Russia: where are the petrodollars going

Published on the russian edition of openDemocracy, by Dmitri Travin, June 25, 2008.

For the first time in years, inflation was oneveryone’s minds in the autumn of 2007. We thought it was a thing of the past.The 1990’s taught us hard lessons. The unwritten consensus among the elite was that creating money was a dangerous tool of macroeconomic regulation: the ‘printing machine’ had to be kept under strict control. No one would describe the head ofthe Finance Ministry Alexei Kudrin, or the head of the Central Bank Sergei Ignatiev, as populists, intent on flooding the market with rubles. But inflation rates, which had been going down ever since the end of the ‘90s, no longer are …

… Who is getting richer? However, today’s inflation is not the result of mistakes in the government’s economic policy. Nor can we blame the world market, although this is of course an important factor. Prices have risen in Russia because the country is getting richer. It becomes clearer all the time that we are paying with inflation for the large profits we are making from the sale of oiland gas. Since we developed a stable and promising Russian commodities market this has been exacerbated by the influx of foreign capital.

Until recently we could still cling to the illusion that oil and gas was only bringing profits to oligarchs, while the rest of the population continued to live poorly. Today, against the background of rising prices (including prices on goods of mass consumption), this is no longer a tenable argument. Petrodollars are spreading right through the country and radically changing the macroeconomic situation. We may mistrust the official statistics which keep telling us that people’s real incomes have grown, but we’ve got to face it. For inflation is one of the factors telling us that it is true: millions of people, from oligarchs to cleaners really are benefitting from oil revenues …

…Following the trial and incarceration ofMikhail Khodorkovsky in 2003, Russian business (especially the oil sector) began to realise that it was going to have to share its revenues with state employees who could otherwise create serious problems for it. These include not just officials on whom the development of business depends directly, as was true in the 1990’s.Today there are also a lot of state employees who, although they do not themselves make decisions that benefit companies, can easily destroy those companies.These include fiscal officials, customs officers, officers of the specialservices, investigators, traffic police, drug agency employees, people who protect the environment, prevent fires, fight outbreaks of epidemics etc. The very list of the people who can come and make threats, demanding their share ofthe ‘petrodollar pie’, is astonishingly long.

Each of these people has a family. They too take this money and join the consumer race, and by so doing they redistribute petrodollarsto regions and industries all over the place, some of which are a long way awayfrom Western Siberia. Observers note that today the richest houses in the elite zones of the Moscow Oblast are not being built by businessmen, but by civil servants, especially those from the law-enforcement organisations.

Nor should the role of the so-called oligarchs be underestimated when calculating where the petrodollars go. In recent years their capital has increased drastically, as you can see from the list of billionaires regularly compiled by Forbes magazine. But the distribution of oil money goes far further than the people on this list.

Buying foreign assets: Especially with the price of oil rising, the more money settles in Russia, the higher inflation will be, while other costs stay the same. One way of slowing things down is to ‘force’ money out of the country. Some time ago, Andrei Illarionov, former economic advisor to Vladimir Putin, suggested that we pay off our foreign debts. Russia is doing this, but such expenditure has its limits. The idea which finding favour now is that of buying foreign assets.

Already, the US senate is worried about the flowof Russian money entering America. And with good reason. In the years to come this problem is likely to get a whole lot worse. (full text).

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