Russian Economic Reform


Presidential co-operation between Medvedev and Putin will not last!

Published on September 24 2011
Posted by: jeff

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.

The article examined the basic sources of expenditure increases for the draft 2012 budget and the budget plans out to 2014. After considering publicly available evidence and talking to officials, “Vedomosti” concluded that Medvedev had been the driving force behind expenditure decisions that added up to more than twice those pushed by Putin.

Medvedev’s push for improvements (including fighting corruption) in the legal system and law enforcement bodies has led to significant increase in spending on remuneration of officials, with the armed forces also benefiting. The formation of a patent court has resulted in some additional spending, as have some subsidies for the “mass media”.

The much discussed reduction in the wage based insurance contribution paid by employers (from 34% to 30%) has, despite the introduction of new payments obligations above the threshold, resulted in the need for additional transfers from the federal budget to non-budget funds – namely the national pension fund – to compensate for lower contribution inflows. 

Most of this reflects a Medvedev orientation to set basic conditions – or “principles” – on which future developments can occur.

Putin, according to “Vedomosti”, has “preferred to add (spending) for specific projects”, which – in my view – reflects his more “hands-on” approach.

While Putin has pushed modernization of education, projects such as the 2012 APEC Summit to be held in Vladivostok (and associated projects, including a new university) and a new port on the Yamal Peninsula figure prominently in his priorities. Events connected with various regional celebration dates have also directly benefited from the Putin “hands-on” approach.

“Vedomosti” notes that in contrast to Medvedev’s funding push for the mass media, Putin has favored the movie industry and “culture”. Both Putin and Medvedev have pushed for spending to develop the economy of the North Caucasus – particularly tourism.

Some of the different priorities of Medvedev and Putin have reflected their respective responsibilties under the Russian constitution, but they have also lined up, to a significant degree, with the intellectual interests of these two men. And, the responsibilities are soon to be reversed!

On the revenue side we saw further evidence of some fundamental differences between Medvedev and Putin by way of comments by their principle economic advisers on the likelihood of tax increases after the presidential election. Kudrin and Dvorkovich continued to argue about taxation and the like – and at times it has seemed rather personal.

Kudrin is a cautious, and perhaps rather conservative, economist. Dvorkovich seems to be in favor of more pro-active steps on both the expenditure side and taxation/revenue side to boost “modernization” – with the resulting increase in the budget deficit limited by the receipts from more active privatization.

In turn, these attitudes probably tell us something about the people that they work for – ie Putin and Medvedev – who have quite different basic personalities. Conservative and somewhat fearful of the new on one side, and innovative and optimistic on the other.

The intellectual whose main interest is the law along with concepts and ideas will now, as prime minister, be forced to concentrate on day-to-day economic administration — while often looking with dismay at what is happening in the legal field. And the hands-on manager with little interest in concepts and ideas, as president, will not be able to resist hands-on management interventions into the work of the prime minister.

Medvedev will be prime minister in name only. It will not work, and it will not last!

In my view, attempts to “modernize” the Russian economy will not stop with Putin as president. But Russia’s full latent potential will not be realized.

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