Andrey Kostin, the head of the state bank VTB, suggests that the government take advantage of the mechanisms that were popular in the 1990s to support the economy – increasing public debt and privatizing state assets. In his opinion, these tools will help the Russian economy mitigate the negative effects of sanctions and get on the track of economic growth. The state banker expressed his opinion in a column for RBC.
Kostin argues that Western sanctions have destroyed the basic elements of the Russian economy that the authorities have been building for the past 30 years. Therefore, he proposes to focus on building new ones, and, in his opinion, priority should be given to new transport corridors, restarting entire industries, as well as strengthening the state's defense capability. In addition to privatization and increasing public debt, Kostin sees additional opportunities in the competent management of the state budget, the funds of which will be correctly prioritized.
“The transfer of state property to private hands on transparent and market terms is a tool that has repeatedly proven its effectiveness. Domestic business has accumulated significant investment potential. There is money in the country,” writes the head of the second bank of Russia.
Before the war with Ukraine, according to Kostin, "the prospects for privatization could be discussed, but now is the time to act." Since the annexation of Crimea, the Russian authorities have repeatedly allowed large-scale privatizations of state-owned assets to boost investment in the Russian economy. However, no large-scale state stakes in state-owned companies were ever sold, although in words the Cabinet of Ministers was ready to sell shares in VTB, Alrosa, Bashneft and other companies. In reality, a 19.5% stake in Rosneft was sold, which brought the budget 700 billion rubles.
“The resumption of the privatization program will not only make it possible to successfully attract funds to the budget on market terms, but will give a powerful impetus to clearing those bottlenecks where the willingness to take risks and make quick and unconventional decisions is especially important today. Private initiative can provide them,” the state banker believes.
The business has funds for privatization, Kostin believes. He cites data from the Bank of Russia, according to which, at the beginning of spring 2023, funds in the accounts of organizations amounted to 20.8 trillion rubles, and business deposits in banks – almost 28 trillion. It is these funds, according to Kostin, that could be directed to privatization. The level of public debt, according to the state banker, can also be safely increased from the current 17% of GDP to an unproblematic level of 60% of GDP.
“The difference between the current level of public debt and what is considered a ‘problematic’ threshold creates a huge margin of safety. Without significant risks to financial stability, the domestic economy can receive an additional 70 trillion rubles,” Kostin is sure.
The head of VTB calls the main buyer of public debt Russian banks, which "could be more actively involved" in the purchase of federal government bonds (OFZ). At the same time, state-owned banks are already the main buyers of Russian government bonds. Moreover, they do this not very willingly , since they understand the risks of the economy very well and they did not really want to collect public debt at relatively low rates at the beginning of the year. OFZs with a floating coupon were in high demand (the yield on these securities varies depending on the economic situation).
Andrey Kostin, as a solution to economic problems, offers methods that were actively used in the “dashing 90s” – a period in which Russian President Vladimir Putin likes to intimidate the population and argues for the need and importance of maintaining stability. Privatization in the early 1990s created a Russian oligarchy, many of whose representatives still occupy top positions on the Forbes list. The buildup of public debt through the issuance of government short-term bonds (GKOs) ultimately led to the default of 1998 and the economic crisis. However, the current state of the Russian economy does not yet allow us to say that the consequences of similar measures will be the same as in the 1990s.