Putin's economic liberalization drive divides analysts

By bne IntelliNews February 3, 2012

bne -

Prime Minister Vladimir Putin made his boldest pledge yet on February 2 that he will liberalise the Russian economy, telling delegates at the Troika Dialog investment conference in Moscow that he if he's elected president come March, then his administration will push for Russia to rise a full 100 places on the World Bank's "Doing Business" survey to 20th.

Most importantly, he put details on how he intends to do this: by reducing energy waste by a factor of 4; reducing the time to file a tax return by a factor of 3 by cutting the amount of reporting necessary; making transport faster by a factor of 7; and reducing the time it takes to acquire an asset by a factor of 5. Putin also pledged to continue the anti-corruption campaign launched by current President Dmitry Medvedev.

Analysts note Putin continues to nail his colours to the liberalisation mast since the recent protest movement emerged following the parliamentary elections on December 4. However this being Russia, the proof of the pudding is in the eating.

Putin's target of the number 20 spot in the World Bank list, for instance, appears arbitrary. In a manifesto article on economic policy published on January 30 he raised for the first time the idea of Russia targeting the Ease of Doing Business index - but said the country should emulate neighbouring Kazakhstan - which sits 47th on the index.

Perhaps the top 20 target is intended to be ambitious enough to mobilise state bureaucrats. People laughed when Putin said in 2000 he planned to double GDP, but he in fact did deliver on the target, albeit with a lot of help from commodity markets. However, another potential motivation is more personal. Putin's arch-rival Georgian President Mikhail Sakashvili, has pushed his country up over 100 places on the index to 16th place since he came to power in 2003. If Putin is going to look at the index, then he won't be happy to lag behind his bête noire.

Russia's scores on the ease of doing business index differ considerably across the various subsections: Putin's plan seems to be to target indicators where Russia has horrible scores but where it lies within the government's power to change them significantly through administrative changes, as opposed to social and behavioural phenomenon such as bribery and biased court rulings.

This risks however becoming a more pro-forma exercise with no deep-seated shift in business culture. For instance, both Kazakhstan and Azerbaijan are examples of post-Soviet countries that has 'engineered' a rapid rise through the ease-of-doing business ranks by targeting specific indicators. Both Kazakhstan and Azerbaijan however count as family-run petrostates, where big business requires connections and tribute to the respective ruling clans, as detailed in a number of leaked US diplomatic cables on the wikileaks website.

Experts are thus divided over the significance of Putin's new goal.

"The fact that Putin mentioned Russia's 120th rank in the Doing Business rating represents a significant change in his approach," writes Alfa Bank analyst Natalia Orlova. "Putin touched upon areas where Russian business is facing the most obstacles - the key factors making the costs of gaining access to infrastructure in Russia 6-8 times higher than in BRIC peers and limiting investment recovery," Orlova says.

"Unfortunately, Putin's goal is too ambitious to be achievable: while moving up 20 steps in the rating does sound like a plan, a 100 step improvement would require a complete reform of the current political and economic framework," Orlova adds.

Orlova also points out that Putin, almost in the same breath as promising an improvement in investment conditions, called on state-owned VTB to buy back shares at the 2007 issue price from retail investors who complied with the massive government push to invest in what it dubbed the "people's IPO'" The bank's shares are currently languishing at around 50% of the original price. The move could cost the bank RUB15-18bn, but more significant is the direct state order given to a partly privatised company.

Orlova suggests this illustrates "no change in the state approach to economic management. Setting overly ambitious goals and mixing two contradictory signals in one speech risks ruining the credibility of Putin's positive message to the investment community," she writes.

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