Anatoly Sobchak, the reformist mayor of Saint Petersburg with whom Vladimir Putin worked after he left the KGB in 1990, once suggested that Putin might be Russia’s Napoleon Bonaparte. And, in a sense Sobchak was right, and much of what I wrote in March 2000 in this article has occurred:

http://www.jeffschubert.com/index.php?id=20

Now, in order to justify his impending return to the presidency, Putin has invoked the cases of Franklin D. Roosevelt, Charles De Gaulle and Helmut Kohl as men who held power for a long time and who have been treated quite well by history – in contrast to Russia’s own Leonid Brezhnev.

Dmitry Peskov, his press secretary has said: “Putin reads all the time, mostly about the history of Russia. He reads memoirs, the memoirs of Russian historical state figures.”

This is dangerous reading!

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Indra Nooyi, the chairman and CEO of “PepsiCo”, was clearly impressed with the performance of Vladimir Putin at a meeting of the Foreign Investment Advisory Council (FIAC) last week, saying that he “was on top of every issue” and “knew the facts”. George Buckly, CEO of 3M, said: “Mr. Putin was very impressive, strong and intelligent. He is extraordinarily well informed.”  And they were not the only ones who were impressed: consider the words of James Turley, chairman of “Ernst & Young”: http://www.jeffschubert.com/index.php?id=105

But, are the very positive assessments of such people positive indicators for the Russian economy and positive indicators for economic reform?

I am very doubtful.

Over the years I have participated in many groups and meetings considering Australian economic reform – particularly in taxation and anti-monopoly policy – which contained academics and very senior businesspeople (some of were who heads or former heads of Australia’s biggest companies).

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The 21 Working Groups of the Strategy2020 project provide a framework for consideration of the likely course of economic reform in Russia over the next few years. By the “next few years” I mean the remaining period of Medvedev’s presidency and the first part of Putin’s. For me, trying to foresee events past that becomes impossibly difficult, although I doubt if things will improve in the later years of a Putin presidency.

I am assuming that Medvedev is now a lame-duck president with Putin essentially taking on the roles of both President and Prime Minister – with Medvedev in reality little more than his assistant. Neither Putin or Medvedev will want anything like a repeat of the Kudrin affair, and coordination will now be very tight to insure that everone is now on the same hymn sheet. I also assume that Medvedev increasingly comes to understand and regret his weakness in the face of Putin’s more powerful personality, and eventually moves – perhaps to the Constitutional Court. I am also taking account of the fact that Kudrin is no longer Finance Minister.

I have not looked at the reports of all 21 Groups, and have indeed ceased to try and keep up with latest developments – which, in any case, do not seem to be that significant – within them. An Interim Report was presented to the Government (headed by Putin) in August and any further developments are likely to be mainly refinements. What happens in reality will now be much more interesting and important.

Below is a quick guide to the next few years based on my impressions:

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Vladimir Putin and Dimitry Medvedev are two very different men in their basic psychological make-up and approach to government, and I find it difficult to believe that they will now be able to work together for a full Putin presidential term.

The tension between them has now been relieved by the final  announcement about the coming election — but it will eventually return in a slightly different form.

As I relate below, last week’s revelations about the draft Russian federal budget for 2012 and plans for later years – both composition and controversies – provides a basis for examining the way forward for the relationship between Medvedev and Putin and also for the Russian economy.

While Putin is now triumphant, Medvedev will be a diminished man in the eyes of many Russians who supported his “modernization” view of the way forward and also a diminished man in the eyes of his colleagues in government. Alexei Kudrin, who will almost certainly remain as Finance Minister, will treat Medvedev with contempt — both now and after March 2012.

Medvedev will also begin to see himself in a diminished light. Much as he wanted to, and in spite of the possibilities and his achievements, he could not summon the psychological strength to go against the man to whom he owed so much. The passing of time is likely to build a sense of regret – and even resentment — in Medvedev.

Putin will display loyalty to Medvedev because it is both his natural style and because Medvedev has demonstrated loyalty to him.

Nevertheless, I will be very surprised if Medvedev is prime minister at the end of Putin’s presidential term. Long before this the situation will be untenable for both men.

Budgets have income and expenditure sides to give a result.

On the expenditure side “Vedomosti” last Wednesday (21 September) carried an article that added force to the notion that Putin is a “hands-on” manager/leader and that Medvedev is more “principles” based.

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Several weeks ago a tribunal of Arbitration Court judges passed a case regarding “thin capitalization” up to the Supreme Arbitration Court for definitive determination. The Federal Taxation Service was claiming that interest payments to a foreign company were really dividends and that they should be taxed as such, and that the interest payments on the loan should not be an allowable expense for the calculation of taxable profit. At issue was an apparent conflict between the requirements of the Russian tax code and one of Russia’s international agreements on the avoidance of double taxation.  

The above paragraph in itself says something about Russia: there is a taxation authority which is pursuing a company through the courts because its inspections suggest that financial flows have been misrepresented in the accounts for taxation purposes. It might sound simple, but each of the steps in this process is quite sophisticated. Exactly the same scenario could occur in Australia, the UK or most other “modern” economies.

Last week the Federal Anti-Monopoly Service announced that it was taking legal action against Russian Railways and two subsidiary companies involved in supplying wagons for goods transportation. It seems that Russian Railways cannot or is refusing to supply wagons at regulated tariff rates and that its subsidiaries are instead offering the wagons at higher unregulated tariffs. From one point of view, this could be seen as sensible commercial behavior by Russian Railways group of companies, but from another point of view it might be seen as activity to boost prices with anti-competitive monopoly behavior.

Whether the Anti-Monopoly Service has a good case will depend on the details, but my main point here is that – following complaints from organizations wanting to move cargo – the Anti-Monopoly Service is on the job and basing its case on the law. Working Group 4 has done work on anti-competition laws and enforcement (see right-hand listing of Groups) and, while things are by no means perfect in his area, they do function in a similar way to a “modern” economy.

I could labor the point with other examples, such as the Central Bank, but my point is that from an institutional framework point of view Russian is already a “modern” economy.

Yet, at the same time the efficient functioning of the taxation system, the court system and the banking system is greatly hampered by very significant corruption and sometime staggering incompetence. And the examples abound: from the issue of VAT refunds (highlighted by the Magnitsky case) to the Bank of Moscow case.

So, what has this got to do with the choice between Vladimir Putin and Dimitri Medvedev?

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Some psychological articles  — which are relevant to economic reform — from www.jeffschubert.com for reading over the Summer holiday month of August.

(1)   Vladimir Putin’s likely policies, written in March 2000:

The post-USSR chaos in Russia was bound to throw up a leader whose instinct was more authoritarian and nationalistic than Boris Yeltsin. This leader has now arrived. In 1989 Unity was a dirty word, but now both society and Putin want it. In this sense, the desires of Putin and society complement each other in much the same way as did Yeltsin and society a decade earlier. Putin will be seeking to reconstruct some of what Yeltsin sought to destroy. Whereas Yeltsin sought, in his own way, to promote diversity within society and to free the Russian regional governments from the centre, Putin will be aiming for consolidation.

http://www.jeffschubert.com/index.php?id=20

(2)   Putin & Medvedev – Ataturk and Ismet Inonu — written in March 2008:

Psychologically, Medvedev will remain Putin’s servant (as with Inonu, “puppet” is too strong a word) for some time. As Medvedev exercises power he will begin to like it and become less the servant — and, initially at least, Putin is likely to take some pride in Medvedev as a capable (and I think he will be) president. Over time, however, Putin will need to accept various indications of his decline in formal and informal power — and will, at times, have to swallow his pride. However, Putin is not as focused on “self” as Ataturk and will accept this for a time. Nevertheless, tensions will grow.

http://www.jeffschubert.com/index.php?id=56

(3)   Medvedev and Putin and the effect of “power” — written in November 2008:

Albert Speer, Adolf Hitler’s architect and Armaments Minister, nicely summed it up the effect of prolonged power:

“There is a special trap for every holder of power, whether the director of a company, the head of a state, or the ruler of a dictatorship. His favour is so desirable to his subordinates that they will sue for it by every means possible. Servility becomes endemic among his entourage, who compete among themselves in their show of devotion. This in turn exercises a sway upon the ruler, who becomes corrupted in his turn.”

http://www.jeffschubert.com/index.php?id=61

(4)   Putin “personality cult” — written in December 2009:

Dimitry Medvedev believes that he is the best person to be president after the 2012 presidential elections. But power is as much about the psychological need for power – and, not surprisingly, Putin’s need has grown with time in power – as it is about intellectual analysis. Medvedev’s visual image is very lackluster, and unless he can do something about it in early 2010 – and boost his self-confidence (a la Mao) – he will be “psyched-out” both privately and publicly by Putin.

http://www.jeffschubert.com/index.php?id=73

(5)   Medvedev and Obama — written in March 2010:

While Obama’s team will be continually reminding him of 9/11, Medvedev’s team will be continually reminding him of the disastrous Yeltsin years. Medvedev’s team – which includes Putin – is afraid of loosening the government’s role as society policeman. Medvedev says he wants to strengthen the rule of law, but he appears to be having some issues in his own mind about how to do this without reducing ultimate state power over citizens. He is thus forced into a philosophy of modernization from above (ie “city of the future” project) rather than – more sensibly – providing the conditions to let it emerge from below.

http://www.jeffschubert.com/index.php?id=80

(6)   Putin’s “flaw in the weave” and no “new faces” approach — written in July 2010:

Neither Putin nor Medvedev seem generally inclined to use the “termination” option as a management tool. After the disastrous Yeltsin years, both Putin and Medvedev crave stability in the Russian governmental system. But there is also a difference. Medvedev is probably disinclined to use “termination” because of his intellectual nature which seems to generally focus on the good in people. Putin, however, is clearly more manipulative and inclined to use force. Putin’s reluctance to use the “termination” option can be explained, at least in part, by considering how some historical strong-men have approached this issue.

http://www.jeffschubert.com/index.php?id=88

The Russian Federal Budget forecasts for the next three years were released last week and contained funding allocations to allow the 34% “insurance contribution” rate to be lowered. As noted earlier on this site, this has been a very controversial issue with Finance Minister Kudrin fiercely resisting a lower rate because it would – in the absence of some other source of money for the government pension fund – result in higher transfers from the federal budget (and thus a higher deficit).

From 2012 the “insurance contribution” will reportedly be lowered to 30 % on payments of annual wages up to 512,000 rubles, and there will be a new levy of 10% on additional amounts (with concessions for small business).

Kudrin was not impressed with this result, and has also been unimpressed with some other ideas coming out of the Kremlin – such as presidential assistant Arkady Dvorkovich’s support for sales taxes at regional level. As I have already noted on this site, I tend to agree with Kudrin on the sales tax issue because there is already a consumption tax on such sales (in the form of VAT).

However, I am presently agnostic on the “insurance contribution” issue because I am somewhat confused about the data being thrown about on international comparisons and do not know if 34% is really very high in international terms.

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President Medvedev’s speech to the St. Petersburg Economic Forum just over a week ago clearly ruffled a few bureaucratic feathers. Contrary to what some people seem to think, he is not just making pretty speeches.

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This Group has been discussing a general approach to formulating a new model of economic growth, taking into account the realities of the basic Russian economic structure and “current imbalances and long-term tendencies in the world economy”. A summary of an early joint report by a number of members of this Group can read here.

Jeff says that ….

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Russia aims to become one of the world’s five largest economies within ten years, though it will admittedly be impossible to do so relying on a resource-oriented economy, prime minister Vladimir Putin stated on 26 May. ­“We have set an ambitious goal, that in ten years Russia should become one of the five largest economies in the world,” Putin said, speaking at the first social business forum in Moscow. “And the GDP should rise from the current level of 19,700 dollars to 35,000 dollars per capita.” He specifically pointed out that such figures will be impossible to achieve relying on “past sources of growth-exploiting the resource-oriented economic model.”

Jeff says that ….

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