November 29, 2019 No.

Russian Economist Vladislav Inozemtsev: Russia's Megaprojects, Whose Effectiveness Are Not Obvious, Pose Serious Problems For The Country's Economy

The Russian economist Vladislav Inozemtsev wrote an article published in the Russian media outlet, titled "Does the problem of non-payers threaten the Russian economy?" where he criticized Russia's new megaprojects. According to Inozemtsev when the state initiates megaprojects, whose effectiveness is not obvious, the state of public finances that are ostensibly in perfect shape can cause serious problems in the immediate future. Inozemtsev also warn that some of the highly touted foreign contracts are financed by Russian credit to less than credit worthy borrowers.

"The fact that Russia has an increasing number of financial and production companies in the 'too big to fail' category and that huge injections under various pretexts and from different angles actually only hide their insolvency or inefficiency of the projects they implement, one cannot but worry," Inozemtsev wrote.

Below is Inozemtsev's article:[1]

Vladislav Inozemtsev (Source:

"Russians are well aware that they live in a country in which the horrors of the 1990s will never recur. And although many do not even remember that time, stories about the domination by criminal activity, the impotence of the authorities and economic traumas are passed on by word of mouth. Without going into historical discussions, I would like to draw attention to the revival of some economic problems regarding the distant past.

"One characteristic of the 1990s Russian economy was what economists Clifford Gaddy and Barry Ickes termed virtuality, namely the absence of transparent cash settlement, and the formation of almost uncontrolled debt pyramids, that originated with an insolvent government. Today, the situation is seemingly the opposite: the budget surplus in January-August 2019 exceeded 2.5 trillion rubles, and there is only an extremely stubborn struggle for state contracts. However, some signs of impending problems are becoming more noticeable. As examples, let's consider just a few issues.

Unsound Restructuring

"Since the beginning of 2013, more than 400 banks have gone bankrupt or fell under the reorganization program in Russia. Unlike previous times, the state did not abandon their depositors and customers - and now we have at least a few monsters who have received trillions of rubles (only 'Otkrytie', 'Promsvyazbank' and smaller structures have received at least 2 trillion from the Bank of Russia), but practically have no working assets that were transferred to them from their previous owners (from March to November of this year alone, the estimate of 'recoverable' debts made by the head of 'Trust Bank' decreased by 1.34 trillion rubles).

"Thus, financial authorities create the semblance of normality, while a significant part of the banking system assets may turn out to be as real as the assets of restructured banks. This applies to almost all credit institutions that are already preparing to solve their problems, if not by their own reorganization, then by state's injections to debtors. And this applies to companies that, it would seem, cannot but have a stable and powerful financial flow. The difference from the situation that existed in the 1990s is that back then holes were camouflaged for the time being via surrogate financial instruments, today they are hidden by real state funding, budget guarantees and obligations, as well as Bank of Russia support. But sooner or later, the balance sheets will not match, which is fraught with serious problems for the markets.

Debts And Guarantees

"The second issue, whose relevance is clearly underestimated, is the financial support of Russian foreign policy. I'm not talking about writing off debts to Africa, which was much discussed in connection with the summit in Sochi: they were written off a long time ago. It's about more modern endeavors. Just recently, it was recognized that the debts to Russian defense enterprises, whose interests in the foreign markets are represented by 'Rosoboronexport', exceeded 800 billion rubles ($ 13 billion), which, incidentally, is 70% of the official annual export of domestic weapons.

"These unreceived funds are another black hole, reaching almost a third of the annual military allocations. Partly for this reason, the amount of loans unpaid by the sector, which have to be restructured, has already reached 2.3 trillion rubles. In parallel, the state assumes additional obligations to support the nuclear industry: for example, an allocation of a $ 25 billion loan from the NWF for the construction of a nuclear power plant in Egypt is being discussed.

"The third issue is the state of regional and sectoral finances in the field of infrastructure, housing and public utilities. Citizens owe 564 billion rubles for utility services. The so-called garbage reform has revealed the degree of financial disorder in the utility sector. Here, the main debtors are industrial enterprises and municipal budgets - they account for 70–75% of the total debt. The sector continues to work, accumulating losses and seeking either bank loans against guarantees of local authorities, or deferrals, or simply sabotaging the reform.

Latent Threat

"Each time the state initiates new megaprojects, from, construction of high-speed railways to the Sakhalin bridge, one can expect a repetition of the experience of some [2014 Winter] Olympics construction projects in Sochi. Most likely, the consolidated losses from inefficient projects will ultimately end up on the balance sheets of VEB [the national development bank] and other government agencies, increasing the scale of bad debts and making general economic indicators more and more virtual.

"Of course, any comparisons with the 1990s now seem rather arbitrary. The state can easily borrow the necessary funds or even print them de facto - in a stagnant economy this is unlikely to radically affect inflation. But the fact that Russia has as an ever increasing number of financial and production companies in the 'too big to fail' category and that huge injections under various pretexts and from different angles actually only hide their insolvency or inefficiency of the projects they implement, can only arouse concern. If the process continues to develop at the same pace as in recent years, the seemingly fine shape of public finances may become sources of serious problems - especially serious because their eruption will come as a surprise to most senior Russian officials."


[1], November 18, 2019.