The predatory state: what Russia can learn from Saudi Arabia

A fundamental choice

While Alexei Kudrin intends to begin writing a program in 2019, and Dmitry Medvedev has proposed to create a Commission to “coordinate the development of strategic options for socio-economic development”, the Saudi Prince Muhammad bin Salman al-Saud has announced the launch of reforms that would dramatically reduce oil dependence, Saudi Arabia, the main oil countries in the world. Prince says that this dependence is dangerous and inhibits the development of the country.

Why is this news so important for Russia? Oil production per capita in Saudi Arabia is about 4 times more than in Russia, and the oil monarchy can dramatically increase this amount at any time. That is unlike Russia, which can live on the oil rent only at very high prices, Saudi Arabia just might, as it seemed, to live on rent always. However, the authorities believe that oil dependence is an urgent need to get rid of. And the very appearance of such plans feels like the end of an entire historical epoch.

What is the main idea of the program? It’s simple: the national state oil company should become a public, all its financial activities will be fully transparent, the management company will be transferred to the State investment Fund and elected to the Board of Directors, which will make the company less dependent on the state and, ultimately, to gain from the sale of its shares to the maximum amount possible.

This money will be invested to the national Fund, which will use them to stimulate the diversification of the economy — investment in education, health care and national businesses. At the same time to raise the private sector will use the scheme co-investment in addition to investments of the state Fund seeks to simultaneously increase the share of foreign direct investment from 3.8% to 5.7% of GDP. As a result, the share of private sector is expected to grow from 40% to 65% of GDP.

Current plans of the Russian authorities on this background look especially samsel. First, when Russia Kudrin program will be at best only written and will be submitted for consideration of the authorities, the Saudi program should be in the main part has already been done (by 2020). Thus, the basis of calculation programs for the period of its implementation laid the price of 30 dollars per barrel — in the Russian leadership on such a nightmare trying seriously not to even think about.

Russia seems to be also has plans to sell a package of “Rosneft”. But the Russian authorities are going to do this at a time when access of foreign companies into the market the most difficult, — that is, to knowingly sell at competitive prices. In this case all information about the “Rosneft”, Vice versa, rapidly and officially classified. Well, and the money apparently will be used to repay debt of the company that its management managed to make some during the period of highest oil prices. The same management however will steer and privatization, the real details of which the audience can hardly recognize, because it is impossible to transparently sell the company, scramble the information on its financial position.

Openness and resource curse

In fact, the transition to open government rent and rental assets is one of the key elements of care from a rent economy and a movement towards real diversification. And if Russia at some point really need the program of liberalization and modernization of the economy, the mechanism of management of rental assets and rent will be one of its Central themes. Uncontrolled, opaque and archaic ideology and objectives of the management of the annuity is the mechanism that creates the rent or, as it is called, the predatory state (predatory state).

Fork in the road here is very simple. The predatory way of the distribution of rents involves investments it in something that, on the one hand, very much is on the mind of the population, and on the other supports intraspecifically coalition. A striking example of this type of investment are all sorts of large-scale construction projects and urban improvements. On the one hand, the performance of the government as would be apparent: that built so many new facilities, improved this and that, on the other hand, in countries with weak institutions, the construction is usually a bottomless pit of corruption, i.e. allows parallel on a large scale to privatize the annuity in favor of intraplatelet coalition, thus increasing its political influence and ensuring the reproduction and sustainability.

It is interesting that you create in this process jobs are usually annihilated with the reduction of the rent flow: a decline in employment in construction starts immediately and dramatically after the construction boom associated with the distribution of rent ends.

This is the mechanism the oil curse: the distribution of rents increases intraspecifically coalition, which is beginning to build a state for themselves, inhibiting the incentives for the development of non-rent sectors. Conversely, the use of resource rents to diversify investment involves rental income in the creation of jobs and support of the elites, not related to the distribution of rents.

In 2010 — 2014, total export revenues of oil and gas in Russia totaled $1.64 trillion. It is 1.7 times more than in 2004 — 2008 Of them to keep saving the funds was only 160 billion, i.e. approximately 10%. The rest is more or less left to maintain intraspecifically coalition. However, the saved money is rapidly melting, leaving no noticeable trace in the economy. In fact, today they serve not to start the reforms, despite falling oil revenues.

Pension fork

A chance to solve the strategic problems of the country using rental incomes are largely missing. If the spending of oil revenues in early 2010, he remained at least at the level of aggregate income the oil boom of 2004 — 2008 ($960 billion), it would save about $700 billion In a result, more likely the country would be busy during this period, the search for new sources of growth, and not eating up the rents, and the annual interest income on this amount could be today at least $20 — 25 billion, which would, for example, to increase the average pension by about 25%.

These opportunities do not return. And the government today, by contrast, is still talking about the necessity of raising the retirement age, arguing that it is necessary to solve the strategic problems of the country. This, of course, not true. The strategic problem of the country, hindering its development, are the rental nature of its economy and the dominance of rent-seeking elites in politics. And to solve this problem, raising the retirement age makes no sense. In fact, it will only be a fiscal measure designed to support the existence of rent-seeking, predatory state at the moment of sharp reduction of rental income.

The real answer to the strategic challenges facing the country, would be to transfer oil and gas assets of the state in management of the special Fund, all proceeds of which must be the intended use — the formation of pension savings, investment in health, perhaps in education. In this case, the income of the Fund shall be considered all revenue from oil exports at a price above $30 per barrel (or lower), as well as funds from the sale of shares of the Fund’s assets.

And that’s when the program income Fund will be approved, and these expected revenues will be for obvious scheme is distributed across the individual accounts of citizens, when citizens will have the presentation on the financial status of owned state companies, when it is clear how much money these companies spend on the purchase of musical instruments through offshore accounts, then it will be time to talk about retirement age. And this conversation in this case, it will not look like a new fiscal measure predatory state, but as a new social contract.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.