#7 - JRL 7064
From: "Vlad Ivanenko" <vivanenk@uwo.ca>
Subject: JRL 7057 Demodernization by Yavlinsky
Date: Fri, 14 Feb 2003

It is depressing to see that a politician like Yavlinsky uses faulty reasoning to support his case. Let me mention several dubious statements:

1) "It is becoming more and more evident that the growth over the past few years offers no panacea to the obvious (and in a certain sense threatening) structural distortions in the economy towards the raw materials industries."

Open to doubt. Apparently, Yavlinsky believes that putting emphasis on minerals makes countries poor. What about Canada? This country is oriented towards raw materials industries; yet, this situation is only natural given its endowments. It is not a "distortion".

In fact, if Russia attempts to emphasize its processing sector and succeeds, it would be a disaster at least for the rest of Europe. What will it offer then for Russian oil and gas? Or Yavlinsky expects Germany to start developing its non-existent deposits and sell oil to Russia?

2) "Although raw materials account for a relatively moderate proportion of Russian GDP, this sector accounts for the bulk of the financial resources available to Russian companies."

The sector of fuel controlled 9% of money available to the whole economy in 1997 (see Finance in Russia 1998, Tables 3.42, 3.46)

3) "This sector (raw materials -- V.I.) has accounted and still accounts for a visibly larger proportion of cumulative production investments all these years than the manufacturing industry".

The statement is technically right but misleading. For example, on the beginning of 1999 the sector of fuels had the residual value of capital funds of 395 bn Rbl compared with 411 bn Rbl for machine building (which is apparently what Yavlinsky means). The total amount of investment for 1998 was 49 and 12 bn Rbl respectively. However, for the whole economy the sector of fuels accounted for 12% of investments (see Funds in Russia 1999, Tables 3.7, 7.5, and 7.6).

4) "companies in the export-oriented fuels and raw materials sector account for almost 80% of all capital investments".

Again, a misleading statement. Yavlinsky is bent on calling almost every product that does not belong to machinery as not "processing". For example, it includes the sector of construction materials, which is not export-oriented. Yet, I would argue that rolled steel or synthetic rubber are examples of processed products.

5) "Output of fuels and raw materials & accounts for 70% of total exports and may increase".

This statement is wrong. Trade group 27 (mineral fuel) fell slightly in significance: from 55% of total export in 1991 to 42% in 1998 (see External Trade of CIS Countries in 1991, CIS Statistical Committee 1992 and Russian Economic Trends 2q-1999).

6) "this sector (raw materials -- V.I.) is critically important for the state of the government's finances, as it accounts for over 50% of indirect taxes".

It is hard to say what Yavlinsky means by "indirect taxes". There are several definitions in use.

The data from the input-output table for 1995 published by GKS in 2000 reports that taxes assessed for the sectors of oil and gas extraction accounted for 9% of the total tax revenue. It is important but not critically.

If Yavlinsky means that oil and gas producers pay in cash unlike other sectors, then such statement is outdated. It belongs to 1996-8.

7) "The prime minister was right and wrong in his impertinent rebuttal of the President demanded more ambition in competition with Portugal."

Yavlinsky's sarcasm is at least strange if not representative of the old Soviet obsession of "catching up with USA". Russia was poorer on per capita basis than Portugal in 1913 (see Paul Gregory. Russian National Income: 1895-1913, pp. 155-6; comparison with Spain) and still is. Catching up with this country in the standard of living will be a significant achievement for Russia.

One should not forget that Putin is tricky setting this target. If Russia succeeds, it will become the largest economy in Europe (see http://www.worldbank.org/data/databytopic/GDP_PPP.pdf for PPP GDP 2001 to calculate what its GDP would look like).

To be honest, I have stopped checking mistakes in the end -- there is too much of sloppy argumentation in the text. If Yavlinsky is too busy to check statistics I recommend him to hire a professional economist to do this job. It is my hope that he has not twisted statistics deliberately to support some of his questionable ideas.

Vlad Ivanenko
Dept. of Economics
Univ. of Western Ontario