Risk premium abolishes Depreciation and Multiplies Prices

This article presents an economic and theoretical analysis of the methodological foundations of the transition to long-term tariff system in the Russian economy. The focus is on the fact that the investment component of the new long-term Russian tariff in the energy and water supply is formed in the most paradoxical way in the scientific sense - without the depreciation of fixed assets. The authors have revealed some problems concerned with economic mechanisms of worn-out fixed capital re-equipment in the areas of water supply and power engineering in Russia. These problems are "extrusion" of the traditional element of "depreciation of fixed assets" from the accounting cost and also the inclusion of the new element of "risk premium" into this cost. This new element is characterized by unclear economic meaning and by a non-transparent procedure of valuation. The paper proposes the following hypothesis: in the (publicly) regulated organizations explicit accounting costs are displaced by the implicit opportunity costs in the form of risk premium, and this phenomenon takes place under pretence of transition to long-term tariffing. The subjectively overestimated valuation of various risks - via high cost of both personal and borrowed capital, as well as the "tyranny" of discounting - leads to continuous rises in prices and tariffs in the analysed sectors. What is more, we hypothesize that capital flight on a massive scale from Russia is being generated by investor myopia. The latter, in turn, is the very important cause of the fact that in the Russian economy a large amount of out-dated, obsolete and time-worn capital equipment is in current use. The authors explore the Russian phenomenon of applying the classical (for volatile financial markets) "risk-profit" ratio in the non-financial sector. We criticize and reject the mechanical "transference" of the risk valuation approach developed for financial speculations to the long-term investment in fixed capital re-equipment of the publicly regulated organizations with almost guaranteed markets. The authors increase the "risk-profit" ratio by including an additional element titled "time factor-price", and sever the rigid connection between all elements of these ratios (this connection is usually demonstrated in the simultaneous increase of values of all elements). The transition to a long-term tariffing system is treated as an aggravation (rather than an alleviation) of the investor myopia which long ago became a chronic problem in Russia. The described processes can be explained due to the treatment of higher uncertainty being an inherent feature of Russian "clan-based capitalism". This article uses basic propositions of, the little known in Russia, Post Keynesian conception of uncertainty. This conception distinguishes uncertainty from risk, whereas the neoclassical school treats both concepts as being synonymous. We also develop the important proposition that the ability of economic systems to cope with uncertainty is one of its fundamental characteristics. Moreover, it is the widespread nature of highly secure long-term contracts in the economy that leads to a relatively low degree of future uncertainty and correspondingly low valuations of risks, costs, profit and prices.

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