Expert Speak Raisina Debates
Published on May 16, 2018
As Putin begins new term, will he focus on reforms to mend economy?

On 7 May, President Vladimir Putin was inaugurated for what becomes his fourth overall term as the Russian President. His nominations to certain key leadership positions in the presidential administration as well as the new cabinet will provide a useful signal about the priorities of the new government. The challenges facing Russia in the near future will be primarily economic and will depend considerably on its external environment, especially the continued imposition of sanctions on its individuals and entities by the United States and its allies.

On the day of his inauguration, President Putin signed a decree outlining the government’s developmental goals for the next six years. While many of the goals were understandably aspirational, others demonstrated a need and willingness to spend more on infrastructure, health and education. What has also been evident is the general agreement over the need to diversify the sectors of the economy. The country is dependent on resource rents for a large part of its revenues — oil and gas sales form up to a third of the revenue source for the government’s annual budget. As oil prices have remained sufficiently high, there was no urgent need to undertake efforts at diversification. But the over-reliance on oil and gas rents does, however, leave the economy vulnerable to external shocks, and given the thorny relations with the West, it is likely some efforts will be made to spur development in areas other than hydrocarbons.

How this might be done remains an open question. Any measures taken in this regard may not necessarily translate into a reduced role of the state in the economy. The re-appointment of Prime Minister Dmitry Medvedev, while providing a level of continuity between the two governments, signals that he continues to enjoy the support of the President despite allegations of corruption. This may also hint at the direction in which efforts at modernisation and diversification are headed. It is notable that during his tenure as President, he had acknowledged the need to modernise the economy. He has in the past enacted policies that pursued a state-led approach toward encouraging innovation and entrepreneurship. His efforts followed similar attempts by the state to expand into other areas with the establishment of a state-controlled fund for growing the nanotechnology sector. Rosnano was established in 2007 with the goal of turning developments in nanotechnology into viable businesses. Another example is the Skolkovo Innovation Centre, a business park for technology firms, which was initially announced by then-President Medvedev in 2009. It is also likely that some measures that have been put off, such as raising the retirement age — currently at 60 for men and 55 for women — will be implemented to reduce the strain of the pension system in an aging country. Many analysts, however, consider these short-term measures and advocate for longer-term institutional changes.

Although the full composition of the rest of the cabinet has not yet been announced, there is a likelihood that Alexei Kudrin, a former long-serving finance minister under President Putin, will play a role in formulating economic policy for the next government. He and other liberal economists have advocated for greater liberalisation have called for even more widespread reforms, as well as greater investments in ‘productive’ programmes such as health, education and infrastructure, something which was reflected in the decree signed by President Putin. He has been an influential voice, advocating policy proposals in his capacity as head of the economic affairs think-tank, the Centre for Strategic Research. He is an advocate for reallocating funds into productive sectors, cutting certain ‘non-productive’ defence expenditure, made possible as Russia winds down its multi-year military modernisation programme. He may also have to tackle the state’s role in the economy. Russia scores poorly when it comes to protecting property rights according to the World Economic Forum’s Global Competitiveness Report, and so improving the institutional environment in order to restore proper market mechanisms and incentives to make it a more attractive destination for long-term investments, something Kudrin has advocated for, will be a key task.

He was initially tapped to play a central role in the presidential administration, but was eventually appointed the head of Russia’s Audit Chamber. There was the hope that his role would have involved improving economic relations with the West. This more than likely meant easing the pressure of sanctions in addition to shoring up ties with the European Union, with whom Russia shares significant trade relations. The recent sanctions seem to have had a stronger impact than previous ones, especially in the aluminium industry, and preventing further sanctions through outreach efforts may also be a priority. However, he is now charged with tackling corruption, and his appointment can be seen as a way to give him a say in decision-making, while balancing the various competing interests in Russia’s domestic sphere by not change things too drastically.

However, it remains to be seen what reforms are proposed, and whether they will be implemented fully. Polls show growing dissatisfaction about the state of the economy, particularly growing income inequality, and salaries and pensions more generally, so the government may also have to deal with an increase in public demonstrations across the country. There is therefore the chance, however unlikely, that given the continued dependence on natural resources, in the event of any significant external or internal shocks, the state may respond by increasing its hold on the economy and private enterprise.

As much as the current government’s level of support lies in the personal appeal of President Putin as well as the country’s assertiveness in the international sphere, it is also contingent on ensuring a reasonable standard of living for the public. The incumbent President enjoys the approval of a large support base which may make it easier to undertake deeper reforms, and may also provide a platform and mandate for any potential successor. It is early, but it is clear that something has to change.

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Christoph Benn

Christoph Benn

Christoph Benn Director Global Health Diplomacy Joep Lange Institute

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