Russian President Vladimir Putin is preparing to spend billions of dollars on a bizarre trip into the Soviet past, restarting construction on the storied and ill-starred Baikal-Amur Mainline railroad. Sadly, Putin's nostalgia will come at great cost to the country's future.
In the late 1990s, the American writer Fen Montaigne traveled across Russia for his fly-fishing book, "Hooked." Among other adventures, he rode on the BAM, a major railroad through the wilderness of Eastern Siberia and the Far East that was meant to unlock the area's vast natural resources. BAM was conceived under Stalin in the 1930s but built in the 1970s and 1980s at a cost of $25 billion, paid for mainly by oil exports. By the time the BAM became fully functional in the late 1980s, "the party was over," Montaigne wrote. The Soviet Union's collapse meant there was no money to build mining towns and factories along the mainline.
"Someday, no doubt, capitalist Russia would make use of the BAM," wrote Montaigne. "But as my train chugged along, I saw only a derailed Communist dream."
Now, as Montaigne predicted, the project is being revived, albeit not by capitalists. The Russian government will finance construction with oil revenue that was supposed to be locked up in the $87.9 billion National Wellbeing Fund, whose primary purpose was to make sure the pension system had enough money to support an aging population. The Russian Railroads monopoly will spend 150 billion rubles ($4.4 billion) from the fund on increasing the capacity of BAM and the Trans-Siberian Railroad.
As much as 60 percent of the National Wellbeing Fund is now earmarked for infrastructure projects of this kind. Two other projects -- the construction of a ring road around greater Moscow and a high-speed rail link between Moscow and Kazan -- have been approved for an additional 300 billion rubles in financing from the fund.
Together with Russia's annexation of Crimea, with its history of World War II heroism and memories of cloudless holidays on Black Sea beaches, the BAM project illustrates Putin's growing nostalgia for the Soviet Union's might and glory. Deep down, Putin appears convinced that Russia's past is also its future, so why not finance the Soviet revival with money stockpiled against a rainy day? The trip down memory lane can even be cloaked in modern rhetoric: "The National Wellbeing Fund is now seen as an instrument of stimulating economic growth, investment," Deputy Finance Minister Konstantin Vyshkovsky recently told Bloomberg News.
True, Russia is having trouble with economic growth. The economics ministry expects investment to drop 2.4 percent this year, and capital flight may reach $100 billion. Putin's government sees public spending as its main recession-preventing tool: Foreign investors will shun Russia for a while because of its actions in Ukraine, and domestic ones are pessimistic because Putin's Soviet project is not business-friendly. Apart from milking the pension system, there are plans to raise the value-added tax and allow regions to introduce sales taxes.
The finance ministry says developing Crimea will require about 90 billion rubles a year in subsidies and a separate 100 billion ruble investment program for the next three years. There are other Soviet-scale plans, too, like the 2018 soccer World Cup, which, according to recent estimates, requires 620 billion rubles. The state-controlled natural gas monopoly Gazprom intends to invest tens of billions of dollars in developing East Siberian gas fields and delivering the fuel to China. That project, too, may require direct state funding, though Gazprom says it can cope on its own.
Such enormous projects fuel both short-term growth and corruption. Spending on railroad or pipeline construction in East Siberia is not easy to control. Putin needs the growth to stay in power and retain his sky-high popularity as the remnants of Russia's capitalist economy shrink. His businessmen friends at Russian Railroads and Gazprom's pipeline-building companies need the government contracts. As for Russia, it is being told what it needs, just like in Soviet times.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Leonid Bershidsky at firstname.lastname@example.org
To contact the editor on this story:
Mark Whitehouse at email@example.com