Evgeny Nadorshin of Trust Investment Bank -
February was an eventful month on the Russian political scene, with important speeches from both Russian President Vladimir Putin and the frontrunner in March's presidential election, Dmitry Medvedev.
On February 8 at an enlarged session of the State Council, Putin talked about the national development concepts up to 2020. This was followed up on February 14 by a press conference in which Putin suggested that Medvedev would soon be presenting his own programme, which would provide more details about the proposed long-term national development concepts. The president was not proved wrong and on February 15, during a speech at the Krasnoyarsk Economic Forum, Medvedev provided further details of the much-heralded national long-term development programme.
Putin had laid out the overall development course proposed by the programme of measures. In his view, the purpose of the programme is creating a Russia that is a global leader and the most desirable country in the world in which to live. Both of these ideas are complex, multi-faceted and virtually impossible to define quantitatively. Their complexity implies a need for far-reaching reforms, which certainly looks encouraging from the current standpoint. However, because they are virtually impossible to objectively gauge or measure, it makes them (as specific goals) virtually impossible to achieve. So are they really such good development goals?
Even if they are understood as general development directions rather than specific ends, they are, while not mutually exclusive, inherently quite different in terms of what is needed to achieve them. Global leadership implies a predominant focus on economic strength and competitive advantages at an international level, which often leads to social inequalities at a domestic level. Quality of life on the other hand is primarily based upon eliminating social problems - protecting and providing services for the most vulnerable, ensuring social stability and cohesion, and putting curbs on the activities of the most powerful elements in society.
Maintaining a balance between the two is extremely difficult to achieve. However the government has already started moving in this direction: investment activity has intensified coupled with growing social spending. Development institutions are being set up and funds have been allocated to tackle the demographic crisis. However, the most interesting aspect of the authorities' latest strategy is not the apparent contradiction between pursing economic growth and quality of life, but rather that they are no longer solely interested in GDP growth but in the quality of that economic growth.
According to Medvedev's speech, the key short- and longer-term development priority is innovation-based development. This places the emphasis firmly on human capital. So we can expect that the authorities will be focusing not just on education and science, but also on the practical applications of scientific innovation for research and development (R&D). It is common knowledge that currently the bulk of scientific endeavor is not aimed towards any practical application.
Changing the current status quo is likely to be extremely difficult. A far-reaching, stable and permanent alteration to the quality of economic growth will take far more than a couple of reform measures. Simply stepping up federal spending (as has occurred over the last few years) will not be enough. Nonetheless, to date we have not seen any specific plans for far-reaching changes in education and science or for increasing innovation.
It remains a mystery how much time will pass before precise measures have been devised. What is clear is that change will not come quickly. In fact, in order to achieve concrete results within the next 10 years, measures should be put in place immediately.
Such lofty and ambitious aims are of themselves praiseworthy. However we are disconcerted by the fact that the numerous attempts of the past few years to stimulate the education and science sector have only produced very modest results. And so far no new measures are on the table. This means that even the best intentions may not bear fruit, although we still hope for a serious attempt to improve the situation.
It is interesting that as well as a stated desire to stimulate innovation, the authorities also intend to create change on an even larger scale. Both Putin and Medvedev commented on one problem that has not only persisted but worsened in recent years - corruption.
Reforms launched back in 2004 to tackle this issue failed. Despite numerous changes at both a senior and grass roots administrative level, a new order has failed to emerge. In fact the changes themselves paralyzed several newly formed state organizations for months, since their specific powers had not been properly defined. The same story was true for the judicial reforms that occurred slightly earlier. The net result of all this is that Russia still lacks an independent judiciary and an effective administrative apparatus.
An open admission of failure in the fight against corruption is progress in itself. Defeating corruption, the need for an independent judiciary and improvements to legislation, were the opening topics of Medvedev's speech in Krasnoyarsk. We believe that at the very least, this signifies a willingness to make another attempt at tackling the relationship between the authorities and the private sector. Hopefully, this time it will meet with greater success. In particular we highlight Medvedev's proposed anti-raider legislation aimed at strengthening private property rights. It is common knowledge that in many cases local authorities have assisted criminal groups to seize property.
In our view, the successful implementation of anti-corruption measures will require far-reaching reform capable of overhauling both the executive and judicial systems. In contrast to such ambitious aims, the number of other actual measures proposed looks extremely sparse. We have seen some headway and even results stemming from changes to the taxation system (in particular the recently discussed reduction in VAT) as well as from measures to stimulate investment, development infrastructure, improve health care and housing policy. In the main, some improvement would flow from a simple continuation of current measures.
At this point we can conclude that the general course of economic development has been decided upon, at least for the next few years. We are pleased to see that alongside minor improvements and revisions, there are also some major structural and institutional changes planned. It is also encouraging that the authorities are considering an integrated approach rather than limiting themselves to a narrow range of issues.
Less encouraging, however, is that plans have been presented in the form of catchphrases, while actual devised measures are extremely thin on the ground. Since all the issues that the government has announced it is tackling are far from new, words alone do not seem a very powerful tool. We would like to see action in the form of detailed, realistic and well thought-out measures. We would like to find out how they intend to create and sustain an innovation economy and just how they plan to defeat corruption.
In the run-up to the election on March 2, specific measures would show voters just how serious they are about economic change. After all, it would be sad to see all this determination on the part of the authorities to carry out reforms end up as a single piece of failed legislation a year after the elections with nothing on the books to replace it with.
Evgeny Nadorshin is an analyst at TRUST Investment Bank in Moscow
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