Russian Economic Reform


What will happen over the next few years?

Published on October 02 2011
Posted by: jeff

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:

1.  New Model of Economic Growth. Securing Macro-economic and Social Stability

I have never been particularly enamored with the idea of a “new economic model” which seems to assume that Russia can make some magical break from its present dependence on resource exports. I would prefer to see the focus on improving the efficiency of working with what it has. Many of the desired structural changes would then come more gradually and naturally, and be more sustainable. Medvedev, both in reality and in the perceptions of others, is now in a much weaker position to promote his so-called “modernization” agenda, so I expect the overall push for this will weaken. From the point of view of less emphasis on a magic white rabbits coming out of a hat, the Putin-Medvedev switch may not be so bad. But Medvedev’s “modernization” agenda was not only about a radical change in the structural composition of the economy, but was also about increased efficiency within the present structure – and in this sense, the presidential switch is a considerable negative for Russia.

2.  Budgetary and Monetary Policy, Macro-Economic Parameters for Developing the Russian Economy

The basic aims of monetary policy are unlikely to change much in the absence of a significant change in fiscal (ie budgetary) policy. The departure of Kudrin probably means some softening of fiscal policy and, as a result monetary policy may be tighter than otherwise.

3.  Reform of the Pension System

I think that Putin will be extremely reluctant to raise the pension age or change the basic entitlements, and will not want to again change the wage based insurance contribution from the 30% which will apply from 2012 (which would put many business groups off-side and remind people of the Putin-Mededev and Kudrin affairs). Thus, the pension fund will continue to require large transfers from the federal budget.

4.  Strengthening market institutions. Securing stable conditions for ownership and development of competition, stimulation small business

Progress will continue here, but it will be uneven. The Federal Anti-Monopoly service is very active and overall the legislation that it works with is adequate, but Putin is also more likely than Medvedev to interfere in individual cases. Small business will be of less concern to Putin than Medvedev, but on the other hand Medvedev may be given a relatively free hand in this area – if for no other reason that Putin will have little interest in it.

5.  Moving from stimulation of innovation to growth on its basis

The Medvdev-Putin switch has probably delivered a significant blow to this. Not only is Medvedev in a weaker position to promote this, but the PR aspects of the switch are extremely negative for those people most willing to embrace and invest in change.

6.  Taxation Policy

I do not think that the Medvdev-Putin switch, or the departure of Kudrin, will have a significant effect in this area. Aside from the resources area, Russia will probably be forced by budgetary pressures to introduce a progressive personal income tax system in place of the present flat rate. VAT exemptions will be reduced, taxation administration tightened, and the local real-estate tax slowly put in place to replace the existing land and property taxes. This combination of actions has the potential to significantly increase the income of the consolidated (federal, regional, local) Russian budget.

7.  Labor market, professional education, migration policy

I have no particular view on this.

8.  New schools

 I have no particular view on this.

9.  Reducing inequality and overcoming poverty

I have no particular view on this.

10.  Development of financial and banking sector

This will continue and I do not expect either the presidential switch or the departure of Kudrin to have any significant general effect. However, Putin will be less concerned about the dominant position of the state owned banks, and will find it hard to resist some hands-on intervention in some major lending decisions. 

11.  Health and a healthy environment living environment

I have no particular view on this.

12.  Real federation, local self-government, budgetary relations between the center and lower levels of government

As noted above, the introduction of the real-estate tax (which by all accounts is not proving easy, but will proceed) may go some way to reducing transfers from the central (ie federal) budget, but significant imbalances will remain. The presidential switch and the departure of Kudrin will have little effect on this, despite the fact that Dvorkovich was pushing the idea of introducing a regional sales tax and Kudrin was opposing it on the ground that there was already a tax on final consumption in the form of VAT. I would expect Kudrin’s sensible line of reasoning on this issue to prevail – even in his absence.

13.  Increasing the efficiency of government investment and government purchasing, creation of a federal contract system

I have no particular view on this – except that Putin’s general preference for hands-on management rather than the setting of principles (on which decisions are then based) will mean that the improvement will not be as good as could have been with Medvedev in a more powerful position.

14.  Optimizing the role of government: reducing regulatory functions, securing transparency and good communication with business and society

The Putin-Medvedev switch is a significant negative in these areas. Putin is not as personally interested in these issues as is Medvedev, and the latter will now have less authority to push such changes along.

15.  Managing government property and privatization

In earlier articles on this site I have suggested that Medvedev was in too much of a hurry to implement the planned new round of privatizations. Medvedev wanted accelerated privatization both to provide revenue for the state and to reduce the role of the state in the economy. Putin’s emphasis will be on the former, so there may be more concern about possibly getting better sales prices in the future than on hurried sales. On the other hand, the Medvedev emhasis on “independent” directors on the boards of (fully or partly) state owned entities will be allowed to quitely fade away.

16.  Development of social institutions

I probably don’t need to state the obvious here !!

17.  Reform of budgetary sector of the economy

I have no particular view on this.

18.  Reform of natural monopolies

The Putin-Medvedev switch is a significant negative for this. Putin’s personal relationship with the leaders of these organizations and his strong psychological preference for control and order will mean the pressure to reform is reduced.

19.  Overcoming territorial and information barriers: development of transport system, communications and information

I have no particular view on this.

20.  International position of Russia: economic benchmarks

As should already be clear, I think that the Putin-Medvedev switch will have a generally negative effect on these indicators.

21.  Development of economic and social integration in post-Soviet area

This is the only area where the presidential switch will have an unambiguous positive effect. Putin’s interest in this is much greater than that of Medvedev.

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