For the Kremlin to do something utterly predictable is quite rare. For this reason, the return of Vladimir Putin as Russia’s president next May managed to take Russia’s political class by surprise. Mr Putin’s return, announced on September 24, lays to rest the principal source of intrigue over the past four years.
Ever since he avoided constitutional prohibition on a third term in 2008 by appointing his friend Dmitry Medvedev to the presidency while he became prime minister, Moscow political circles have speculated about his return. Now that this uncertainty has been cleared up, the chattering classes are wondering what the third (and likely fourth) Putin term will bring.
Things have not gone well thus far – the very announcement was botched, taking not only the public by surprise, but also the most senior government officials.
The decision that Mr Medvedev would take over as prime minister next year, meanwhile, provoked a row with Alexei Kudrin, the finance minister and fiscal conservative long viewed as the guarantor of a stable economy, who was sacked after his angry announcement that he would not serve under Mr Medvedev. In effect, it was a decision to trade a political crisis for an economic one and Mr Kudrin’s departure has rattled markets at a time when confidence in Russia is low.
The stock market has lost about 21 per cent of its value so far this year, entering the realms of a bear market, while the rouble was down 8 per cent in September against a eurodollar basket of currencies, due partly to global turmoil and partly to increased perceptions of risk in Russia. Only billions of dollars in hard currency sales by the central bank have kept it from falling further.
However, Russia remains a fundamentally healthy economy with low sovereign debt of 9 per cent of gross domestic product and a budget that could balance this year – provided oil and commodity prices remain high.
Over the long term, however, Mr Putin’s return puts a question mark over Russia’s future, especially privatisation plans that could transform the economy from one mainly state owned to one with a more vibrant private sector in which competition could flourish.
Most economists see further reform as vital to avoid a repeat of 2009, when a global financial downturn hit Russia extremely hard and GDP fell 8 per cent, further than any other G20 country. Since then, the economy has limped along anaemically, and the growth forecast has been revised downwards by the World Bank to 4 per cent from 4.4 per cent.
“The 4 per cent growth we have now is mostly the result of good anti-crisis measures and high growth rates in Asian countries. The anti-crisis measures can’t last forever and growth [in Asia] is not expected to be as high as it was in the last two years,” says Arkady Dvorkovich, a senior aide to President Medvedev.
Reforms such as privatisation have been undertaken cautiously, partly because of the need to build consensus in government, and partly due to concerns for social stability.
“It’s always desirable to do things faster, but first we should make sure that we do no undermine stability,” says Mr Dvorkovich. “Reforming too quickly would put millions of families at substantial risk.”
Raising investment is a priority for the Kremlin, though this is proving more and more elusive, except in the oil and gas sector, still hugely attractive, as made clear by an agreement between ExxonMobil and Rosneft to explore for oil in the Arctic Sea.
Foreign direct investment was $42bn in 2010, according to ministry of economy figures, smaller than both China and Brazil, and Putin’s declared goal is raising this to $70bn.
Stanislav Voskresensky, deputy minister of the economy, says growth in the past decade was primarily about high oil prices and spare capacity left over from Soviet days.
“In the next 10 years, however, growth will be about increases in efficiency and productivity,” he says. “Russia has a peculiar advantage in that it is very inefficient, so there is plenty of room to become more efficient.”
Increasing productivity is a good argument for privatisation, which economists agree is essential to breathe life back into a stagnating economy.
“The thing that the Russian economy lacks most is competition,” says Mikhail Shamolin, CEO and president of Sistema, a large Moscow-based investment company. “Once there is competition, there is the answer to inflation and to the high cost of capital. It all starts with increasing competition, and the only way you can do that is to decrease the role of the state,” he says.
Few people doubt that the tempo of reforms will be slower under a Putin presidency than they would have been under a Medvedev one, but Mr Putin’s priorities are still a matter of guesswork.
Some believe he favours a form of authoritarian capitalism such as the system that flourishes in China, and that privatisation would threaten the perks and vested interests of a corrupt bureaucracy.
Economists Sergei Guriev and Oleg Tsvininski wrote in a September 27 editorial in the newspaper Vedomosti that the main danger of a return by Mr Putin is that the state may view losing control over the economy as an unacceptable risk, and hesitate to liberalise. “The ruling elite prefers to remain in control of a stagnating economy – having the largest slice of a smaller pie – than risk losing power,” they wrote.
Others believe Mr Putin is, in his heart of hearts, a liberal, pointing out that, despite the Kremlin’s nationalisation of a number of private companies, Mr Putin is also a moderniser and liberaliser of sorts. He legalised the sale of land, got rid of capital controls, and reformed the tax system during his first two terms as president.
They point out that Mr Medvedev’s liberal policies, such as kicking ministers off the boards of state companies, were undoubtedly discussed with, and approved by, Mr Putin.
Mr Putin’s recent statements suggest that he has been sending the message that he, like Mr Medvedev, sees the state’s role in the economy shrinking. During a September 16 speech to investors at a conference in the southern town of Sochi, Mr Putin said: “We are not going to build state capitalism. If we are concentrating on certain resources, we do so exclusively to ensure the recovery of this or that industry. But we are not going to stay there for good.”
Much will depend on the price of oil, which seems inversely correlated with Russian democracy and reform. A fall in the oil price could put pressure on the Kremlin to liberalise both economically and politically, much as it did in the 1980s and 1990s.
Unless Mr Putin comes under unprecedented pressure, there is little hope for reform of Russia’s authoritarian political system. In his first two terms, he brought parliament to heel, had several prominent businessmen exiled or jailed, and established direct Kremlin control over much of Russia’s mass media.
“Political reforms are now off the table,” says Igor Yurgens, head of Insor, a liberal think-tank and an economic adviser to Mr Medvedev.
However, not everything in Russia is under the Kremlin’s control. Russians are richer, more middle class, and less patient than they were when Mr Putin first took power in 2000. At that time, exhausted by a decade of democratic reforms under the erratic President Boris Yeltsin, they were relieved to have a firm hand restoring order.
The urban middle class gets much of its information from the internet, works in the private sector and speaks foreign languages. Keeping these talented people from emigrating may force the Kremlin to change the way it governs.
Some believe that “Putin 2.0” as he is known, might surprise everyone. “He will have to show everyone that he is not power-hungry, that he has not come back just to strangle our freedom some more. He will be under pressure to show that he is good,” says one former senior Kremlin official.
Source: ft.com