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It's been ten years since Vladimir Putin assumed power in Russia. So what has he achieved, and what does the future hold? David Stevenson reports.
What's up with Russia's economy?
Everything. "The past year has cruelly exposed the weaknesses of Putinomics, showing how it relied on rising commodity prices and cheap foreign credit," says the Financial Times's Lex.
The economy began shrinking late last year with GDP crumbling by an annual 10.2% in the first seven months of 2009. Despite a 0.5% seasonally adjusted expansion in July, any recovery is set to be shaky. "While the recession is over, the crisis hasn't yet been overcome," says the deputy economy minister, Andrei Klepach. "The revival still isn't robust or intense."
Indeed, output may shrink by 10% this year, making Russia one of the former Soviet bloc's laggards. Meanwhile, "the Kremlin's war chest is vanishing fast as the budget deficit rises to 9.4% [of GDP] this year", says The Daily Telegraph's Ambrose Evans-Pritchard. "The picture could turn ugly if there is a second leg to the global downturn."
Did Putin start this badly?
No. Ten years ago this month Vladimir Putin, an obscure ex-KGB man, took up the reins as Russian prime minister. By the end of 1999, following Boris Yeltsin's surprise resignation, he'd become acting president, where he stayed until he returned to the prime minister's office last year.
Examples of his reforms include the introduction of a 13% income tax flat rate and new land laws. "Many of Putin's economic reforms are impressive," says Michael McFaul in The Putin Paradox. Inflation and unemployment fell, most foreign debt was repaid, while poverty more than halved. Nominal GDP (annual output) leapt from $200bn to well above $1,000bn and average wage levels soared from $100 to $600 a month, says Lex.
How bad was pre-Putin Russia?
"An economy on the brink" was how the BBC described Russia in 1998, the year before Putin's first prime ministership. "The weak financial system had been hit by the spill-over from the Asian financial crisis", while oil export receipts were collapsing. The state deficit was soaring and Russia was paying interest rates of up to 150% and also had to borrow from the International Monetary Fund (IMF).
So what's gone wrong under Putin?
For all that things have improved since 1998, much of it has been down to over-reliance on oil and gas exports. This 'resource curse' pushed the rouble to uncompetitive levels, "throttling what remained of Russian industry", says Evans-Pritchard.
President Dmitry Medvedev reckons the country's huge reliance on energy and commodity exports can't continue. "The situation is outrageous and has been for a long time. We continue to ship raw timber for export, and processing isn't being developed," he says.
"Medvedev's comments are a veiled attack on Putin, who has long viewed Russia's energy resources as the spearhead to its return to superpower status," says Evans-Pritchard.
Any other problems?
"One of the major obstacles to conducting business in Russia is the all-pervasive corruption," says Harvard professor Richard Pipes. "Because the government plays such an immense role in the economy, little can be done without bribing officials."
A recent survey by Russia's Ministry of the Interior revealed – without shame – that this year's average bribe has nearly tripled compared to the previous year. Further, businesses can't rely on courts to settle their disputes. Lastly, this month the IMF highlighted the instability of Russia's financial system.
"There's a risk that banks will continue to struggle to adjust balance sheets, stifling credit expansion and impeding a recovery. The central bank should... be more willing to compel bank closures and consolidation as banks' capital deteriorates and the level of problem loans increases."
The US vice-president, Joe Biden, recently went further: "Russia has... a banking sector that's not likely to be able to withstand the next 15 years."
What's stopping reform?
Vested interests. Even minor government officials "have aped the state-led asset grabs of their superiors", says Lex. Instead of embracing Medvedev's bold reform agenda, "the best that may be expected is probably a kind of Putinomics-plus, involving limited efforts to build more refineries, smelters and timber processors. Not the best start for Medvedomics."
Indeed, "Moscow is starving itself of foreign technology and investment, but Putin may not care", says Philip Stephens in the FT. "Perhaps the braggadocio that drives him tells him all is well as long as the world shows Russia respect. In that case, Russian power will wither as surely as will Putin's physique."
So are Russian shares a disaster?
Surprisingly, no. Russia's MICEX index is up 82% this year in rouble terms; that equates to a 71% US dollar return. It's been helped by investors' growing appetite for high-risk assets, which has driven the global stockmarket bounce since mid-March.
Yet Russia remains a "heaven or hell" market, says Peter Lucas at RBC Wealth Management, without the broad growth scope of other big emerging countries. Further, Russia has dropped this year to 120th – from 112th in 2008 – in the World Bank rankings for ease of doing business in individual countries.
This highlights the "issues investors have to deal with in a system where the mercurial judicial system provides little protection", says Patrick Sherwen of Citywire.
We'd avoid it in favour of other emerging markets with healthier prospects and fewer risks.
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