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. Last Updated: 07/27/2016

INSIDE FINANCE: Government Needs to Leave Investment to Private Sector




To hear people talk about it, the federal authorities have firmly made up their mind to set up a new state development bank. The necessity of this novelty is obvious to all sides in the negotiating process f the government (personified by First Deputy Prime Minister Yury Maslyukov), the Central Bank (deputy chief Vladimir Goryunov) and the State Duma (budget committee member Georgy Luntovsky). These officials are already discussing what the bank's charter capital will be, who will head it and other such details. No one wonders aloud if Russia really needs such an institution and whether it will actually work.


The idea of government investment in large projects is nothing new. Unfortunately, in the new Russia investment has been the last spending article the government worried about. So the fans of a development budget and a development bank have an understandable desire to separate investment money from the total amount the Finance Ministry distributes out of its sieve-like pocket.


The 1997 federal budget came closest to implementing a separate development budget. After 18 months of relative financial stability, the reformers who were in power then were looking forward to economic growth, which they felt was just around the corner. They felt it was a good idea to make investment in retooling and the construction of new factories a "protected" spending article which would be financed under any circumstances, like, for instance, wages for the military.


Part of the Communist faction, headed by Maslyukov, was enlisted to get the development budget through the Duma. Maslyukov agreed to help on his own terms, in exchange for the right to control the financing of the development budget. Proposals that the state set up a special bank, insurance company or agency to distribute the funds multiplied like mushrooms after a shower. At that stage, the idea temporarily faded.


It was as unlikely then as it is now that new "investment" officials would be able to use the government funds efficiently and honestly.


In recent years, we have seen numerous examples of former government officials getting a kind of contract buyout from the state and then setting up semi-private structures into which federal funds, property and other assets were pumped.


For example, the State Investment Corporation, set up by a presidential decree in 1993, hardly furthered the investment cause. Luckily, Yeltsin's former chief of staff Yury Petrov, who was made head of the corporation, only managed to get the government to cough up the first $100 million installment for his investment insurance fund. That was just 10 percent of what he was entitled to under the decree. The money went toward setting up a Russian insurance company in the Bahamas. That was it.


Now the ideologists of the new development bank would like to distribute World Bank loans. The smell of easy money has drawn quite a few people. The shareholders of bankrupt Inkombank have offered their rotten creation as the base for the new institution. The plan fell through when the Central Bank withdrew Inkombank's license. In any case, the development budget would not have been enough to get Inkombank up and running again.


Now Promstroibank would like to be the base for the new project. In Soviet times a bank of that name was indeed the channel through which massive investment went into industry. But a lot has changed since then. The bank went private, despite its full name, Promstroibank of the Russian Federation, which evokes the newly fashionable image of a government office.


There is also an ideal person to lobby for the miraculous transformation of Promstroi into the development bank. Deputy Georgy Luntovsky, often mentioned in the context of the development bank idea, used to work in the Soviet Promstroibank system, and he and Promstroi owner Yakov Dubenetsky have long been covert rivals for influence in the associations and holdings that unite regional industry and construction banks, or Promstroibanks.


The only problem is that Promstroibank, like Inkombank before it, is threatened with bankruptcy. The Aug. 17 default and the outflow of private deposits that followed have left huge holes in Promstroi's balance. It seems to me that the development budget will be first used to plug these holes.


So what about government investment then? The recipe is simple. Do not take money away from those who do a good job. Do not force tax collection so that the revenues can later be distributed by bureaucrats as government investment. Leave the money to those who earn it. They will invest it themselves if no one gets in the way.