly the new institutions for structuring and increasing the quality of credit obligations by the real sector (mainly to the banking sector), should provide adequate means for reducing the risks.
Under present conditions, the technological modernization of Russian industry and infrastructure, whose fixed capital equipment has been dangerously run down, requires substantial imports of high-technology capital goods. Present trade and tariff policies, which impede imports of capital equipment and stimulate imports of consumer goods, must therefore be reversed. Capital equipment, which is either not produced at all in Russia, or only in small quantities, should be freed from import duties. At the same time, duties should be shifted to exports of raw materials and imports of consumer goods, thereby increasing the demand for consumer goods and facilitating the expansion of domestic consumer goods production.
In this context, the paper notes that the volume and structural quality of Russia's trade could be greatly increased, if means were created to mobilize existing surplus and "frozen" foreign currency reserves in the country. In particular, it is proposed that a portion of surplus currency be channelled into the banking system, to be recirculated as credit, above all to support the export operations of domestic manufacturing industries and agriculture, and for the purchase of high-technology equipment from abroad, by domestic firms. Major state-controlled commercial banks (Foreign Trade Bank, Sberbank, Russian Development Bank, Russian Agricultural Bank) would be the chief channels for the lending of foreign currency, to be deposited in them by the Central Bank and the Ministry of Finance for this purpose.
By these means, imports of high-technology capital goods for basic capital investment in the Russian economy could be expanded by $8-12 billion per year, and overall investment activity boosted by 20%.
It is furthermore proposed to increase state investment into the Russian Development Bank, the Russian Agricultural Bank, and the Credit Organizations Restructuring Agency, for the included purpose of intensifying investment in infrastructure, industry (including conversion of military industry), and agriculture.
To overcome the present ineffectiveness of Sberbank, which has the potential to become a very major lender to the productive sector, the Ishayev paper proposes to utilize intermediate institutions--specialized banks or investment companies--which would mediate between the Sberbank and potential lenders. Another area for expanded operations of Sberbank would be a program for medium- and long-term consumer credit.
A last, important point of the paper, to be mentioned here, concerns the energy sector. The paper notes that stable economic growth is impossible without reliable "life support systems," such as electricity, gas supplies, and so on. But today, major bottlenecks, or worse, have emerged in the supply of vital necessities to the Northern and other regions, and intense conflicts are occurring, both between the major energy monopolies (especially Gazprom and Anatoli Chubais's United Energy Systems), and between these and the regional governments. The proposed way out is to drastically increase the powers of the Energy Ministry, giving it the right to determine the energy policy of the country and to realize that policy. This would, in effect, be a major step toward loosening the strangulating grip of the infamous "oligarchs" over the life-lines of the nation.
This completes our condensed review of the Ishayev program.
Some Final Comments
Apart from technical aspects of secondary importance, I do not that think there could be competent objections to the essential approach, outlined by the Ishayev document, as far as it goes. It is also clear, that Russia would be in an incomparably happier situation today, had something like the indicated approach--some elements of which were already on the road to being implemented, when Yevgeni Primakov was removed as Prime Minister in May 1999--been adopted by Putin from the very beginning. In the meantime, a great deal of precious time has been lost.
The problem, from our standpoint, is not what the Ishayev document says, but rather, what it does not say--at least, not in the version which has been widely circulated and discussed since the end of last year. Let me give some examples.
First, it is not sufficient, in Russia's present situation, to merely insist that investment be channelled into the productive sector--infrastructure, industry, and agriculture. A successful economic mobilization must be developed around certain key strategic tasks, which define a least-action pathway of successive breakthroughs in rates of development of the economy as a whole. A focus on selected, breakthrough areas, including specific areas of technological development, provides an instrument by which the state can drive the entire economic process forward. It is necessary to go beyond mere macroeconomic generalities, and to identify such areas in a precise manner.
One such, very obvious example is the role of nuclear energy. Without a large-scale use of nuclear energy in advanced forms, there is no possibility that Russia can attain the levels of overall productivity needed to reverse the effects of the ten-year economic collapse and rebuild the economy over the medium term. In particular, nuclear energy--for electricity, district heating, and industrial process heat applications--is key to the future of vast regions of Siberia, the Far North, and Far East of Russia. At the same time, the design and production of advanced nuclear energy systems provides an ideal context in which to mobilize the capabilities of the military-industrial sector, and to rebuild crucial machine-tool and machine-building sectors. Furthermore, with adequate development of suitable technologies such as modular high-temperature reactors (HTRs), the export potential of Russian nuclear technology to China, India, Iran, and other developing nations of the world, could be multiplied many times over.
By the same token, even a relatively short-term economic program for Russia, must locate Russia's development in the context of the future of Eurasia as a whole--a context in which Russia is destined to play a decisive role. The necessary parameters for Eurasian development, including most emphatically the Russia-India-China "Strategic Triangle," the pivotal role of Central Asia as well as Russia's relations to Western Europe, are very precisely defined; they center on the necessity of large-scale infrastructure development, including such things as transcontinental high-speed rail and maglev systems, energy systems, water systems (canals, irrigation systems, flood control), and so on, in the course of the coming decades. The essential parameters have been set forth in the strategic conception of the Eurasian Land-Bridge, put forward by Lyndon LaRouche and his collaborators.
This leads us to a more profound point, which we can only hint at here. To conduct an economic mobilization, to uplift Russia out of the depths of economic and social disintegration into which it has fallen during the last ten years, requires more than merely "objective" economic measures. It is not a purely technical issue, but depends on the ability of national leaders to mobilize the population around an appropriate set of ideas--ideas that must center on a notion of the national mission of Russia in the world as a whole (see Lyndon H. LaRouche, Jr., "The U.S. Strategic Interest in Russia," EIR, Dec. 15, 2000).
That mission is defined, among other things, by the urgent requirements of the vast populations of Asia, for the kinds of scientific and technological developments which Russia is uniquely situated to supply. But Russia's mission has a more universal aspect, which is perhaps best identified by reference to the great Vladimir Vernadsky's notion of the noösphere.
The universe, as Vernadsky showed, is governed by three absolutely distinct sets of physical principles--principles of non-living or inorganic nature, the principles of living processes, and the higher principles manifested in human Reason. The demonstrable, hierarchical relationship of those three domains, demonstrates the existence of a universal principle of creativity, subsuming all three. Thus, man and the noösphere did not emerge out of the biosphere by virtue of the principles of living processes; rather, the universal principle acted, already before the emergence of man, to bring about, in advance, the conditions under which man's existence became possible. The reflection of that universal principle of creativity into the economic process, which is the subject of LaRouche's Science of Physical Economy, cannot be properly ignored in the context of projecting an economic mobilization such as that which Russia must accomplish now. The intrinsically nonlinear character of such processes, and the apparent "time reversal" which is a leading feature of them, cannot be mastered in any lesser terms.