By bne IntelliNews May 8, 2012

bne -

Russia is run more like a company than a country. That's one of the reasons it clashed with the West so often: the Kremlin doesn't do diplomacy; it does deals.

Take social spending, for example. While birth rates were up in the first quarter by 6% and death rates down by 3%, the number of deaths (486,000) was still slightly ahead of the number of births (450,000), according to the Ministry of Heath and Social Services, so Russia's population declined by 36,000 - a lot less than the million people a year it was losing a decade ago. Still, this means the workforce continues to get older and shrink in size.

The Kremlin's solution? First, it just signed a law to naturalize roughly 5m illegal immigrants and President Vladimir Putin has been pumping money into pre- and post-natal care to make it easier to have a baby. But for the Kremlin this is a labour issue, not a social issue. Elena Anya Tubayeva is a paraplegic, who lost the use of her legs after being shot through the spine in the second Chechen war. "The care for paraplegics has got a lot better, but all the money is going to support mothers and little is left over for people like me," she tells bne.

The same attitude can be found in Russia's energy relations. It cut off gas exports to Ukraine in 2006 and then to Belarus in 2007, not for political revenge, but simply because neither country had paid their gas bills. bne asked Igor Shuvalov, at that time first deputy PM, why the Kremlin didn't phone Berlin or Brussels before turning off the energy spigots. "It didn't occur to us," said Shuvalov in a stunning admission. "It was a force majeure. Everyone knew we had supply contracts and that we weren't being paid. So the fact we cut the gas off should have come as no surprise."

As Putin takes over the office of president for a third term, what is in store? More of the same. There has been a lot of talk about Russia's need for "new economic model" where the state goes from pushing to nurturing the economy, but that is not how the Kremlin sees it; most of Putin's recent moves have been aimed at improving the bottom line as Russia Inc is not as profitable as it was in the boom years.

Take Putin's assault on the utilities sector in December. "Utilities is the most corrupt sector in the country," said Putin at a government meeting and went on to ban any contract between a power company and a counter party where the identity of the counterparty was not known (ie. shell companies set up by the senior management's wives and children to skim off massive profits for the family). In April, the national grid operator FSK announced it was breaking 60% of its contracts because of the new rule. A raft of other power companies have followed suit.

But Putin's campaign has little to do with an anti-corruption fight and everything to do with securing more revenue. He has targeted the sector that bleeds the most money and has acted to stop the waste simply because it was the most effective way improving Russia's bottom line.

This new focus on profitability as opposed to revenues is a result of the new post-crisis realities. The government has decided to invest heavily into infrastructure - spending has increased ten-fold from the 1990s to $100bn a year - and needs to pay for it. At the same time, pension reforms are about to be launched, not because it is a structural problem, but it is a labour cost gone out of control, eating up a third of budget spending. The issue at hand is restructuring the funds that the labour force generate (social taxes) and making them work more effectively so that labour can pay for its own pension costs.

The goad for all this is that while Russia Inc is still in profit at the moment (just), it won't be once oil prices start to come down, as many predict will happen over the next few years.

While many commentators complain about the $125 price level for a barrel of oil that's necessary to balance the budget, as it is not sustainable, if you think of it as a company investing heavily in new production facilities that add value to the product made at a time when the company can afford it, then the heavy spending looks less objectionable and more like a ballsy attempt to take the company in a new and profitable direction.

It may not work (although investing into infrastructure is almost always a good idea), but if it doesn't, then at least Russia can retreat back to its extremely well established and very profitable core business where it is a leading player on the international market - selling oil and gas - and think again.

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