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New tandem — same old problems

June 2012

On May 7th, 2012 Dmitry Medvedev passed along the torch (as the Russian president) to Vladimir Putin. How did the economy fare during Dmitry Medvedev’s four year presidential term? What tasks stand before Vladimir Putin, the three-time winner of presidential elections?

Dmitry Medvedev: no breakthrough happened

Now it is fair to say that no economic breakthrough happened in Russia during Dmitry Medvedev’s presidential term. Russia has not managed to ‘wean itself off its oil addiction’ since its economy is still completely strapped down to the raw materials market.

© RIA Novosti, Ekaterina Shtukina

Dmitry Medvedev,
Prime Minister of the Russian Federation

All of Medvedev’s brainchildren, mainly modernisation and innovations, have not really materialised. The country’s political institutes and the leaders’ management ability do not make Russian investors (who prefer to register their businesses in off-shore zones) or their foreign counterparts feel at ease.

According to the Chairman of the VTB Supervisory Council and the ex-chairman of the Central Bank of the Russian Federation, Sergey Dubinin, “political institutions do not make investors feel at ease. The fact that Cyprus is one of Russia’s largest foreign investors demonstrates this feeling very clearly. Taking a look at off-shore companies on the books, one can see that the majority of our major companies have their parent companies there. The lack of confidence in Russia’s system of management has become a political issue and it can only be resolved through political decisions. He adds that first of all it is necessary to ensure that private property is properly protected from a legal, social and political standpoint.

During the ‘Medvedev’ years, the country’s GDP rose by 5.5%. This is not exactly a figure one should be proud of. For comparison purposes, according to IMF (International Monetary Fund) statistics, China grew by 44.2%, India by 34.1%, Brazil by 15.6% and South Africa by 8%. It turns out that Russia was rated last among the BRICS countries.

When comparing Russia with other CSI (Commonwealth of Independent States) countries in terms of GDP growth, the former does not exactly come out on top (it took 9th place in this category). Turkmenistan is the leader with a 52.4% increase in GDP. But affairs are worse in Ukraine where the GDP shrunk by 4.5% over the past four years and Armenia saw a 2.1% decrease.

The Russian Federation is slipping in the majority of world ratings. In particular, for the 2011-2012 rating on the Competitiveness Index we fell to 66th place, compared to 51st place in 2008-2009.

Russia’s progress in fighting corruption, creating a world financial centre in Moscow and minimising government involvement in the economy through privatising numerous large companies can be evaluated as unsatisfactory.

An increase in investments in infrastructure did not occur; despite the fact that the lack of solid infrastructure is exactly what is keeping investors away. Additionally, according to the approved three-year budget, the proportion of expenses under the category “The National Economy” is going to decrease from 16.2% to 11.3% in 2014, meaning that the government does not consider investing in infrastructure to be a priority.

At least we joined WTO and boosted pension payments

The biggest accomplishment to note was the decision (after an 18 year negotiation process) for Russia to join WTO.

Aside from that, in 2011 Russia’s inflation level (only 6.1%) was at an all-time low.Also, in 2009-2010 pension payments for Russian retirees increased dramatically. Pension payments rose, on average, by 2.5 times due to their accelerated indexation. As a result of this, the replacement coefficient (the ratio of the average pension to average salary) reached the desired 40% which is recommended by the International Labour Organisation.

The economic crisis of 2008 hit during Dmitry Medvedev’s presidency. Due to resources from the Reverse Fund and the National Wealth Fund the government was able to prevent the total collapse of the country’s banking system, support numerous large companies and increase unemployment checks for those who were impacted during this time of lay-offs.

Vladimir Putin will define Russian modernisation

Vladimir Putin will need to take over the reigns from Dmitry Medvedev regarding the latter’s modernisation project. Without an overhaul of the economy it will be impossible to increase Russia’s competitiveness in the world market and labour productivity which is currently three times lower than the level in the USA. Nikita Maslennikov, an advisor for the Institute of Contemporary Development states that “the modernisation programme is part of the main agenda for the years to come, but Russia is lacking the technology for it”.

© RIA Novosti, Aleksey Drujinin

Vladimir Putin,
assumed office as the President of the Russian Federation

Additionally, government officials will need to not only develop new technology, but also outline where Russia has a competitive edge. Sergey Dubinin points to other countries by saying that “China’s competitive edge was due mostly to its high labour productivity and cheap labour power.

One cannot forget the important task (standing before Vladimir Putin) of attracting investments into the country. The 2011 inflation rate of 6.1% should serve as a strong argument persuading businessmen to invest in the Russian economy. Meanwhile, capital outflow last year, according to the Central Bank of the Russian Federation, reached 80.5 billion dollars, while 35.1 billion dollars went abroad in the first quarter of 2012. As one can see, investments are flowing out of Russia, not into it. This year’s first quarter figures even beat the previous record from the first quarter of the crisis year 2009 (when capital outflow amounted to 35.0 billion dollars).

Experts believe the problem is rooted in an unsavory investment climate, in other words, the imperfection of the legal system, high level of corruption, controversial law enforcement practices and poor infrastructure.

The government has already defined the ‘locomotives of modernisation’. Arkady Dvorkovich, the Assistant to the President, declared that in the next few years the administration will pay careful attention to IT, pharmaceuticals, the automotive sector, the agriculture and the energy market, including nuclear.

Budget policies will be tightened

Expenses on social programmes will be cut. In the pre-election years the government overextended itself a bit by increasing pension payments by a third and significantly boosting salaries for members of the service and policemen. In the coming years teachers and doctors have been promised yet another base pay raise. It turns out that budget expenses are rising much quicker than revenue. Moreover, the ‘critical and irreversible obligations’ (those which the government has to uphold to keep society under control) have also increased.

The need to constantly transfer funds into the Pension Fund’s budget has been putting a strain on the federal budget for quite some time now. It is impossible to solve this funding problem for making pension payments without overhauling the pension system. Vladimir Putin has to make a decision regarding this matter and may have to either increase the retirement age, reconsider the minimum time on the job which grants one the right to receive a pension or turn away from the mandatory individual pension system. The government is now looking into a few different reform options.

Nikita Maslennikov from the Institute of Contemporary Development says that a “reset” of the pension system is due. He continues by stating that “it is unacceptable to keep racking up budget expenses because if this is to continue Russia’s economy will not be able to become innovation-oriented. Obviously, how can one even begin talking about investments in Russia’s economy if the government runs up a debt of 25% in order to fulfil its social obligations”?

Migration policies to be changed

Additionally, Natalya Akindinova, the executive director for the Fund for Economic Research at the “Centre for Development” believes that the government needs to seriously tackle the “brain drain” issue which manifests itself in a situation where the smartest and most-qualified workers leave Russia because they feel they cannot find high-paying work in their home country.

More often than not, migrant workers in the Russian Federation are not highly-qualified and will not modernise the country’s economy. Ms. Akindinova notes that “currently the demand for labour power is met by a worsening supply of unqualified migrant workers”. She concludes that it is necessary to keep the best of the best in the country and attract qualified human resources from other countries to increase labour productivity.

Over the course of the next six years if Vladimir Putin manages to launch a full-blown modernisation of the economy, attract investors, strike a balance between budget revenue and expenses while ‘keeping the peace’ in society, then it will be possible to evaluate yet another one of Putin’s presidential terms much more positively than Dmitry Medvedev’s job as president.

Mariya Selivanova
Economic observer for RIA Novosti,
Exclusively for Russian Survey

RS Pall

The following tasks stand before Vladimir Putin at the beginning of his term.

Modernisation begun during Medvedev’s rule

Attracting foreign investors, put a stop to capital outflow

Reform the pension system

Keep qualified labour power in the country

Will the Putin administration find an effective solution to these problems? Vote on Russian-survey.com, we value your opinion!