Sunday, July 8, 2012

What is to befall barrel and us?

Annual economic forum in St. Petersburg — pretentiously dubbed the “Russian Davos” — has come to an end. Neither its significance for the global economics, nor the ranks of the guests, nor the announced goals can match the Swiss ones, but peculiar aspects of it are crucial for our country.

Year after year Saint Petersburg remains the source of frank economic forecasts, put forth by the leading Russian economists and government leaders.

Despite the perennially repeated mantra about the vital importance of getting the oil-and-gas monkey off our backs, no actual moves in the direction were made as of yet. Everything in Russia still hangs on the tip of an oil needle. There is hardly a single sector of economy not bound to the oil and gas revenues. Even the seemingly remote enterprises, with no connections to Rosneft and Gazprom will face certain setback, once the energy carrier prices drop, since everyone is feeding with the crumbles from the master’s table — with oil and gas industry workers apparently being the masters. And, alas, there are all the grounds to expect the further decreasing global demand for oil and gas. The United States of America that gradually crawls out of the crisis, heads towards lesser dependence over energy carrier export and has succeeded with that indeed. 
Today in America shale gas is traded at $80 to $100 per 1000 m3. That leaves China but the pace of its economic growth is on the decline, too, being tightly bound to the well-being of the countries that import Chinese goods, i.e. the very same USA and Europe. Altogether these factors may reduce Russian oil and gas incomes manifold.
Speaking at the Saint Petersburg Economic forum, former Minister of Finance and Prime Minister Deputy Aleksey Kudrin stated that if we subtract these incomes, deficit of the Russian budget will reach 12% mark, which is the Greek level. But while Germany and France rushed to save Greece, having sacrificed the interests of its own taxpayers, no one would lend us a hand.

Putting it mildly, that lets us challenge the possibility of keeping up with the tremendous social obligations, which our budget is encumbered with. Those are the salaries of state-funded enterprise workers, pensions, state of education, health care, housing costs and a great deal of other things, which makes the day-to-day lives of the overwhelming majority of our compatriots. The 2008 crisis will seem a trifling ripple over the water as opposed to the storm that is coming our way. Make no mistake, we’ve “learnt how to mend the sails and cover the breaches with our bodies”, but it is not 1941 out there and we would really like to go through the tempest of the next crisis with the minimum casualties possible.

Most analysts believe the oil price to settle around $70–90 per barrel in the nearest future, which is a critical mark for the Russian treasury. First Deputy Prime Minister of Russia Igor Shuvalov is confident that “once oil price hits $90 per barrel Russian budget would require some serious consolidation”. That is the keyword that we have to grip for in order to survive the new crisis — have the budget indices maintained, business safeguarded from the recession consequences and living standards of population preserved intact. A little remark, though: it is our entire society, not just the budget, that is to be consolidated.

President Vladimir Putin understands that well enough; he has delivered a speech at the same St. Petersburg forum that gives a clear evidence of the forthcoming changes of domestic policy: “Collaborating with every single political power in the country through the framework of open debates and dialogue we have to work out a uniform solution for the acceptable and efficiently operating formula of national democracy and development model”.

This can be treated in no other way but the direct address to the “angry mob”, i.e. the brand-new opposition that dubs itself “non-systemic” for some reason — as if we had some other kinds of it (unless someone really takes the Communist Party, LDPR and the “Just Russia” for an actual opposition). President unequivocally called the sane part of the “protesters” — those who do worry for the fate of the country, whose lives are bound to their motherland, and who don’t own a modest castle at the Loire river banks or the estate in the Austrian Alps (with the European citizenship coming as a pleasant extra) yet. Elvira Nabiullina, presidential economic adviser and Sberbank president German Gref said the same, acknowledging the necessity to adjust the state management system, since “Russians feel the need to directly influence political decisions that the state leaders make”. Both the authorities and the opposition are to define the character of that dialogue — government has to invent new form of that interaction, while the majority of the opposition is obviously still unfit to talk about the national future.

To a considerable degree success depends upon the regional authorities, who hold both levers over the economic and political components of the civilian accord.

At the same forum First Deputy Prime Minister Igor Shuvalov also mentioned that “It is embarrassing to have such a real estate market for a country like Russia. What kind of aerospace industry can we talk about if an engineer lives under a leaking roof and there are no companies to maintain the living conditions well, while the country is entangled with the fraudulent housing maintenance firms”. Shuvalov has called “to make the affordable apartments true. Today’s investors build a 10- or 20-storey building, ‘knock up’ their 150% profit and wash their hands of it, which is basically inappropriate”.

We may barely argue with that estimate. It seems that “affordable real estate” only exists in the minds of those, who invented the national project under the same name. The government has fairly defined the corrupted practice of allotting lands for construction (either roundabout the existing legislation, or through the slyly crafted auctions with faux bidders) as the key contribution to the outrageous housing prices. Yet, even assuming that since this day on all the land plot tenders will be in strict accordance with the law and the bidders will be engaged in a fair competition, consistently offering higher prices, it would only boost the land prices furthermore, which would inevitably ricochet at the housing price. At best, we would end up with the inflating budgets all over the place (which capitalize on that in their cupidity), rather than housing prices drop.

Construction profitability that goes way beyond 150% would merely allow the developers bid “until the bitter end” — and mind that luxury estate developers would have the advantage over the ones, representing “affordable housing” due to the greater profitability. In order to lower the housing price those auctions have to submit to the “lowest offer per m2 of final accommodation” logic rather than to the “highest offer per m2 of land” one.

In praxis this may look like that. Municipality that sells the land for construction needs defines the average prime cost of a square meter of housing in this area on the basis of the expert estimates and taking the peculiarities of the certain traded land plot into consideration. Naturally, everything (including geophysical nuances, power and communication supply prospects) are to be taken into account.

Having, thus, calculated the average housing price, the municipality sets the initial price for a square meter of housing, which emerges from the prime cost and the profitability rate, set by the land owner.  Companies willing to start the construction, try to outbid each other, consistently reducing the announced housing price. Land price, though, is not included here, since it is fixed and is not subjected to changes, or equals to zero.

On the 1st of July all of us are to face the growth of the housing and maintenance rates, which will strike the underprovided strata the first. However, actual regional rates are to be reestablished by the Regional Energy Committees (REC), who are not the only ones responsible for the end customer price either. In fact, the root of evil is the consumption rates for water, gas, etc. Those are magnified manifold and allow the local housing maintenance providers make extra profits, simultaneously bolstering the inflation. Most part of the population has no money to install the flow meters, so the poor, who cannot afford the money-saving devices, keep paying more. If we add the “fraudulent housing enterprises” (using the term Igor Shuvalov coined), who lavishly add their margin to an already exaggerated price, it is getting clear that the greed of those housing fat cats may trigger the social explosion as soon as this fall — which is exactly what the most radical opposition members reckon upon.

In order to evade this danger, we have to reinforce the “collaboration with every single political power in the country” with the economic component. And that is where the regional authorities can make quite a contribution. In the conditions of a budget deficit, caused by the global economic situation, it would be both fair and reasonable to ease the burden of the unprotected strata. One more thing. On May, 24 Omsk Oblast governor Leonid Polezhaev has retired. Deputies of the local legislative council have fixed a terminal wage in the amount of 32 million rubles for him (and mind the pension of 458.333 rubles a month). This nearly matches the salaries of the current U.S. Ministers — merely 39.267 rubles a month less than Hillary Clinton and 20.867 rubles less than the CIA Director David Petraeus get. An immortal line by Leonidov Filatov immediately comes to mind: “Fixing sandwich in the morn, thinking of low- and well-born, my, oh, my, I’m so forlorn”. I swear, we need no State Department conspiracies with state officials like that.

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