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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The 21 Working Groups have presented an Interim Report (apparently about 400 pages) to that part of the government headed by Putin. It has not been published on the official Strategy2020 internet site, but media reports of its content suggest that it contains few surprises to anyone who has been following the work of the individual groups. A Final Report is due to be completed by December. I expect that further work by the 21 Working Groups published on the Strategy2020 website will essentially be refinements of that which has already been published. Thus, commentary on this site (ie the one you are now reading) will move more to what is actually happening now in the economic reform process in the areas being worked on by most of these groups. I will aim to post a new commentary every Monday.

Last week saw many reports and much commentary in the Russian media related to the necessity of promoting “modernization” and “innovation”.

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