Russia launched work on its long-awaited "Plan K" on May 25 with a brainstorming session between President Vladimir Putin and members of the Presidential Economic Council, co-headed by ex-finance minister Alexei Kudrin.

"Economic growth will not resume by itself. The GDP dynamics will hover around zero unless we find new growth points," Putin told the council's first meeting in three years, with a seemingly sincere call for candour in the Russian economy's hour of need: "There is no monopoly on truth in an economically oriented discussion. I'm asking all of you to move beyond ideological preferences, not to be restricted to any theoretical concepts and constructions but to rely on pragmatic approaches and focus on searching for feasible and impersonal solutions," he said.

They discussed what are the major impediments to growth, with a view to drawing up a plan that will return Russia to at least 4% annual growth within the next five years. But Kudrin has his work cut out for him and the plan will probably fail, thanks to the way the president has organised the way he controls Russia.

Nothing concrete is expected to come out of this first meeting, but the lines of battle have already been drawn. Kudrin has already said the new programme, Russia's third big reform effort, will focus on structural reforms: the judicial and law enforcement systems must become more objective; the pension system will be overhauled; the share of the state in the economy must be reduced by privatisation; increasing non-oil exports are going to be put centre stage; and the budget is going to be rejigged to focus more on investing into human capital and infrastructure. And of course cutting red tape, improving the efficiency of public administration and fighting corruption all remain priorities.

None of this is particularly new as it has always been obvious what reforms Russia needs to do. Where Russia always falls down is the implementation. The key to reforms in Russia has always been how much political will there is to push through change. And the fact that Kudrin is in charge should mean this attempt is a serious one.

As bne IntelliNews has been arguing for some time (here, here and here) Putin has had a "Plan K" for years; Kudrin has just been brought in to manage it.

Putin has been preoccupied with a geopolitical showdown with the West for much of the past two years, but clearly he feels that he has at least partially achieved his goal of putting Russia back at the international diplomatic top table, and it is time now to turn his attention to fixing the ailing economy. The irony is that Kudrin was sacked in 2011 for opposing Putin's massive increase on military spending in the lead-up to the current clash. Since then, Putin has kept him close and he has spent his time studying the details of the Russian economy, according to bne IntelliNews sources. 

Keeping reforms in the club

Russian reform programmes always seem to come out of clubs and this one is no exception. Russia's first serious attempt at reform was the so-called Gref plan that Putin launched shortly after taking office in 2000.

At the end of the 1990s, Herman Gref was hired by a group of successful private entrepreneurs from the 2011 club and charged with working out a reform plan to make Russia a place the children of these men would want to live and work in when they reached adulthood in 2011, hence the name. Putin simply took over both the plan and Gref, who was appointed minister of economic development.

The plan was a partial success, but when bne IntelliNews interviewed Ruben Vardanyan, one of the founders, in 2011, shortly after he sold his investment bank Troika Dialog to Sberbank, he said the plan had rather failed.

The golden era of reform was in the boom years between 2003 and 2008 when New Economic School rector Sergei Guriev was the leading intellectual force in the country. The school became the epicentre for liberal thought and a touchstone for policymakers and oligarchs alike. The Kremlin adopted Guriev's advice almost verbatim, including relauching the privatisation programme in the summer of 2008.

But this effort failed too after Guriev got caught up in an investigation by Alexander Bastrykin's Investigative Committee into the Yukos oil major, culminating in a second jail sentence for imprisoned oligarch Mikhail Khodorkovsky. Afraid he was about to be arrested, Guriev fled the country and has been living in self-imposed exile every since.

However, he will be back in the game from September when he becomes the chief economist at the European Bank for Reconstruction and Development (EBRD), and he is already an outspoken critic of the Kremlin. 

In keeping with this tradition, Plan K has come out of a debate with the so-called Stolypin Club, named after the Russia reformist prime minister who attempted to remake Tsarist Russia at the start of the 20th century. Today, a statue of Stolypin stands outside Moscow's White House, the seat of the government, and he is revered as Russia's greatest reformer. 

The Stolypin Club includes many of Russia's leading liberal minds such as business ombudsman Boris Titov,  presidential adviser Sergei Glazyev, Deputy Chairman of Vnesheconombank Andrei Klepach, the deputy chairman of the Duma committee on economic policy Victor Zvagelski and Economy Minister Alexey Ulyukaev. However, there is a debate amongst these men. Some, like Titov, want to see the state stimulate the economy with massive spending, whereas Kudrin wants to hold wages back and encourage investment to produce sustainable growth - and so far Kudrin is getting his way. 

The new plan is bound to be a decent one - Kudrin will not have his name attached to a sham - and from the public statements already made it appears it will focus on reorientation of state investment into human capital and infrastructure, which are the two fundamental pillars of any economy.

Here Russia is off to a good start as the Kremlin has already successfully reformed the education system so that Russia's leading universities are climbing back up the top 100 rankings.

And for all its faults, the Soviet system before 1992 did invest heavily in basic infrastructure, even if the quality of this infrastructure leaves a lot of be desired - Russia is far ahead of its BRICS peers in terms of basic infrastructure, even it is falling behind countries like China in terms of investing into its upgrade.

Indeed, from the details that have emerged of the plan it appears that Kudrin is in effect intending to relaunch the $1 trillion infrastructure plan that was introduced at the start of 2008 after inflation fell into single digits for the first time since the 1991 collapse of the Soviet Union.

In parallel, the Central Bank of Russia (CBR) has nailed its colours to the mast in a fight to bring inflation down from 12.9% at the end of 2015 to 4% in the near future. Governor Elvira Nabiullina decided not to cut rates at the last policy meeting, despite the fact that inflation has already fallen to 7.3%.

But Plan K is going to be at best a partial success. If deep change is to be effected then Kudrin should have been appointed prime minister with all the considerable political power that comes with that post. Instead, like Gref before him, his authorities is entirely drawn from Putin's personal support. He has no formal power to implement his plan. 

And that is why the plan will go wrong, or at least not make as big a difference as it could. Putin is increasingly using a dual system where there is liberal reform and rule of law for the masses, but an exemption for the small elite circle around him, as bne IntelliNews discussed in a recent blog "Kudrin and Poroshenko will fail because corruption is the system in Russia, Ukraine".

To take one example of how this system works: Russia introduced e-procurement to curb graft in state orders and some 56% of all public purchases are now made using the system. But the biggest abuser of the "single bidder" exemption is the presidential administration.

And in a more recent example: the government ordered all state-owned enterprises to pay out 50% of their IFRS profits as dividends, except all the really big companies, such as Gazprom or Rosneft, negotiated special exemptions, which massively cut the amount the state receives as dividends. Putin allows this favouritism as it binds these men to him. 

Increasingly these state-sponsored oligarchs, or "stoligarchs", who Putin keeps close and uses to control the cash-richest parts of the economy, are becoming the impediment to change. They use their cash flows and political connections to build up empires that distort the market, waste resources and ultimately will destabilise the political system.

As Guriev pointed out in an interview with bne IntelliNews just before he left Russia, unlike the 1990s vintage oligarchs, none of these stoligarchs own the assets they control and they are all looking for a way to take ownership if they can and legitimise their wealth. They are also anti-democratic, because if Putin leaves office the first thing a new leadership will do is clean house and all the stoligarchs are vulnerable to corruption probes; therefore they will work hard to keep Putin in office as long as possible.

These stoligarchs are off limits to Kudrin and without the powers the prime minister is supposed to have there is little he can do to force change on them. As Russian state-owned enterprises account for about 30-40% of Russia’s GDP,  and a quarter of state spending, that means nearly half the economy can't be reformed unless Putin decides to change his modus operandi.

Even with the half of the economy left to him, Kudrin has a big task on his hands. Former EBRD chief economist Erik Berglof and Guriev co-authored a paper in 2007 that argued that since the state was the only economically active agent in the 1990s, it was right for it to take the lead in business and investment. But as the noughties came to a close, this growth was exhausted and the state needed to change its role, withdraw from the economy and nurture private business.

When Putin took over in 2000, Russia's GDP was worth $200bn, but that rose to a peak of $2.1 trillion in 2013 as private business moved into the driving seat. The collapse of oil, and to a lesser extent Russia's political problems, mean the economy is now worth $1 trillion, but even with $100 oil in 2013 growth had already shrunk to around 1% a year before oil prices collapsed. Russia Inc was already very sick before the annexation of the Crimea or oil prices dropped to $28 a barrel. 

In practice the state sector needs to be downsized, and millions of public employees should be forced to look for jobs in the private sector. Deregulation will mean the state will lose control over the wage setting and investment level controls in the economy, as these decisions will be made by independent businessmen. This will all help  push Russia up the World Bank's "Doing Business" ranking.

Kudrin is promising to reverse the current economic contraction and produce some 4% a year growth within five years. The Russian economy is expected to shrink by 1.2% this year, according to the bne IntelliNews consensus forecast of the 13 biggest banks and IFIs, before returning to modest 1.25% of growth next year.

Even this modest goal will be extremely difficult to achieve. Ulyukayev said on May 23 that it was "impossible" for Russia to return to its previous high rates of growth. "Our calculations show that even in the face of high oil prices, ie above $ 50 per barrel, a return to the old growth path of 5-7% per year is almost impossible."

The Ministry of Economic Development believes the current state of the Russian economy is associated with "deep structural changes in the global economy, passing into a state of a 'new normal'," Ulyukayev said, reports Kommersant.

So Russia is face again with its perennial question: "What's to be done?" Based on the Stolypin club members' public statements a few of the policies are already clear.

• Infrastructure over investment

Maybe the most painful problem Russia is facing is the total lack of investment. As Alfa Bank chief economist Natalia Orlova said in a recent interview with bne Intellinews, unless this changes, Russia will face at least four years of stagnation. There is plenty of money in Russia, but as Kudrin points out, the companies are not investing it.

He says the only way to get to the 4% growth target is to draw in another 4.5mn workers and invest RUB40 trillion ($596bn) into areas like infrastructure, reports Vedomosti. Kudrin is in effect proposing to restart the 2007 infrastructure investment plan, plus change the pension rules to counteract the fall in the size of the working population caused by the collapse in life expectancy in the early 1990s.

As the chart shows, after a brief boom of investment in 2006-2007 it has turned negative. The population fall also reversed thanks to the boom but it is expected to turn negative again this year as the 1990s fall in life expectancy hits the demographic curve this year. 

• Pension reform

Together with fiscal consolidation, Kudrin proposes to carry out a pension reform and over six years hike the pension age gradually to 65 for men and 63 years for women from the current 60 and 55 years, respectively. Thanks to a very successful set of reforms to support maternity care and families Russia has exceeded even the most optimistic demographic projections for population growth made in the 1990s, but that boost just ended.

Kudrin and Ulyukayev agree that raising the retirement age is necessary not only to balance the pension system, but also to reduce labour shortages. Indeed, it was Kudrin himself who first broached the subject of hiking pension ages in a speech at a Renaissance Capital conference in 2007. Putin has already put the first piece in place, signing off on a order on May 23 to hike civil servants' retirement age to 65 for men and 63 for women by adding six months to the pension age each year over the next six years.

This has been a hard reform to make as Putin hiked pensions by 50% in the run-up to the 2012 presidential elections. With a general election looming in September, the Kremlin has been forced to sacrifice pensioners' support this time round by indexing the payments at below inflation rates. Prime Minister Dmitri Medvedev just found himself in the hot seat when he was heckled by angry pensioners during a trip to Crimea. "We don't have the money," he shouted back. "But we will find the money and re-do the indexing. You stay here. All the best, and good health!" he rather unconvincingly told the crowd.

• Hold down wages, tackle inflation

Controlling inflation is probably the most important task facing the government if it is to create a conducive investment environment. Most of this work will be tackled by the CBR, but Plan K calls for limiting wages rises. Nominal wage growth was just revised to 7.1% for March and 5.8% growth in April (which economists think will also be revised up). That means that after decreasing for nearly a year, real wages have just turned positive, helped by falling inflation rates.

Retail turnover has also responded. After crashing by a massive 15.3% y/y in December, the contraction in consumer sales had fallen to 4.8% by April and should start growing again after the summer. But the days when consumption drives economic growth are over; the reformers want to keep wage growth modest to restrain inflation, which will allow interest rate cuts and boost lending and investments. 

• Investment policy (nonethless)

The previous reforms are about containing the damage, but more proactively the state is planning to use its considerable resources to boost investment.

Ulyukayev said recently that investment should be based on three pillars: the creation of investment resources, macroeconomic and regulatory measures for the transformation of savings into investments, and promotion of investments through government support mechanisms. In short, the minister is hoping to stimulate a rate of investment growth of 7-8% a year, while keeping consumption levels flat.

• Export promotion

Another proactive, and entirely new element is that the Kremlin intends to take a leaf out of China's playbook and promote non-oil exports. Thanks to devaluation, Russian wages are now less than China's and several Russia-based companies from things such as the car sector have started to talk about exporting to the rest of Europe.

The Ministry of Economic Development is calling for Russia's Eximbank and the state export promotion agency EXIAR to be recapitalised, while state support for troubled businesses is switched to support exports. A considerable simplification of procedures related to exports is also planned, with an accelerated VAT refund programme, reduction of costs and simplification of customs regulations to make it easier to export, and import duties on components and equipment for factories will be reduced. Indeed, work on this has already begun after Russia expanded its "single window" for exports in December 2015 to help the exports non oil companies sell overseas.

This change will also not be easy. The hope was that Russia's self-imposed sanctions on EU agri-goods would spur import substitution, but that policy has so far been a flop as the breakdown of the economy in 2015 showed no change. But as bne IntelliNews columnist Chris Weafer points out, this change will take years to affect. And Russia has had a small victory as its cheese production in the first quarter of this year grew for the first time since the sanctions were imposed in summer 2014.

• General reforms

In addition to workers and more cash, Kudrin is calling for a general overhaul of the way the government works. Here the list is very long indeed, as Russia is still plagued with a lot of bad Soviet habits that the system simply could not kick. On the list are judicial reforms to make the courts impartial; reduction of the state's share in the economy through accelerated privatisation – something that all the liberals agree on; fiscal consolidation; cutting red tape; finishing the deregulation that was started by Gref and so on.

Many of these items are on the World Bank's "Doing Business" ranking list. But one key reform not on that list is investment into training more highly qualified managers, which is another aspect highlighted by the Stolypin club members. The government has already had a stab at this one with the $1bn it invested into the Skolkovo business school. However, after a promising start its MBA programme has turned into a very large and very expensive white elephant.

A World Bank study from a few years ago showed that Russia's GDP could double in size simply if the country's existing businesses were better run. But training good managers and more importantly, changing attitudes so management becomes a meritocracy instead of the Soviet-style vertical power structures, will take years. And the fact that Putin continues to develop his "vertikalnaya vlast" (power vertical) at the core of the system is grounds for pessimism.

The Plan K reforms are badly needed, and badly overdue, but this is the right time to start them. As the charts below show, the worst of the recent collapse is past, as real incomes stop falling and go back into the black, thanks in part to falling inflation. This has already fed through to the service sector where the Markit services PMI is now above 50 again, which indicates growth.

However, the urgency of the need to make change is highlighted by both manufacturing PMI and overall industrial production, which are both still falling. Without reform the economy will stabilise around current levels, but with little prospect for growth.