National Projects Under Crisis Watch

Ria-novostiMedvedev visiting a vegetable producer outside Moscow on Wednesday.
Editor's note: This is the sixth in a series of reports about the effect of the global financial crisis on Russia.

The national projects, a state priority during Vladimir Putin's last years as president that catapulted Dmitry Medvedev into the Kremlin, have taken a back seat since the presidential election and face being sidelined further as the financial crisis sets in.

The four projects were enacted in 2006 with a mandate to fulfill a series of short-term goals aimed at improving public health, raising educational standards, providing affordable housing and stimulating farming and agriculture. The measures, greeted by some as a sign that the government had begun to think proactively about public welfare for the first time in 15 years, turned the little-known Medvedev into a national figure overnight.

Medvedev said last year that the national projects would fulfill their objectives by the end of 2009. But Deputy Prime Minister Alexander Zhukov said on Sept. 24 that the projects would be reclassified as government programs with longer-term objectives starting next year. Zhukov, speaking at a meeting of the national projects committee, promised to develop concrete program proposals and present them at the next committee meeting by year's end.

The national projects have only touched the tip of the iceberg, and for real success federal funding must be committed to the four areas with longer-term planning and on a more systematic basis, experts said. But the projects seem to have been successful in at least one thing — properly defining the four areas of social policy where support was most needed.

"For years, everyone understood that things were bad, but few people talked about what should be done," said Valery Fedorov, general director of VTsIOM, a polling agency. "The projects became the battering ram that broke the wall of silence. The topics they addressed finally left the category of kitchen conversations and went into the realm of government decisions."

Spending on National Projects

*Billions of rubles
Health care119.9105.9109.3
Source: Federal budget for 2009-11
This year, the government is expected to spend 330 billion rubles ($12 billion) on the four projects, which, according to VTsIOM polls, are considered "vital" by the Russian population. But this financial commitment pales when compared to the more than 1 trillion rubles that will be spent this year to support the nation's banks.

In 2006 and 2007, a total of 432.6 billion rubles was spent on the four projects, with 51 percent, or 222.5 billion rubles, going to health, 20 percent to housing, 18 percent to education and 11 percent to farming. This is for a country that, as of the end of 2007, had stockpiled $476.5 billion in foreign currency reserves and accumulated a stabilization fund of 3.8 trillion rubles ($156.8 billion), built up from windfalls in oil revenues since 2004.

The government had waited for years to start pumping money into the areas that were at the core of Russia's most critical social and demographic problems, seeming to save up for a black day until it was almost too late.

After the financial crisis struck in September, the state began scrambling for measures to stabilize the financial markets and prevent the economy from going into a recession. State-owned Vneshekonombank, or VEB, has been charged with refinancing the foreign loans of some of the country's biggest and most aggressive borrowers with 1.35 trillion rubles from the national reserves. This might appear to be a reasonable measure when faced with the possibility of a flood of defaults. But it also could be seen as a missed opportunity, considering the funds that could have been invested into what Medvedev called "human capital" in his state-of-the-nation speech last week.

United Company RusAl, whose 51 percent shareholder is Oleg Deripaska, one of Russia's most heavily indebted oligarchs, last week received a $4.5 billion loan from VEB to prevent foreign creditors from taking over a 25 percent stake in Norilsk Nickel. By granting the loan, the VEB broke a $2.5 billion loan limit for a company that it had set itself.

The RusAl loan alone is worth more than the funds spent on education improvements in all of Russia in 2006, 2007 and 2008, which amount to about 123.7 billion rubles ($4.48 billion). While RusAl generated $14.3 billion in revenues last year, it also has only four shareholders — Deripaska, billionaire Mikhail Prokhorov and Sual and Glencore shareholders — compared to the millions of Russians who had stood to directly and indirectly benefit if the same funds had been spent on education before the crisis.

"This crisis has really showed the true value system of our government and business elite," said Sergei Mikhyeyev, political analyst at the Center of Political Technologies.

Deputy Prime Minister Igor Sechin said last week that oil companies would need $100 billion in state aid to get through the crisis — or 720 percent more than what has been earmarked for all national projects in 2008.

Big 3-Year Plans

Yet, on the surface, the government has not reduced its commitment to the projects. In his state-of-the-nation speech, Medvedev vouched for continued investment into social programs such as education and health. He said a new development strategy for the education system would be approved shortly, building on the framework of the national project on education. "We must use the experience of the national project on education when developing the principles for the operation, design and construction of 'our new school,'" Medvedev said.

In approving the 2009-11 federal budget on Oct. 31, the State Duma set aside 354 billion rubles for the national projects in 2009, 323 billion rubles for 2010 and 274 billion rubles for 2011. Farming will receive the biggest chunk of the funding, getting 34 percent of the money in 2009, 43 percent in 2010 and 53 percent in 2011. Health care will be the second-largest recipient of state funds, accounting for a third of all funding over the next three years.

The budget, however, could go into a deficit as early as next year as oil prices slide and the financial crisis continues.

"Since the general population is the least sensitive to changes in the budget, their share of expenses would be the first to be cut," said Konstantin Sonin, a professor at the New Economic School/CEFIR.

He said some results of the national projects, like the purchase of new ambulances for all hospital emergency rooms, were immediately visible, but longer, more gradual improvements in health care services would be more important.

Statistics published by the Health and Social Development Ministry show that the number of outpatient clinic visits increased from 8,900 per 1,000 people in 2005 to 9,800 in 2006, 10,550 in 2007 and a projected 11,550 in 2008. No information is available as to the actual improvement in quality of outpatient services.

During the meeting of the national projects committee in September, Prime Minister Putin emphasized that the experience of national projects should be used as a foundation to develop the new government programs, which will run through 2012. "The program for the development of farming has already been approved," Putin said.

The original project focused on incentives to speed up cattle breeding, the development of private farms and affordable housing for young agriculture specialists. But the project was the first of the four to be transformed into a government program when in June 2007 the state passed a five-year development plan for the agriculture sector that encased the initiatives of the national project.

"The project gave momentum to the agriculture sector, which, frankly speaking, was in ruins for many years," said Nikolai Shkilev, chairman of the commission on agriculture, land and forestry in Nizhny Novgorod and a deputy in the region's legislative assembly.

He said that of the 4.7 billion rubles granted to the region in 2006 and 2007, 2.6 billion rubles went to support 15,000 private farms and 480 collective farms, and 2.1 billion rubles were spent on building cattle-breeding centers. "In addition, we built 23,000 square meters for 400 young families," he said.

Shkilev said the biggest hindrance in the implementation of the project were banks, which were unable to disburse loans efficiently.

He said the transformation of the project into a government program proved its necessity and showed that the government had finally started to think strategically about the sector.

At a meeting Wednesday with the Russian Agrarian Movement, a lobby group, Medvedev said Russia had harvested 100 millions tons of grain this year, the largest crop in 15 years. Medvedev also said agricultural production grew 6.5 percent in the first nine months of 2008, the highest in the past seven years. "Russia has enough agriculture resources to minimize the risks of the global financial and food crisis," Medvedev said.

All programs implemented as part of the health care project will be retained in the 2009-12 government program, said Health and Social Development Minister Tatyana Golikova at a meeting of the national projects committee in September. In addition, three new programs will be introduced next year: 28.5 billion rubles will be spent on cancer patients, 3.5 billion rubles to develop healthy lifestyle programs and public campaigns against alcoholism and smoking, and 16 billion rubles to increase the use of technology in health care. Golikova said the program envisions the creation of a comprehensive database of patients and would store a patient's medical history across all medical institutions.

Education and Science Minister Andrei Fursenko said at the meeting that new education programs would cover four key areas — education as a means of social development, innovation in school education, continuity of basic education to match professional specialization needs and the development of communications tools between society, economy and education.

For their part, ordinary Russians would most like to see spending increases on health and sports (34 percent), housing and social policies (31 percent) and science and education (20 percent), according to a VTsIOM survey last month that asked about 1,600 people about government spending priorities for the next three years. More than half of respondents said public administration expenses should be cut.

The national projects committee has met only four times this year, compared to 11 times in 2007, according to its web site, The last transcript for a meeting dates back to April.

Few Details on Projects

At its most recent meeting, chaired by Putin, ministers touted the success of the projects. Putin spoke of the growth of new housing, improvements to health care, the development of new universities and the attraction of additional investment into agriculture. Fursenko said all of the country's schools now have Internet access, and Golikova said the health care sector had benefited from reforms unseen in the previous 20 years, with total spending reaching 182 billion rubles ($7.5 billion) over the past two years.

People familiar with the implementation of the projects agreed that they had made an important one-time impact and raised the profile of each of the four areas. Yet, no comprehensive studies have been released about the changes achieved over the past three years in health care, education, housing and agriculture and the effect of the projects on the lives of ordinary Russians.

"The fate of the national projects is becoming less and less enviable," said Ruslan Grinberg, head of the Economics Institute at the Russian Academy of Sciences. "The volume of financing was not significant to begin with. These were little islands of support in a sea of dilapidated infrastructure."

Grinberg said the transformation of the national projects into government programs is necessary and will allow for more systematic and structural support.

"The biggest success can be seen in the farming program because it is the one that got the most continuous support," he said. "The health project essentially focused on one-time increases in salaries and equipment, while education focused on increased levels of technology."

The biggest obstacles have been faced by the housing project, which counted on the availability of bank financing and mortgages to make housing affordable. In the current environment, the project's future looks bleak.

"The financial crisis will affect this program negatively because of the difficulty in getting mortgages," said Alexander Serikov, chairman of the housing and construction commission in Nizhny Novgorod and a deputy in the region's legislative assembly. "But the government's decision to allocate 50 billion rubles to the construction sector should help."

Serikov said several thousand apartments have been provided to people through the programs "Young Family," "Young Specialist" and "Relocation Out of Old Houses" in the region over the past several years, but demand still far exceeds supply.

"We have faced a significant increase in housing prices over the last several years," he said. "We estimated that it would take three years for an average family of three people to afford an apartment, but at current prices it will take more like five to seven years."

Serikov said that at current market prices, one square meter of new housing in the region costs about 48,000 rubles, while it costs only 30,000 rubles to build. He said the legislative assembly was currently discussing the possibility of putting some housing projects into government hands.

Tamara Goncharova, a department head at the Union of Healthcare Workers, said the health care project was very successful in what it aimed to achieve — most doctors and nurses in emergency rooms and clinics have received significant salary increases and additional payments have been provided to specialists at maternity wards. She said, however, that no salary increases have been provided to doctors in hospitals, and they often are responsible for the most complicated surgeries.

"The program requires more clarity and continuity. If they are not able to raise the salaries to all doctors right away, it would make sense to announce when such improvements could be expected," she said. "Otherwise, this creates tension among specialists."

Goncharova also said the program's implementation had not been smooth — for instance, initially salary increases were not taken into account when calculating employees' vacation payments, and it took several months to revise the legislation and receive additional funding from the Finance Ministry.

"Despite the project's drawbacks, this is the first time that attention to the health care sector has happened on this scale," Goncharova said. "It has had a significant impact on the sector and its employees."

Mikhyeyev, of the Center of Political Technologies, is wary of the future of national projects, especially in their new form as government programs.

"Overall, the projects failed to solve the problems at hand," he said. "Yes, the funds were allocated, but how effectively they were used it is hard to say, and there certainly was not enough money.

"Now everyone is too busy with the crisis, and the biggest chunk of funding yet will go to banks and big commodities companies," he said.

Shkilev, the agriculture official in Nizhny Novgorod, also voiced concern that the state's dedication to the projects would decrease during the crisis.

"The government is now providing additional protection to the automotive sector," he said. "A car is only a car, but the quality of food is important to the health of all our citizens — this is what should get attention first, not cars and banks."