Jim O’Neill of Goldman Sachs who originated the BRICs slogan has published a book, “The Growth Map”, which suggests his knowledge of Russia is quite shallow and unsophisticated (sometimes “thick as a brick” economiсs, with too little feeling for psychology or sociology).

Good analysis of a country’s economic prospects requires more than anecdotes and an ability to handle data. Demographics, the presence of technology, education levels etc – mentioned by Jim in his prognosis for Russia – are not particularly difficult issues to deal with, or even measure.

The really difficult issue to assess is how effectively a society will bring these, and other, things together to maximize productivity increases. The optimal way to do this will vary between countries, and over time for any one country. There are few general hard-fast rules, and a lot of judgment must be applied.

According to Stefan Wagstyl, in articles in the Financial Times, Jim argues that “that political ‘antipathy’ blinds western critics to Russia’s advantages, such as its strong position in technology and education. He concedes Russia does badly on corruption and the rule of law, but claims that Italy’s economy has ‘rolled along for years’, despite having weak rule of law for a long time.”

There is some truth in each of the points, but Wagstyl also wrote that Jim “has little time for western criticism of Russian authoritarianism or one-party rule in China. He quotes an American businessman recounting a line from a Chinese person, who had said: ‘What’s the big deal about voting? In the US everyone can do it and only half the people do. If voting were that great a thing, like sex for example, everyone would do it.’” According to Wagstyl, Jim argues that “a lack of democratic development does not seem to concern most Russians”.

This is childish simplicity – at least in regards to Russia!

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The issue of “decentralization” of power and finances (away from Moscow to the regions) is currently a fairly hot agenda item. However, in my view, its strongest proponents are going to be disappointed by the result. This is not so much because of a lack of will by most people involved in examining and making decisions on this issue — but, by very practical impediments which would be there irrespective of who is president!

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The Strategy2020 team of Expert Groups is completing its final report for delivery in December. Initially commissioned by Prime Minister Vladimir Putin, it now appears that Dimitri Medvedev – as future prime minister – will be taking the running on this issue even before he steps down from the presidency. The Expert Groups have been quite critical of a number of the policies pursued by Putin, both as president and prime minister, and many of their ideas seem closer to those of Medvedev. But Medvedev is now in a much weaker political and psychological position than before announcing his decision. Putin now has the uncontested upper hand, even before legally assuming the presidency, so I am not sure that it makes much difference which one of them is the “curator” of the Strategy2020 project. 

Moreover, policy making is not on hold while this document is being finalized. The two most notable related issues reported last week were about “Free Economic Zones” and the possibility of the return of sales tax. 

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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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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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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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