A famous economist sharply criticizes governmental policy and offers prognoses on the future of the Russian construction complex in an exclusive interview with Construction.RU.
Mikhail DELIAGHIN, Director of the Institute for Globalization Problems, and Doctor of Science and Economics, answers questions from our journal.
— Mr Deliaghin, as we are talking at the time when the results of the first two months of 2016 have been published, let’s start with figures. How do you assess the statistics from January/February? It does not seem as bad as may have been expected, and our underlying strength turned out to be more than some people thought…
— In fact, in February industrial growth was observed (1%), cargo carriage volume increased significantly, and even construction work grew a bit. I think industrial production growth is caused mainly by mineral resource extraction expansion: oil, gas condensate (more than 13%), coal and iron ore.
The raw materials industry increased extraction by 6% in February – it was really too much. It may be connected with the opening of new markets, in particular the export increase to China. The thing is that the capacity of the export pipeline is restricted, and additional oil to China may have been delivered by railway, which would have led to a cargo carriage volume increase.
As far as construction work volume is concerned, the decrease is very slight, only 0.4%. The Russian Federal State Statistics Service did not even publish the information on investments or the reasons for such growth, but only published last year’s statistics as a whole. They simply do not know how to explain it and are trying to ascertain what might have caused it.
— And what do you think about it?
— On the whole, of course, we can say that our underlying strength turned out to be more than expected. It is good news, but not crucial.
Yes, there is some improvement and even a certain rally, but one cannot really see how exactly construction work has grown… construction materials production is shrinking…
— …not just shrinking but falling rapidly. As compared with last year’s numbers, in January the production of wall blocks went down by 40.2%, precast structures and elements by 29.8%, and Portland cement and brick by 26.7% and 25.6%, correspondingly. There has not been such a fall in production for many years.
The construction complex is seriously underfinanced. Where is the money to be taken from?
— Investments make no sense if there is no demand. If the realty market is falling, it is not clear where and why construction work should be carried out. Of course, in some places, the lack of infrastructure elements, stores, etc. is an issue. But there is no opportunity for investment now, as the banking sector is paralyzed by the Bank of Russia’s activities. The reason is not high rates but an absolutely insane regulating mode in which banks are afraid of communicating with a real economic sector and lending money to it.
— That’s why they included many developers in the fourth category of borrowers…
— Yes, because the risks are too high and the volumes are big. First they get the demand to reserve funds, then a “hole” appears at the bank for some unknown reason, and then the bank is closed. There is also the practice of re-estimating a developer, when a large developer may be re-qualified from the first group to the third, or even the fourth.
So, due to regulations by the Bank of Russia, the banking system is artificially drawn to the sphere of financial profiteering, thus becoming not the financial intermediary necessary for the economy, but its destroyer.
The second factor is connected with the budget having traditionally provided for large investments volume. Now we can observe strict budgetary savings, and in the regions there is a real budgetary crisis. So one may suppose that investments will go down except for some special trends.
As far as our citizens are concerned, the majority of our countrymen’s level of consumption fell by 25% or even 30% last year. The official statistics do not register this, but they reflect the general reduction of total retail turnover by 10%. This shows that people have no money. Consequently, they are changing their behavior.
— In the crisis, people have tended towards a saving-selective mode of behavior. That is, they save money and all long-term purchases, including new housing, are deferred.
— People save money not to buy a flat, but to survive. That is why I do not see any special investment sources in this situation.
— And what are your assessments of concession and PPP in the sphere of construction and utilities? In particular, in the construction of necessary engineering and transportation infrastructure? Almost all roads in the world are constructed via PPP mechanisms. The land is allotted to private businesses for 20—30 years on a concessionary basis. The business builds excellent toll roads, bridges, junctions, ports, etc. For 30 years they profit and at the end of the term they are to pass the object over to the state in an ideal condition. Everybody wins. For example, such mechanisms are widely used in India and a number of other countries.
— Maybe there is a 20-year view of the future in India. We do not have even 3-5 years! Everybody understands it: nobody knows what will happen in 5 years, so businesses do not make calculations based on this perspective.
On the other hand, due to the special nature of the infrastructure, this sphere is rather hard to get, as there is only one investor but many users. If you try to provide for investment payback, the usage bar is raised forbiddingly high. We see this in our road construction.
However, our road constructors modestly keep silent about the fact that the payment for toll roads in developed countries provides for their maintenance and service but not for any investment payback.
In conditions of monopolized economy there are no restrictions on avarice and greed. That’s why all PPP investments in the sphere of road construction start with the “Avtodor” state corporation, which is devoid of any real control, and finish with overpricing and, consequently, the erosion of the economy.
— As far as road construction is concerned, everything is clear. How do you evaluate the Ministry of Construction’s policy as the industry moderator?
— The construction industry has no institutions to provide, develop and implement its own state strategy in this sphere. As a reminder, any ministry should arrange the development of an industry – it is its main function. I think if anybody tells Menn about this, he will be very surprised.
The Ministry of Construction, as well as the government as a whole, deals with governmental regulations both spontaneously arising and as ongoing processes. And it is not sufficient to ask whether such activity is successful or not. It is simply inappropriate.
— Well. Let’s consider the issue as follows: if you were invited to take the floor at the State Council on construction, which is likely to be postponed again, what would you speak about? What is to be done first of all, from your point of view?
— I would say that construction is not significant as it is, but it does provide for development. But when the state destroys the economy instead of providing development, as in the 1990’s, there is no place for construction.
The state is to deal with updating the infrastructure, which is obsolete. A kind of bureau should be created for this purpose and should introduce modern technologies. If this takes place, the industry will have only one problem: where to take materials, equipment, workers and production managers. The existing construction capacities will be stretched, as are the people who can drill in Western Siberia.
But to achieve this, the state must change its behaviour. But right now, the Russian state exists within the notorious “Dvorkovich’s maxima”, according to which Russia is to pay for the financial stability of the USA.
— By the way, recently the Business Outlook Center sent us their review of the first quarter. The construction company directors who took part in the survey confirmed that it has not been this hard for a long time. When will they see the light at the end of the tunnel?
— You know, the government and the Central Bank’s policy has never been so systematic and at the same time so insanely destructive of the Russian economy. Even in the 1990s, when Victor Gerashchenko was Chairman of the Central Bank, he managed to somehow buffer the negative consequences of the liberal policy. The country is simply being destroyed.
When the Russian Vice-Premier says that Russia should pay for the financial stability of the USA, it may be a slip of the tongue or of the pen. But we see that Arkady Dvorkovich has never been punished for that, and the financial policy of the state has been distilled down to the support of the financial solvency of the USA, and the rest is done with whatever funds remain.
So Mr Dvorkovich has not misspoken, but has expressed the standpoints of his seniors. How can we speak of the construction complex of Russia in such conditions? We can only speak about the American one.
If the point of the state’s existence, as far as we may judge according to its social and economic policy, is the utilization of the population (which is simply irrelevant from the viewpoint of the export service), what are constructors left with to be done? The arrangement of cemeteries is, of course, a large-scale construction task…
— This is all too gloomy, Mr Deliaghin. We have large infrastructure projects being implemented, for example WC-2018...
— The World Cup is not an infrastructure project, or at least it is not an industrial project. There are some places which are to be decorated, and that’s all.
The absurdity of such image-building projects in a legal sense was shown by the APEC Summit in 2012. So much money had been spent on it that two Primorsky Territories could have been improved. To say nothing of the investments in the Olympiad in Sochi...
— And what about the construction (with the help of the Chinese) of the high-speed railway from Moscow to Kazan, which is part of the future Moscow-Beijing line?
— The Moscow – Kazan HSR makes no sense, as it is convenient to get there by train or plane. As far as Moscow – Beijing is concerned, it is important, but not as a railway but as more modern transport: there are many projects and technologies in the world to consider. For example, overland “string” transport and others.
— I am afraid even to ask, but I hope we need the Kerch Bridge…?
— It is absolutely necessary. But you see, it won’t help the whole country. It is only infrastructural de-bottlenecking. I saw the project for the Kerch Bridge: it will provide for, at most, the 10m tourists who may come to Crimea and for the local population. But it has no strategic importance.
— What do you mean?
— It is necessary to revive the project Yanukovich started, the project because of which he was ousted by the Americans. According to that project, Crimea was to turn into a distribution base for Chinese goods delivered to Central and South-Eastern Europe. The main idea of the project was as follows: if the route is laid via one country, the Americans might easily stage a coup there and thus close transit from China. But it is impossible to stage a coup in all the countries of the Black Sea region!
That’s why Crimea was considered a good choice of distribution center to provide at least a quarter of a billion people with goods from the PRC.
The bridge under construction now is for a maximum of 10m people. If it is not a solution to a strategic task, then it is an artificial restriction undermining profitability.
— Well, I see now. What is your attitude to self-regulation in the construction industry? Should constructors regulated themselves (which is economically more beneficial) or should their activities be strictly certified?
— I am not an expert on these issues, but I think that an industry cannot be regulated by itself as it results in a bubble of additional industrial bureaucracy, which, like the state, is not very responsible.
— A good shot …
— It is nothing but an attempt by the state to shift their integral responsibility. That is, if a constructor did something wrong it is not the state, having certified him, that is to blame but a self-regulating organization. But this is no use to the people whose house is a wreck. That’s why I am rather skeptical about this system.
— In the West, the responsibility is personal. The head of the company committing violations is excluded from the professional community and cannot work on the market any more.
— This is right. If we remember history, there has been a tradition since the Transsib construction of putting railway bridges into operation in winter. The reason was simple: during the first train’s passage over the bridge, the chief engineer of the construction together with his family, including his children, was to stand under it, on the ice. And the bridges stand even now; there are no “dancing” bridges, like in Volgograd.
Thus, personal responsibility is the right thing, at least in such spheres as construction. And it is strange to place responsibility upon a company which is a limited structure. Limited responsibility covers only finance, as far as technologies are concerned - it is not down to the market, but is the professional responsibility of the sphere.
— And the final question: your macroeconomic forecast for the year?
— Stability will continue; there won’t be any frustration or chaos, nor the destruction of the country. But the stability will be stifling. That is, the situation will deteriorate: not monotonously nor in a wavelike manner, but it will. Even if oil costs 60 dollars a barrel, the current socio-economic policy of the government will not do any good for the construction complex.
— Why not?
— Because the money will not reach it. The problem is not the amount of money, but the absence of any prospects with such a social economic policy. And if this keeps on, we may get another system crisis in 2017 / 2018, and the loss of all social processes and governability.
— We’d rather not…
— That is why, within the current socio-economic policy, I advise the heads of construction companies to think of requalifying their in-house managers. The real crisis is still young.