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. Last Updated: 07/27/2016

Social Spending a Pre-Election Test

With his plans to spend an extra $4 billion next year on education, health care, housing and agriculture, President Vladimir Putin is attempting to overhaul some of the country's most neglected sectors, and is also aiming to win public support ahead of national elections in 2007-08.

While the ambitious plans could see the president and his chosen successor benefiting from the huge windfall the state is receiving from surging world oil prices, they also carry the risk of alienating millions of poorer Russians if the money is perceived as being wasted through corruption and inefficiency, rather than raising living standards.

And since the money will come on top of next year's earlier announced budget spending, it could end up fueling inflation.

"Russia's current capacity fully provides for achieving tangible improvements in living standards for Russia's people," Putin said Monday in announcing the spending at a gathering of Cabinet ministers and leading lawmakers in the Kremlin's plush Alexandrovsky Hall.

Putin said the 115 billion rubles, or $4 billion, would be spent on "national projects," and pledged salary hikes for doctors and nurses, subsidies for rural communities, and increased funding for health care and education.

Economic Development and Trade Minister German Gref said Tuesday that Putin's initiative was not so much about political spin, but was rather the product of months of careful planning.

While it was related to politics, Gref told reporters the plan "was announced in the fall because time was needed to work on this large and complex project, and this is the beginning of the political season."

But while the Kremlin sees the need to boost essential sectors like healthcare, education and agriculture, it also wants to find a way to keep the current ruling elite in power after Putin by law leaves office in 2008.

But to opposition politicians, the extra spending looks suspiciously like pre-election campaign pork designed to curry favor and create a feel-good factor.

"Spending much more on social needs usually starts ahead of the elections and since the end of Putin's second term is looming, the Kremlin feels it is essential to transfer a certain socially-positive image to a successor," said Irina Khakamada, leader of the liberal Our Choice party, Izvestia reported Tuesday.

While it has not yet been determined which state funds will be used to fund the $4 billion cash injection, it is clear that its original source is the windfall oil export revenues that the state has received this year on the back of sky-high world oil prices. Officials first started discussing how to spend the extra funds when the government earlier this year opted to base next year's budget spending on an average price of $40 per barrel.

The initiative comes as demands grow from politicians and the public for the government to pursue a more leftist policy of social justice, where the state's oil bonanza is shared with ordinary Russians.

The Kremlin thus has the choice of trying to buck this trend, and run the risk becoming increasingly unpopular -- or trying to ride the populist wave.

"If the Kremlin does not jump of top of this trend, someone else will," said Alexei Makarkin, an analyst with the Center for Political Technologies think tank.

But the social spending also gives the government a big opportunity.

Unlike its political opponents, including the Communists, Rodina, the liberals or Mikhail Khodorkovsky, the Kremlin can use its cash resources to say, "Others only promise, but we deliver," Makarkin said.

Gref on Tuesday gave a breakdown of how the extra 115 billion rubles ($4 billion) would be spent.

The largest recipient would be health care with about 63 billion rubles ($2.2 billion); followed by subsidized mortgages and housing construction with 22 billion rubles ($770 million); education with 16 billion rubles ($560 million); and the agricultural sector with 14 billion rubles ($490 million), Gref said.

Putin on Monday said that doctors would receive an extra 10,000 rubles ($350) per month and nurses an extra 5,000 rubles ($175) per month.

Money would also be spent on refurbishing rural hospitals and doctors' offices, which often lack the most basic equipment, Gref said Tuesday.

"People are dying because there is no ultrasound equipment. A simple blood clot is often lethal, just because no one found it and prescribed the correct medication," Gref said.

Gref insisted that the extra $4 billion, the equivalent of $28 for every man, woman and child in Russia, represents 0.5 percent of Russia's gross domestic product, would not affect the fundamental parameters of the 2006 budget and the general macroeconomic outlook.

The extra spending for 2006 will likely produce political dividends for those in power well before the next State Duma elections in 2007 and presidential election in 2008.

But to carry through the feel-good factor through 2007-08 and beyond, more long-term social spending plans will likely have to be developed.

Notably, however, the programs have so far not been announced as long-term. And while the promised raises for doctors and nurses will have to be paid no matter how low oil prices fall in future, other programs could probably be cut or abandoned altogether in a worst-case scenario. However, the government appears confident that oil prices will not dip much below $40 per barrel, at least over the next few years.

The government's social largesse is designed to create a positive image of the authorities and send a powerful signal to voters ahead of the elections: "There is no need for an alternative, we have everything you need."

But ensuring a smooth succession to a Putin ally could be harder than it was for President Boris Yeltsin to hand over to Putin in 1999, especially if support for Putin and his policies slipped ahead of the elections.

"Bringing in a successor when a popular social policy is in place would be considerably easier," Makarkin said.

Under a best-case scenario, the Kremlin would be able to ride on the back of a populist wave created by its social spending -- and thus steal the clothes of the political opposition, making them look weak and insignificant.

For ordinary Russians, even if they not interested in keeping Putin in power or in politics in general, the delivery of better health care, education and housing could also be a hard act for the opposition to beat.

But there are plenty of traps for the Kremlin along the way.

For example, difficulties might arise if the government cannot control inflation, which would then simply eat into a large part or all of the increased spending.

The inflationary pressure on the economy could well come from growing government spending and the costs of state-provided services, as well as from booming demand and still-sluggish growth in labor productivity.

Another major concern is whether the funds allocated for social improvements will actually reach their intended recipients and designated purposes, given that a considerable share of financing for the health sector is meant to pay for new medical equipment.

"I am pretty confident that the money allocated for salary hikes will reach the recipients, and I am very glad for these people," said Georgy Satarov, head of the Indem think tank, an anti-corruption watchdog.

"But I am not at all sure about the purchase of medical equipment for clinics, hospitals and ambulances. Here they will be dealing with state contracts, and that suggests vast opportunities for corruption."