Ben Aris in Berlin -

President Vladimir Putin

President Vladimir Putin gave what was probably his last big set-piece speech as president on Friday, February 8, which celebrated his legacy of economic growth, highlighted the shift to reform of the social sphere and introduced an agenda of administrative reform that his successor will take up.

Putin has become increasing confident in his speeches since his April 2007 state of the nation speech where he first introduced the need for action in the social sphere and singled out mothers and family for support.

This speech was also delivered on the eve of the Munich summit this weekend where last year Putin lambasted the rest of the world for reneging on promises made following the collapse of the Soviet Union - specifically that Nato would not put troops on Russia's borders - thus setting out a much tough stand in Russia's international relations.

He spent the first part of this latest speech running through the results of his presidency. And it is an impressive record: since taking office the economy has more than doubled in size and average nominal wages have increased 10-fold to about $500 per month.

This is why he enjoys such strong support from the population, as he has delivered on his promises big time. It is also why his chosen successor, Dmitry Medvedev, is a shoo-in for the elections now less than a month away. The population want more of the same and none of the other candidates are offering anything like a comparable programme - or indeed any sort of programme at all.

Putin used the word "democracy" during the speech, but highlighted that this should be interpreted in a Russian context. He will be roundly roasted in tomorrow's papers for "pretending" Russia is a democratic state, but the issue is confused. To many observers, the lack of debate in Russia is associated with a lack of democracy. But Putin's record means he has built a broad consensus - there is very little to debate as most Russians are taking the attitude: "if it ain't broke, don't fix it."

That is not to say the Kremlin doesn't hold all the political strings and is happy to pull them, but the polls show the majority of Russians are pretty happy with this arrangement for the meantime.

The future

Putin also gave more clues as to what to expect from a Medvedev presidency. Under Putin, the focus of policy was largely concentrated in the economic sphere. He has pushed through comprehensive financial sector reform to the point where the banks are starting to play their traditional role of financial intermediation. He has also overseen the renationalisation of some strategic industries - most notability the oil sector - that the Kremlin considered stolen from the state in the 1990s. Finally, he has established a series of national champions to spearhead the rescue and recovery of other key sectors like aviation, automotive and transport.

However, little was done in the social sphere and nothing was done about administrative reform. Putin broached the social sphere reforms with his "mums" speech in April 2006, but Medvedev is clearly going to take up this baton in a big way and has already talked about this topic on several occasions in the last few months.

Putin followed on in his speech calling for better education and health systems, and said that he wants life expectancy to increase to 75 by 2020, among other things.

However, what was new was an attack on government corruption and red tape caused by "over-centralisation."

"The Russian economy's main problem is its extreme inefficiency," said Putin.

Corruption has been mentioned before, though these comments are new because this speech can be taken as a statement of policy goals of the new administration, rather than a simple list of what is wrong with Russia. It was the first explicit mention of administrative reform in a major speech by the president since entering the presidential campaign period. Although the comments were short on details, this is a very encouraging sign as this reform is long over due and badly needed.

The economy has been growing strongly for all of Putin's eight years in office, but with the recent resurgence in inflation, the game changed in August. Going forward, poor government will increasingly make itself felt as the government tries to launch a massive spending programme into a rising inflation trend. Investments will have to become more efficient and the economy has to be made better able to absorb the increasing large inflows of both state and private investment if inflation is not going to go through the roof.

The military

Putin also made several comments on building up Russia's military strength. This will be seen as an aggressive move, but it's in keeping with rebuilding Russia's "great nation" status, as any large power needs a powerful military if it's to be taken seriously on the world stage. Interestingly, Medvedev, who has made few policy statements so far, said on February 7 that Russian needs a powerful navy.

On the economic front, Putin highlighted the passing of several milestones. Russia is now in the top seven of global economies by size and could pass his goal of doubling GDP by 2009, before the deadline of 2010 that Putin set a few years ago. It has already long passed the goal Putin set in 2001 of overtaking Portugal and is now nipping at the heels of Italy and France.

He also urged the promotion of small- and medium-sized enterprises and the continued diversification of the economy as the only long-term viable model. "Further reliance on mineral resources could put Russia's very existence in jeopardy," said Putin.

This suggests the economic policy will also change as the focus moves away from the big national champions and natural resource sectors and turns instead to the general business environment. Former economy minister German Gref pushed through some reforms aimed at this tier of business - largely an effort to reduce the number of licenses needed to set up a business - but after making some progress in about 2005, the effort stalled as the Ministry of Economic Development and Trade got distracted by other tasks.

Now SME reforms are clearly back on the agenda and it seems Putin is looking to create something like Germany's fabled mittelstand, a vibrant layer of SMEx to provide employment and opportunities.

This would certainly be the easiest way to achieve his stated goal in this speech of increasing the middle-class share of the population from its current 30% to 60-70% by 2020. This is an extremely ambitious target - much more difficult than simply doubling GDP - and will only be possible if the Kremlin starts to tackle the really thorny social and administrative reforms that are long overdue. Politically, this must also bring some softening of control by the Kremlin as the only way to make effective reforms that promote SMEs is to listen to their complaints.

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