A working group on “decentralization of power” led by vice-premier Dmitry Kosak is due to present a report to President Medvedev by 1 December. Medvedev has in the past pushed the idea of greater decentralization of power, and his economic adviser Arkady Dvorkovich has suggested the introduction of regional sales taxes to increase regional fiscal autonomy.

According to an article in “Vedomosti”, the Kosak working group has considered the possibility of abolishing the post of presidential plenipotentiary to Federal Districts – which, on the face of it, would be a move toward “decentralization”. Each of the 8 plenipotentiary Federal Districts encompasses a number of the 83 Russian regions (oblasts, krais, republics, federal cities).

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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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It seems that Russia is making some progress in administration of the tax laws, and in the legislation itself.

Refunds of VAT payments have been an area of great fraud, particularly by way of refund claims for non-existent goods, fiddling the amounts on invoices, and ephemeral businesses. Last week an official of the Federal Tax Service told radio station “Echo Moscow” that such fraudulent claims are being reduced by better administration by the Service. Most of the improvement has occured in Moscow where a change of leadership at the beginning of the year has delivered positive results.

The claims of better administration by the Tax Service were supported by the director of the legal department at “ТНК-ВР management”, the deputy chairman of the tax committee at the Russian Union of Industrialists and Entrepreneurs, and by officials at the Ministry of Finance.

Also last week, “Vedomosti” ran an article on possible future changes to the tax laws. It quoted a report prepared by the Ministry of Finance, the Ministry of Economic Development, and the Federal Tax Service. In 2010 total tax concessions amounted to 2.48 trillion rubles, or 5.53% of GDP, with “business getting 1.063 trillion in stimulatory tax concessions”.

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When trying to change a country or region it makes lot of sense to try to integrate economic goals with those political so that the two facilitate each other. But, there can be two types of problems in doing this.

One type of problem is that the economic and political actions are not sufficiently coordinated, with the result that there is under-achievement of both. The second type of problem arises when one type of action is intended and used as a way of forcing change in the other; and in this case there the results can be worse than underachievement – indeed, they can be quite destructive!

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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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