The Hindu : Putin looks to turn the economy around

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Sunday, Mar 21, 2004

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Putin looks to turn the economy around

Vladimir Putin's top priority in the coming four years will be to restructure the Russian economy and build a diversified economic base for growth, says Vladimir Radyuhin.

Russia's President, Vladimir Putin, has his task cut out in his second term.

THE RUSSIAN President, Vladimir Putin's triumphant re-election last Sunday became a resounding confidence vote for his record in rebuilding the economy and reasserting Russia's status as a global player. The more than 70 per cent of the vote cast for Mr. Putin gave him a strong mandate to carry on his reforms.

Mr. Putin's second presidential term is likely to be different from his first term. While the past four years were a period of stabilisation and consolidation, the coming four years will see Mr. Putin push ahead with more vigorous modernisation of the Russian economy, society and politics.

By the time Mr. Putin took over from Russia's first post-Soviet President, Boris Yeltsin, in 1999, the country was in worse ruin than after World War II. Over 1990-1999, Russian industrial production fell almost 60 per cent, as against a fall of 24 per cent over 1940-1946.

Mr. Yeltsin's pro-market reforms reduced tens of millions of Russians to abject poverty, with the Government no longer capable of paying pensions and factories no longer paying salaries. By the end of 1999, Russia's foreign debt rose to close to 90 per cent of its GDP.

Despite his enormous constitutional powers, the President had little control over provinces that made the most of Mr. Yeltsin's call to "take as much sovereignty as you can swallow down." Governors ruled their territories as personal fiefdoms and regional parliaments adopted more than 20,000 local laws that flouted the Russian Constitution and federal laws.

Oil-rich Tatarstan and Bashkortastan had practically stopped paying taxes to the federal set-up, the industrial Sverdlovsk region mooted plans to introduce its own currency, while Chechnya declared full independence from Russia. The Russian Army was so weak that it miserably failed to restore Moscow's control over tiny Chechnya during the 1994-1996 war.

Mr. Putin began by reasserting the Centre's authority over unruly provinces. He divided Russia's 89 regions into seven zones under specially appointed administrators — presidential watchdogs tasked with reversing a decade of fragmentation. He pushed through reforms that stripped Governors of their seats in the Upper House, the Federation Council, deprived them of authority to appoint law-enforcement officials, and empowered the President to fire a Governor and dissolve a regional legislature if they refused to bring regional laws in line with federal legislation.

Mr. Putin also moved to tame Russia's oligarchs, a handful of business tycoons who had become omnipotent powerbrokers after bankrolling Mr. Yeltsin's re-election in 1996 in exchange for getting huge swathes of lucrative state property. But the oligarchs lost all taste for political games after Mr. Putin arrested Russia's richest man, Mikhail Khodorkovsky, on charges of fraud and tax evasion last year.

It took Mr. Putin two parliamentary elections to push the Communist-led opposition majority in the State Duma, the Lower House of Parliament, into an insignificant minority. Riding high on Mr. Putin's popularity, the pro-government United Russia Party swept the parliamentary election in December winning 306 seats in the 450-member State Duma. The Communists had to do with just 53 Deputies.

Mr. Putin restored Moscow's authority over breakaway Chechnya. Organised rebel resistance has been routed, a pro-Moscow administration has been elected and economic rehabilitation of the war-torn territory has been launched, even though the region remains a festering ground of violence and a source of terrorism.

It was merely three weeks ahead of the March 14 presidential poll that Mr. Putin completed consolidation of power by firing the Prime Minister, Mikhail Kasyanov, a protégé of Mr. Yeltsin, and appointing a coherent team ready to drive reforms forward.

In Mr. Putin's first term, the Government stabilised the economy and put it firmly on the path of growth. The country's GDP has grown by almost 30 per cent, inflation has dropped by two-thirds, real per-capita incomes have increased by half, and the number of poor has reduced by one-third.

However, growth has been largely driven by a windfall of high oil prices, while non-commodity sector industries have remained unreformed and stagnant. The gap between the rich and poor has widened and a quarter of Russians still live below the poverty line. The "growth without development," as one economist described it, threatens to reduce Russia's role in the global economy to a commodity appendage of the West.

Mr. Putin's top priority in the coming four years will be to restructure the Russian economy and build a diversified economic base for growth by channelling investment into manufacturing and high-tech industry.

A major effort will be made to expand small and medium-size business sector and services, which are best-positioned to create jobs, and cut poverty. The Government is busy finalising dozens of laws aimed at reducing the tax burden on the manufacturing sector and raising taxes on commodity exporting industries, closing tax evasion loopholes, and reforming the banking sector to make credit more easily available. Russians must brace themselves for some painful reforms in health care and municipal housing, although the appointment of moderate economists in charge of the Government — Mikhail Fradkov as Prime Minister and Alexander Zhukov as his deputy — is some guarantee that there will be no second round of ultraliberal shock reforms. Mr. Putin's declared goal is to double the size of the economy by 2010 and reduce the gap between the rich and the poor in a country where a quarter of people still live below the poverty line.

Foreign policy has a key role to play in Mr. Putin's plans to speed up economic revival. "The main goal of our policy is ... to secure favourable external conditions for Russia's growth," he said after re-election. He has considerably strengthened the foreign policy wing of his administration, shifting the Foreign Minister, Igor Ivanov, to the key Security Council, and replacing him with Russia's experienced United Nations envoy, Sergei Lavrov.

As he embarks on his second and last term allowed under the Russian Constitution, Mr. Putin has all power in his hands. The state machine is under his full control, Parliament is loyal and ready to approve laws proposed by the Kremlin, political opposition is weak and fragmented, electronic media are either owned or controlled by the state and most of the print media are quite cooperative.

Western media called it "managed democracy" and accused Mr. Putin of backtracking on the democratic gains of his predecessors, Mikhail Gorbachev and Mr. Yeltsin. However, their experiments with planting democracy in Russia have not been wholly successful.

Mr. Gorbachev's democratisation unleashed forces that not only swept him away but destroyed the Soviet Union. Mr. Yeltsin prided himself on being the "guardian of Russian democracy," but his democracy was eventually hijacked by oligarchic clans that used it to settle scores with one another and to dictate to the Government.

Clearly, democracy and civil society will take time to mature in Russia, given its long history of Tsarism followed by eight decades of Communism.

Mr. Putin must use such instruments for efficient governance as are available to him. If there is no established multi-party system or developed civil society at hand, "managed democracy" is the next best choice.

The biggest problem facing Mr. Putin along this road is to make Russia's unwieldy, corrupt and inefficient bureaucracy work for his modernisation plans. Mr. Gorbachev had good reason to believe that democratisation must precede economic reform in Russia, for he knew that several attempts made by Nikita Khruschev and Nikolai Kosygin to initiate pro-market economic reform had been torpedoed by the bureaucracy.

During his second presidential term Mr. Putin will have to negate some of the things he did in his first term. Until now, he sought to appease the bureaucracy to buy its loyalty while he tightened his grip on power. For his second term, he has prioritised an administrative reform designed to slash red tape and downsize the overblown bureaucratic machine. Even though Russia is much smaller than the Soviet Union, it has 50 per cent more civil servants. Corruption, which blossomed during the sell-off of public assets under Mr. Yeltsin in the mid-1990s, has since grown to crippling proportions. According to a recent survey, businesses are forced to hand out up to a half of their profits in bribes to various government agencies and services responsible for licensing, controlling and monitoring their operations. Corruption has deeply infected the police, the judiciary and the legislature.

Mr. Putin is relying on the security services as the least corrupted force to push forward reforms. Prime Minister Fradkov is believed to have a KGB background, like Mr. Putin himself, the Defence Minister, Sergei Ivanov, the Interior Minister, Rashid Nurgaliyev, and a host of other senior Kremlin figures. According to some estimates, over a half of Russia's top government jobs have been filled by people from security or military services.

Will "managed democracy" work as an instrument for sweeping modernisation of Russia? In a long-term perspective, probably no and Mr. Putin is aware of it. At his first post-election press conference he vowed to "strengthen the institutes of civil society" in Russia by promoting a vibrant multi-party system and free media. "This would lay a good basis for building an advanced economy," he said.

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