Even After 'Lost Decade' Putin Isn't Ready to Fix the Economy

With Russia mired in what turned out to be the longest recession in two decades last year, Vladimir Putin won plaudits from investors by tasking former Finance Minister Alexei Kudrin with drafting an economic program for 2018 to 2024, which happens to be the next presidential term.

Kudrin, who is widely credited with achieving record results in the first half of the Putin era, submitted his plan Tuesday, just before the president’s annual pitch to investors in St. Petersburg, where both men got their start in politics.

The new blueprint contains many of Kudrin’s old recipes for reviving growth, such as cutting the state’s role in the economy, curbing the government’s addiction to oil, investing in education, modernizing infrastructure and improving ties with the West to boost access to technology and stimulate trade.

But while policies addressing many of these issues have succeeded before, even Kudrin concedes the chances of Putin adopting his entire package are remote. The reason, he said in an interview, is that such measures would eat away at the Kremlin-centric model that Putin built back when the price of crude was double what it is now. That system rewards people closest to power, creating a network of increasingly wealthy supporters resistant to change.

“A lost decade,” is how the outspoken economist characterized the last 10 years, when growth averaged just over 1 percent a year, a fraction of the almost 7 percent reached during Putin’s first two terms. “Russia, catastrophically, is losing time,” Kudrin said. “Unfortunately, authorities are only slowly understanding that structural changes are necessary.”

While Putin has long embraced many of Kudrin’s goals publicly, the Kremlin’s actions tell a different story. State companies have only become bigger in the 17 years since Putin came to power and crude remains the lifeblood of the economy. Detente with the U.S. and European Union remains a remote prospect.

While Putin hasn’t announced his intention to run for what constitutionally would be a final, six-year term, he’s already preparing for a campaign that is widely expected to meet little resistance. Kudrin said he’s hopeful the man he’s worked with since their days in the St. Petersburg mayor’s office in the 1990s will adopt a less cautious approach in the new term.

But so far the signs aren’t good. After receiving Kudrin’s plan, Putin ordered his longtime adviser to work with a pro-business group to merge the two sometimes contradictory programs. A separate government proposal was also presented to Putin earlier in May. From that combined effort, the president’s staff will extract a final plan, according to Kudrin.

‘Authoritarian Modernization’

In his keynote speech at the St. Petersburg forum on Friday, Putin is expected to repeat his usual calls for opening up the economy and stimulating growth. But even government insiders said there’s no sign the reform pledges will be any more likely to be implemented than previous calls to action, which rarely made it further than the vast conference hall where he holds court every year.

“There’s no reason to believe things will be different this time,” said Andrei Kolesnikov of the Moscow Carnegie Center. “All previous efforts at authoritarian modernization in Russia have failed and this one will too.”

The recent rebound in oil prices and recovery in Russia’s economy have further eroded whatever sense of urgency the Kremlin may have felt. After seven consecutive quarters of contraction, growth resumed in the fourth quarter of 2016, though just 0.3 percent. Officials now expect 2 percent growth for this year and a smaller budget deficit than first forecast.

And though western sanctions remain in place, the Finance Ministry has been able to sell Eurobonds via local banks and another sale is currently being prepared. Demand is expected to be strong as foreign investors slowly return, and economists say any additional easing of tensions with the U.S. that might come from Donald Trump’s administration would only speed that process.

Fading Fortunes

But even the sustained, 3 percent growth that Putin wants is barely enough to keep Russia from sliding further in the ranks of leading economies. That’s been one of Kudrin’s key arguments for reforms in his meetings with Putin over the last year, according to people familiar with the conversations: Russia is falling behind, putting at risk the geopolitical heft Putin so values.

In the last two years, Russia has dropped off the list of the 10 largest countries by nominal gross domestic product and is now on par with Australia, which has just a sixth of the population, and South Korea, World Bank data show.

At the Kremlin session with Putin, Kudrin reiterated his argument that Russia is at “the end of the line” and must reform to achieve lasting growth.

But Putin said he hadn’t decided whether to accept Kudrin’s program or pick and choose from it and others drafted by the government and Boris Titov, the Kremlin’s business ombudsmen. Kudrin and Titov say their programs are incompatible, since the former minister’s is based on tight money and small deficits and the lobbyist’s calls for monetary and fiscal easing to spur growth.

“Plans for economic development must be clear and realistic,” Putin said.

Perks of Power

Kudrin said no final deadline was set for the joint proposal, so some of the approved policies may be announced before the March election, while others may be included in a strategy document that will be released later.

Despite a sharp drop in incomes over the last few years, opinion polls show public support for Putin at a near-record. Anti-Kremlin protests in recent months have been limited, with wider political opposition muted by the security forces and the Kremlin’s monopoly on television.

“The authorities won’t risk fundamental changes now because there are too many people around Putin who have no interest in them,” said Yevgeny Yasin, a former economy minister and one of the driving forces behind Russia’s transition from communism to capitalism. “Reforms would deprive the ruling elites of all the privileges and benefits they currently enjoy.”

To contact the reporters on this story: Evgenia Pismennaya in Moscow at [email protected], Stepan Kravchenko in Moscow at [email protected], Ilya Arkhipov in Moscow at [email protected].

To contact the editors responsible for this story: Gregory L. White at [email protected], Brad Cook, Paul Abelsky