Putin must finally embrace reform: economists

26th September 2011, Comments 0 comments

Vladimir Putin must push through massive economic reform to spare Russia decades of stagnation but his commitment to ending the country's dangerous dependence on oil is unproven, analysts said Monday.

After confirming his planned return to the Kremlin next year, Putin revealed policy moves including tax hikes for the rich but notably did not grapple with systemic problems such as the economy's chronic lack of diversity.

"Putins acceptance speech implied that he intends to continue with the plan to drive modernisation of Russia, which we see as incremental reform rather than stagnation or radical change," said Citi in a note to clients.

"On the positive side it puts into power a stronger character who we believe is likely to be more able to tackle the issues faced by Russia," said New-York based group.

The negative is that Putin had thus far produced "few new ideas to back up the laudable idea to increase Russias growth rate," Citi said.

The first Putin presidency of 2000-2008 -- an era of record crude prices -- saw Moscow officials begin referring to their market as a "safe haven" impervious to contagion from Asia and the West.

That optimistic bubble burst when the economy shrank 8.9 percent in 2009 and then struggled to reach five-percent growth ever since -- figures that veteran Finance Minister Alexei Kudrin warns will leave Russia only further behind.

The job facing Putin is further complicated by the spending promises he made in the run-up to elections and the vast funds earmarked for glory projects such as the 2014 Winter Olympic Games in Sochi and the 2018 World Cup.

"Putin is a committed supporter of social stability," the Vedomosti business daily said in an editorial. "So you should hardly expect serious budget spending cuts."

Yet pressure to reform is building from within as Russians grow increasingly tired of seeing their Soviet-era infrastructure crumble around them and planes crashing with alarming frequency.

Voters' outright anger at bureaucratic corruption meanwhile has reflected in in polling numbers that show Putin's ruling party struggling to keep its majority in December's parliamentary elections.

Some more upbeat local investors said the political and economic realities should force Putin into adopting a more spendthrift policy that gradually eliminates government waste while raising targeted taxes.

Current head of state Dmitry "Medvedev's potential role as prime minister will, we believe, be key in improving the investment climate in Russia," Renaissance Capital strategist Ovanes Oganisian said in a research note.

"We believe Medvedev and Putin, as prime minister and president, could work very well together ... and continue the reform agenda championed by Medvedev for improving the Russian investment climate (modernisation, privatisation and reform)."

Putin hinted on Saturday that he planned to hike property and consumption taxes on the rich while also raising the price of alcohol and tobacco to pay for welfare spending.

Some also said the end to suspense over who will run Russia for the next six -- and possibly 12 -- years should help boost investor confidence and seal cash outflows that reached nearly $50 billion in the past year.

"We believe that clarifying this issue sooner rather than later is a positive sign for financial market," Moscow's Alfa Bank said.

Yet many said the best guide to Russia's economic future may come from Kudrin -- a figure hugely respected abroad who was on the verge of quitting the government Monday.

"Kudrin does not seem to have a populist streak and seemed capable of launching painful pension reform ... and overhauling the inefficient health and education systems during the next parliamentary term," said Tatiana Orlova of Japan's Nomura group.

"At this stage, it is hard to say who else Mr Medvedev could offer to take his position in the new government."

For this reason, several analysts said they expected Putin to to find a role in a future government or administration to one of his most important assets in investors' eyes.

"We believe Kudrin's comment may be an early tactical step in negotiating his role in the new government," the Renaissance Capital investment bank said.

© 2011 AFP

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