Putin lays out ambitious reforms in St Petersburg keynote speech

Putin lays out ambitious reforms in St Petersburg keynote speech
Putin giving the keynote speech at St Petersburg International Economic Forum (SPIEF) / Kremlin.ru
By Ben Aris in St Petersburg June 17, 2016

Putin gave one of his most ambitious and reform-specific keynote speeches at the St Petersburg International Economic Forum (Spief) in years on June 17. But he had to. As his geopolitical stand off with the West over Ukraine winds down into a frozen conflict, clearly the president of Russia has decided its time to turn to fixing the economy as Russia slides inexorably into stagnation. A complete reform of the system is needed as all of the major growth drivers have been exhausted.

This year's speech was made more remarkable as it stood in such stark contrast to his speech last year. In the midst of two wars in Syria and Ukraine, Putin barely said a thing about economics, only becoming engaged and passionate when the questions turned to international relations. This year he was far more relaxed as he ran through a set of initiatives that were clearly drawn from Plan K, the reform plan being drawn up by former finance minister and head of the presidential economic council Alexey Kudrin.

Putin began his speech with international relations and focused especially on technology, but then moved onto a very specific menu of Russian economic problems and proposed fixes: improve productivity, invest in education, promote and learn from the best performing Russian regions, and fulfil the intellectual promise of the Russian population.

Talking to the mirror

Usually Putin kicks off any of his set pieces with a run down of Russia's latest macroeconomic achievements. But this year he focused first on the technological revolution underway in the world and took a back-handed swipe at the US, which has also become a traditional part of his speeches. Putin warning against the "attempt to monopolise the technology of the world by putting up barriers to development", but that this effort was bound to fail if it is "in a huge geographic area". Part of the US sanctions on Russia has been to cut it off from advanced oil and gas drilling technology it needs to exploit the Artic oil fields.

And Putin seemed a lot more confident that his allies would rally round in a showdown with the West. He highlighted the growth of the Eurasia Economic Union (EEU) that went live in 2014 and shared the stage with fellow founder and Kazakh President Nursultan Nazarbayev. Designed to be a smaller version of the EU, the project has been a core part of Russia's international policy, but Putin introduced a new element in this speech by talking about a "Greater Eurasian" single market. Previously Putin has always talked about a Greater Europe that runs from Lisbon to Vladivostok. The vision has suddenly changed and Putin for the first time highlighted a much more Asian version of the same mega-single market.

The shift in the centre of gravity was reflected by the make-up of the crowd at Spief. European investors were very thin on the ground this year and Americans were non-existent (although several prominent US businessmen were seen in the city of St Petersburg on the day of the speech, even if they did not come to the conference centre. At the same time, there were large delegations from China and the Middle East which are both emerging as large investors and increasingly partners in developing the Russian real economy. The vast majority of the delegates were Russia's business elite come to show their filiality to their leader. 

"The EEU will have a summit in June in China that will be the first step in creating the Greater Eurasian partnership," Putin said. "This project is open to the EU too."

The Russian leader suggested that in the next year the EEU membership will be expanded as countries join "at difference speeds with different depths of cooperation, depending on the level of cooperation that country chooses," said Putin, but adding that the EU is still invited to join. "Despite the problems that remain Europe remains our key economic partner."

No one is expecting a reconciliation with the EU any time soon. European Commission President Jean-Claude Junker was also at Spief and offered an olive branch in his speech a day earlier provided Russia adhered to the Minsk II agreement first. To break the logjam Putin suggested Nazarbayev intercede and negotiate with Brussels to find a solution.

Boosting investment

With the international relations issues dealt with, Putin turned to the domestic story. After his traditional running down the macroeconomic results, he laid out the details of an ambitious economic reform plan that in effect throws his political weight behind Plan K.

The core of Plan K is to switch Russia's growth model from consumption to investment as the main engine of growth. And that will be incredibly hard to do. A transition country like Russia needs investment to grow by some 20% a year, but currently Russia's investment growth is shrinking. Turning that phenomenon around will require a complex multifaceted approach of policy changes that work in concert. In short, the dysfunctional, corrupt and inefficient Russian government machine has to be made to work efficiently for the first time in two decades.

Putin ran through a number of measures that suggest at least the Kremlin understands the scale of the challenges and suggested concrete measures to deal with many of the specific problems. However, the issue with Russian reform has never been understanding the problems or having good ideas to fix them, but where it always falls down is on the implementation.

Still, many of Putin's suggestions were encouragingly pragmatic and specific. He emphasised that Russia needs to raise labour productivity by 5% a year for the foreseeable future. "It's a very difficult task, but real and achievable," admitted Putin, and one that has been largely ignored throughout his presidency. If this one is achieved then by itself it could make a huge difference: a World Bank survey from a few years ago found the size of the Russian economy would double if Russian companies were simply better run.

"We will calibrate all the tax payments so it is in the interests of companies to improve energy efficiency and labour productivity. The same with technology: we will introduce a rule that state-owned companies must by law use the best and environmentally friendly technology, but support this with state resources and funding," said Putin. If this means that the Russian government will introduced tax benefits to promote targeted to investments, then it will be the first time since Putin took office where the government steps away from its basic flat tax principle and would be a minor revolution.

Putin said a major effort will be made to double the share of small and medium-sized enterprises (SMEs) by 2030, which has been a constant feature of reform rhetoric for years, but where almost no progress has been made. SMEs in Russia account for about 20% of GDP, but the hope is to build this to 40% over the next 14 years.

This is a serious reform as part of Russia's economic inefficiency comes from the fact that about half the population are working for either state-owned companies, or those that rely on the budget for their income. A key part of any deep structural reform will involve weaning workers off the state teat and moving them into the private sector – and boosting the number of SMEs is one painless way of doing that. Putin said that currently there are some 18mn SME jobs from the total working population of around 70mn and 1.4mn jobs would be created by 2020 and another 3mn jobs by 2030.

Those are the most specific goals Putin has ever mentioned in connection with promoting SMEs and one of the ways he intends to achieve it is through an order for all large state-owned enterprises to place RUB9 trillion ($15.4bn) worth of orders with SMEs by the end of this year alone – a nine-fold increase y/y.

Another new element in Russia's economic policy is the recent appearance to promote export-orientated industries. Russia just became the biggest exporter of grain in the world and has been biggest exporter of oil many times in recent years. But Putin emphasised that now the state is looking to promote "non-resources exports", which has become possible after the devaluation meant that the Russian cost of labour is now less than China's. The state has already beefed up its state export promotion agency, but so far boosting the non-oil exports is all talk and little results.

Shedding some sun on the investment climate

But upping output and investment is only half the story. As important, and as difficult, is improving the business climate – and in large part that boils down to crushing the endemic corruption.

Putin admitted to the both the extent and the source of the problem saying, "We must lower the illegal criminal prosecutions and make those responsible personally liable up to and including criminally liable." What he is talking about is bent tax and police officers who bring fictitious charges against businessmen as a means of extorting bribes or taking over their business. Putin already hired businessman Boris Titov in 2012 as "Russian anti-corruption tsar" to fight exactly this problem, but with a staggering 100,000 plus people languishing in jail on trumped up charges - by Titov's own estimation - he has been unable to make much of a difference. Putin has just upped the game significantly by threatening his own bureaucracy with jail time for their abuses.

On a more positive note he praised the successful regional governors, many of whom have doubled investment and production in their regions. A growing number of star regions, such as St Petersburg,Tatarstan and Kaluga, are leading the way and are responsible for pockets of real reform.

"These regions show the core of leadership talent, but the question remains: where are the rest?" ask Putin. He announced that the federal government would set up a mechanism to promote the best regional administrative and management practises. But he also warned ominously that those that failed to step up to the plate would lose their jobs.

"We will make staff changes if they don't understand," said Putin. "This autumn we will have a serious conversation with all regional heads," he told this audience, setting a deadline for regional governors to get their act together.

Back to school

Finally Putin focused on plans to improve education. Russia's university system was falling to piece until recently as corruption corroded the system from the inside. That has been stopped and Russian universities have begun to climb up the world's top 100 ranking again. But Putin is talking about a root-and-branch reform to the system to create an innovative society – probably the most ambitious of his reforms.

"We need talented researchers and experienced designers which are the most important so we need to create a core education reform in the coming years," said Putin.

He claims that there has been a revival of interest in young Russians in engineering and design who are increasingly choosing to study these subjects, and Putin says that these subjects will be introduced to schools where "children will get used to project based team work and creative thinking from childhood".

"In the next ten years the world will change completely. To be leaders in this world we need to lead ourselves," Putin concluded. And that is the challenge. This is the third attempt at reforming Russia. Some progress is always made, but never enough and with each attempt the stakes get higher as the people's expectaitons grow. 

Listen below to Editor-in-Chief Ben Aris and Editor-at-Large Liam Halligan dissect Russian president Vladimir Putin's keynote speech at this year's St. Petersburg International Economic Forum.