Can Russia reform?

Russia is a great power whose interests on the world stage are to be reckoned with. We know this because the country’s politicians and state TV presenters keep telling us so. Yet the Russian economic challenge Russia is facing is well known.

Current projections for the next few years point at 1.4% annual GDP growth, which is below the 3% the Kremlin said it would like. In attempt to boost economic prospects, experts have come up with two main strategies. Best measures will then be included in the final strategy that will be implemented during the next presidential tenure (2018-24).

What is to be done

Alexei Kurdin, a former finance minister and a head of Centre for Strategic Research Foundation (CSR) sees solution in structural reforms, privatisation, investment in human capital (i.e. in health and education) and technological modernisation.

He finds his rival in Sergei Titov, ombudsman for entrepreneurial rights and a head of Stolypin Club, an expert group. He diverges with Kudrin on two main issues. First, Titov wants to use additional finances to spend on helping the businesses, not investing in ‘human capital’. Secondly, Stolypyn Club is more relaxed about expanding monetary emission, or ‘Quantitative Easing’.

Both economists argue for government’s share in the economy to be reduced and for the rule of law to be enforced properly by independent courts. They also concur on the need to mend relations with the West.

Present debate has mainly focused on the two plan’s differences, namely on monetary policy. However, it’s also worth reflecting on whether wider initiatives endorsed in both plans can be reconciled with the Kremlin’s agenda. When it comes to reforming the economy, devil is not always in the detail. There are more conspicuous factors inhibiting progress.

The price of reform

The problem of nepotism and aggressive rent-seeking (bribes, unlawful seizure of capital; non-market transactions) is not a case of a few rotten apples. Such behaviour amongst oligarchs and security elite (so-called ‘siloviki’) is widespread. The absence of effective European rule of law is also conspicuous. It is these challenges that stand in the way of Kudrin’s vision of entrepreneurial society, most obviously via increasing the risks of doing business. The costs for Titov’s plan of state’s assistance to key industries will also balloon due to the corruption and inefficiency.

Yet control over strategic industries and over capital and oligarchs is crucial for Putin. He remembers the political tumult of the 1990s, when the money flowed more freely, cultivating opposition parties and media. The state could not order big businesses – including within the oil sector – into the direction it wished.

All that was put an end to in 2001. Then Putin and oligarchs concluded a so-called “kebab agreement”. Post-perestroika Gastbys agreed to curb their political ambitions. In exchange the government closed its eyes on how much (and by what means) they could acquire wealth. Why would Putin do away with this arrangement now, when political tensions, if anything, begin to escalate?

Another challenge that looms large is sanctions imposed by the US and the EU. Isolation from the Western imports in key spheres will, according to Titov, “make the task of Russia’s technological modernization virtually impossible”.

It remains doubtful whether Putin will be willing to make concessions on foreign policy, namely on Ukraine, which remains the main stumbling block. Breaking the ‘Crimea consensus’ that has rallied the country around the flag is also something the president would entertain with reluctance. The West, in its turn, is not ready to accept the former USSR as Russian ‘sphere of influence’. The Kremlin also considers it imperative to respond to the NATO’s strengthening of its Eastern borders. That means more money on defence and less on education and infrastructure.

The third way

Modern Russia is the house that Vladimir Putin built. If he wants a renovation, it will prove to be an arduous task.

Thus, the most plausible scenario involves both Titov and Kudrin adjusting their ambitions in line with the president’s more realistic expectations. Putin will then cherry-pick a few technical proposals that will then be incorporated in largely conservative strategy put forward by the Prime Minister Dmitry Medvedev. That is also where, according to some reports, current deliberations are leading.

It’s not like we haven’t seen it before. As Russia’s former finance minister Andrey Nechaev noted, something similar took place in 1990, when Gorbachev asked Prime Minister Nikolay Ryzhkov to develop a roadmap to help the Soviet economy adapt to free market. In the end, the Kremlin fused the bold programme of Grygory Yavlinksy with the government’s own plan. The result was a dog’s breakfast.

The road not taken?

There is a slim hope that Putin will go for a more ambitious vision of change, appointing a new figure to the post of Prime Minister or a reform czar to deliver this bold agenda. Kudrin was at some point touted as a candidate for this role. He has close personal ties with the president: the two even shared a flat when Putin just came to St Petersburg to launch his political career. Putin’s backing could help the reformist to fend off challenges from interest groups or even rivaling Kremlin’s towers. It could also give impetus to business constituency in both the West and Russia to lobby harder for sanctions relief.

Hope dies last, of course. But I wouldn’t hold my breath.