Putin promises to press on with reform

By bne IntelliNews January 30, 2012

bne -

As the March 4 Russian presidential election approaches, Vladimir Putin has published an article aimed at taking back the political and economic agenda of former-protégé and current president Dmitry Medvedev. The publication raises hope that the core of the reform process Medvedev has pushed could continue once Putin retakes the Kremlin. As ever, implementation will be key.

In the article published in Vedomosti on January 30, clearly targeted at middle-class readers, Putin outlines his plans to diversify and modernize Russia's economy through technology, while improving the business climate and shoring up state finances by reducing corruption - all favourite themes of Medvedev during his office. The article is Putin's third in a series, with previous articles tackling domestic politics and foreign policy, and a fourth promised to deal with social issues.

The need for Russia's economy to modernize and diversify is a well-worn theme over the past few years. Whilst the only new specifics contained in the article are targets for technology-based output to 2020, the goal for economic growth is considerably less spectacular than the "doubling of GDP" Putin promised on becoming president in 2000.

The new targets are for hi-tech production to increase by 50%, with a doubling of hi-tech exports, and for the real average wage to increase over the same period by over 60-70%. More significantly, setting the target date as 2020 may indicate Putin intends to run for another term in 2018. This is however unlikely to please the middle-classes who took to the streets in December and still plan protests.

Apparently appealing directly to those demonstrators, Putin consistently defends himself against accusations of state capitalism. He argues that technological modernization requires the state to take the initiative in sectors private capital would not dare enter. "Are we ready to risk Russia's future for the sake of purity of economic thought?" he asks rhetorically.

The current prime minister claims that the aim in creating the sectoral holdings now known as "state champions" in 2007-2008 was to restructure and rationalize state-owned assets in preparation for privatisation. At the same time, he acknowledges that these state corporations have not become globally competitive, highly capitalized or even profitable, and the time has come to "audit" their activity.

Putin also acknowledges that bureaucracy has scared off potential investors and promised improvements to the investment climate, referring for the first time to the benchmark World Bank Ease of Doing Business index. He specifically points at Kazakhstan in 47th place in the index as an example for Russia - currently languishing at 120th - to follow. However, he studiously ignores the 16th place achieved by Georgia via an internationally acclaimed series of reforms. He also supports, as he has done before, replacing state regulation with market principles and administrative control with forms of mandatory insurance.

Continuing his line on the country's massive privatization programme pushed by Medvedev, he shows support for the structural improvements it aims at, whilst also keeping a joker up his sleeve. Underlining that the programme is intended to increase efficiency at the country's state companies, rather than raise cash for the government, he reiterates that market conditions cannot be ignored and that nothing will be sold "on the cheap". This refers to an ongoing standoff between liberal and more hardline ministers over whether to proceed with privatization following the downturn in the markets in 2011, or to wait for valuations to recover. As ever, Putin appears to be sitting on the fence.

Balancing the budget, tackling corruption

Looking at the macro-economic picture, the president-in-waiting calls for a balanced budget and cautious approach to government borrowing. Linking the budget with corruption - both key middle-class concerns - Putin claims he will "liquidate" kickbacks on both the federal and regional levels, and that this would make it possible to cut expenditure by as much as 10%.

With a nod towards blogger Aleksei Navalny, one of his main political challengers who has focused on corruption in the state tender system, Putin said that he will introduce, with immediate effect, mandatory public discussion - including potential participants and journalists - of the terms and starting price of all government tenders worth over $25m. However, he failed to specify the mechanisms of his scheme. The need to crack down on tax evasion through offshore companies and fly-by-night domestic companies is also reiterated.

One of the biggest challenges to Russia's macro-economic health, the PM also made a one-sentence call for a switch to a balanced pension system. The issue is a thorny one for a politician who enjoys a huge wedge of support amongst the country's struggling pensioners, which is why the current system drains billions from the national economy. However, the article gives no indication of how pensions could be reformed. The obvious move to raise the pension age was rejected out of hand last year.

Regarding government revenues, Putin suggested extra taxation on the resource sector where feasible - thus presumably excluding the already heavily-taxed oil sector. He also said there would be new taxes on the rich via "prestigious consumption" i.e. expensive real estate and cars, as well as alcohol and tobacco products.

Between the lines

The article also contained some interesting allusions to past and future events between the lines. In one rare example of a specific reform Putin seems to say that Gazprom will sell its media holding Gazprom Media, which owns TV channel NTV. This may be a nod to Medvedev's initiative to create a freer environment for the media.

Putin also for the first time delves into the takeover of Yukos and jailing of owner Mikhail Khodorkovsky in 2003-2004. Explaining his decision to increase the state's role in the resources sector in his first term as president, Putin writes, "it was not only because some of the oligarchs continued to try directly buying into politics. At the very start of my first presidential term we were confronted with determined efforts to sell off key assets to foreigners. The private ownership of strategic resources by a few individuals meant that within 5-10 years our economy would have been controlled from abroad."

A cause celebre amongst the Moscow-based middle class camp to some extent - with calls for Khodorkvosky's release growing stronger, Putin seems to be claiming that Khodorkovsky was not jailed for political liberal views, but for deciding to sell off his oil company Yukos to US oil majors.

Implementation the key

Overall, the article outlines several vital themes for reform over the next five years of Putin's (certain) presidency. However, as Medvedev found out during his term, the issue in Russia has always been implementation.

Renaissance Capital analysts sum up by saying: "These are all lofty goals and Putin deserves credit for explicitly enumerating them. However, as always, implementation will be key. At the same time, we have repeatedly claimed that there is a strong macroeconomic and political economy incentive (the great transition from twin surpluses to twin deficits) for Putin to deliver on them."

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