Only through bold reforms can Putin restore Moscow’s economic shine
Russia’s president has never been shy about his taste for physical challenge. So it was no surprise to see him beat a personal record last week, when he managed to stretch his annual call-in marathon over four hours and 46 minutes. Answering questions on anything from pensions to foreign policy, Vladimir Putin spared no words to reassure his public that he is still Russia’s “good tsar” – the stalwart of his people’s welfare against vested interests and global headwinds.
No doubt his audience needed convincing. Worries that Russia’s economy is stalling have recently re-emerged: the finance ministry slashed its 2013 growth forecast from 3.6 to 2.4 percent last month, after reporting a fifth consecutive quarter of slowdown in March. This is hammering local markets, sapping Putin’s approval ratings, and reviving memories of early 2012 – when stagnating incomes and electoral grievances led many young Russians to take to the streets.
It was always going to be difficult for Moscow to match last year’s numbers. The upswing in growth of early 2012 had much to do with a public spending boom unleashed prior to the March presidential elections, so 2013 started from a very high base. Nor is the economic picture entirely bleak: record low unemployment and reasonable inflation are buoying consumer sentiment, which is supporting lending growth and retail sales.
But the slowdown could soon get worse. Last year’s spending spree has pushed the budget break-even oil price to $110 a barrel, leading the government to tighten the purse strings; with oil now below $100 a barrel, this fiscal retrenchment is likely to accelerate. Most worryingly, any stimulus Moscow can still afford seems to be yielding diminishing returns. Despite high oil prices in the first quarter, industrial output recorded a 2 percent drop in February – its first decline since 2009.
Putin is not blind to the danger. He has suggested dipping into the country’s rainy day fund to finance public spending, and talks of loosening monetary policy when the central bank changes presidents next June. But both are likely to fail: new episodes of government largesse, given the low competitiveness of Russian goods and the stable rouble, will boost imports rather than domestic production; Moscow’s already tight production capacity means that monetary expansion will only result in higher inflation.
What Putin needs to do instead is get started with long-overdue structural reforms. He should put his privatisation program back on track, to foster productivity gains and innovation in an economy dominated by state-owned companies. He needs to reduce red tape and corruption to encourage private investment in neglected industries. And he should further improve the business climate by protecting property rights and strengthening the judiciary.
That will surely require a lot of convincing in the Kremlin, where conservative forces are gaining ground. But if he wants the rest of Russia to stay tuned for much longer, Putin must now show he can find real answers to the country’s problems.
Photo Credit: Lada Ray