Oil
growth eases Putin
presidency By Robert M Cutler
MONTREAL - Vladimir Putin returns to the
Russian presidency on Monday with the prospect of
improved growth in the economy, yet he will be
aware that the 4% expansion recently forecast by
the International Monetary Fund (IMF) rests on two
very fragile legs - continued high oil prices and
the European Union's ability to stave off a
deepening crisis.
Putin headed his last
cabinet meeting as premier on Wednesday, when
ministers approved tax increases on natural gas
production, top-end motor cars and up-market
housing. The same day, he said Russia needed to
bolster foreign direct investment in the country.
The IMF last month upgraded its estimate
of Russia's economic growth for 2012 to 4% from
3.3%, bringing its forecast closer to
its view of last
September (4.1%), which it modified
three-and-a-half months ago in light of the global
slowdown. That is more optimistic than estimates
from within Russia itself, which tend to be under
3.5% and sometimes closer to 3%. The World Bank
last month forecast a decline in growth to 3.5%
from last year's 4%.
The IMF's optimism is
based principally on its anticipation of continued
strength in the world price of oil, with low
inflation from good harvests also helping. Besides
dependence on the world price of oil, the other
significant risk to growth in Russia is an
exacerbation of the crisis in the euro area.
If European countries suffer worse than
they already are, then Russian energy sales to
Europe would fall, possibly bringing about a
renewal of the recession there.
Russia
recently agreed to contribute US$10 billion to the
IMF for help to bail out the European countries
affected by the crisis. IMF managing director
Christine Lagarde notes that overall commitments
from IMF states should amount to $430 billion with
the European Union contributing nearly half that
amount.
Russia has failed to moderate its
dependence on hydrocarbon exports, which now
account for two-thirds of all export revenue and
nearly half the federal budget. Oil and gas
exports as a proportion of gross domestic product
(GDP) rose in 2011 to 19% from 17% in 2010, while
as a proportion of total exports they are around
20%, up from 15% at the turn of the century.
Russian manufacturing grew in April at the
fastest pace in more than a year as output and
employment rose and new orders accelerated, HSBC
Holdings said this week. Even so, March's
year-on-year growth in industrial production
overall fell to 2% from 6.5% in February, and
growth in electricity and utilities is also weak.
That means household spending, up 5.1%
year-on-year in the first quarter of 2012, leading
a 4.1% advance in year-on-year GDP, is upholding
the Russian economy.
Yet even household
spending is showing weakness, as the year-on-year
increase in March was down from 7.9% in February
to 7.4%. Unemployment for March was steady at the
first-quarter average of 6.5%, nevertheless higher
than the 6.3% for the past three months of 2011.
This whole perspective confirms that the
main problem of the Russian economy is
underinvestment, an affliction that has
characterized it for years, although last year,
US$52 billion worth of direct investment came into
Russia from abroad, nearly back to the
pre-financial crisis $55 billion it attracted in
2007.
The reforms announced three years
ago by outgoing President Dmitry Medvedev and his
then-finance minister Alexei Kudrin are still to
be set into final form and given a legal basis for
implementation; they have also been watered down
by endless discussions within the bureaucracy.
The position is reminiscent of the fate of
Soviet prime minister Alexei Kosygin's much more
modest proposed reforms of the Soviet system in
the mid- and late 1960s before the Communist Party
general secretary Leonid Brezhnev seized political
primacy in the early 1970s from what, up until
then was characteristically referred to as the
"Brezhnev-Kosygin regime".
Those reforms,
too, were batted around the bureaucracy and
diluted as a supposed consensus-building process
ending by sapping all progressive momentum from
the initial effort. Thus the interests of
personnel surrounding Putin, on whom he must
depend, complicate any moves in directions of
reform that he may seek to make.
Even if
Putin succeeds in ensuring long-term macroeconomic
stability, the recent institutional history of the
Russian political elite does not augur well
efforts to decentralize regulatory power to
regional and municipal authorities, and still less
for any effort to reform the central bureaucracy
or make it more efficient.
Such fairly
common-sense measures were advocated by Kudrin
before he was sacked by Medvedev last September.
Kudrin also urged government stimulation
of investment and growth; a reduced state role in
the economy and increased competition; improved
transport and other infrastructure; reduced
barriers to flows of goods and capital; higher
spending on healthcare and education; and
modernizing the labor market, with increased labor
productivity.
Putin's decision, announced
last week, to quit leadership of the United Russia
party no doubt indicates not just a lassitude with
the daily political grind but also a wish to
portray himself as above politics - just as the
Russian president is, according to the Russian
constitution, actually above and separate from the
three branches of government.
Unfortunately, the Russia economy's
increasing dependence on energy exports continues
to distort the sectoral structure of its economy
and capital flows, complicating optimal investment
policy.
It will not help Putin that the
institutions of governance on which he would
depend to "routinize charisma" and implement any
economic "reform" policies that he might actually
wish to seek, have their own claims to
bureaucratic legitimacy, and even have them
potentially against him.
Dr Robert M
Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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