Kremlin attempts to uproot corruption, clear the field for a spending leap

Kremlin attempts to uproot corruption, clear the field for a spending leap
Russia's Audit Chamber is getting some teeth to oversee regional budget spending
By bne IntelliNews June 5, 2018

The Russian Audit Chamber that is now headed by ex-Finance Minister Alexei Kudrin will be given carte blanche to scrutinise regional spending, Vedomosti daily said on June 4 citing the amendments to the Budget Law approved by the government and prepared for hearings in State Duma.

Eyebrows were raised when heavyweight policymaker and author of the current reform plan Kudrin's long-awaited comeback to politics was through the backdoor, with his appointment of the largely toothless Audit Chamber. 

Now it appears the plan to beef up the Audit Chamber into a real oversight body that has a special focus on regional spending. Empowering the chamber, along with other recent appointments, suggests the Kremlin is preparing to clear the field and increase oversight by the centre in major spending hubs before its starts pumping President's Vladimir Putin's ambitious 6-year RUB8 trillion of cash into the regions.

In the end of May Putin appointed Igor Shuvalov the head of the state development bank Vnesheconombank (VEB). Shuvalov is another heavyweight bureaucrat that has been Putin's economic deputy since 2008, and later first deputy Prime Minister. Just like Kudrin, Shuvalov is a long-time Putin's ally that has proven his efficiency in office. VEB will be another agent that spends vast amounts of state cash on economic development projects, especially on infrastructure projects.

Shuvalov replaces current VEB head and ex-Sberbank banker Sergei Gorkov. Shuvalov already announced that he will be laying off half of VEB's staff and move the development and investment bank's headquarters closer to Kremlin.

On paper the government has already come up with ways to finance Putin's latest May Decrees through creation of infrastructure spending fund, long-postponed hike of the retirement age, oil and gas tax reform, and possibly VAT increase. But how efficiently the funds will be spent remains the make or break of the plan.

In an interview to chief economist of VEB Andrei Klepach on June 4 argued that primary domestic reserves that could be tapped for pushing Russia's GDP growth above the structural ceiling of 1.5-2% growth include channelling private savings to investment and stepping up state spending.

While the former requires further decline of the interest rates, the efficient and clean transmission channels for both private and state investment are key factors for success, Klepach noted.

In 2017 the Audit Chamber has flagged more than 6,500 federal spending failures worth a total RUB1.9 trillion, which was mostly attributed to loopholes in legislation, low competency, and lack of accountability in state institutions and spending hubs.

Indeed, curbing corruption was the main goal of Kudrin’s appointment in his new capacity at the Audit Chamber, along with tying Russia's strategic development goals to the actual budget, enhancing the methods of budgetary control, and informing the public on realisation of national strategic goals. 

"The question is not, whether we spend the money in accordance with the procedures, but whether the spending is getting us closer to the national strategic goals," Kudrin said.

Putin’s inauguration speech unveiled a very ambitious reform plan during his state of the nation speech on March 1. The President wants productivity growth to accelerate to 5% per year (since 2009, the average growth was only 1%) during next decade, the share of SMEs in GDP to go up to 40% (from current level of 20%), the number of people employed in SMEs to go up from 19mn to 25mn people, and to halve the number of people living below the poverty line (currently 13.8% of the population or 20mn people).