Russia: Spreading The Oil Wealth

Putin is vastly boosting social spending. Will that sidetrack economic reform?

Is it a "new course" in Russia's economic policy? That's what Russian commentators are calling President Vladimir V. Putin's recent promise to spend at least $4 billion annually over the next few years to overhaul the country's neglected health and education systems and to provide subsidies for groups ranging from farmers and soldiers to aspiring young homeowners. Russia is the world's No. 2 oil producer. The President aims to use his windfall from soaring oil prices to boost the living standards of his people, especially low-income public employees. The risk is that Russia's oil wealth will distract Putin from finishing important reforms envisioned when he first took office in 2000.

For now, the spending surge looks like a smart political move. Elections for Russia's Duma, or Parliament, are due in December, 2007, and a presidential vote will take place in March, 2008. Putin wants his spending spree to show results before voters head to the polls. Since Putin can't run for reelection under Russia's constitution -- and he has emphasized that he won't attempt to amend it -- he is working both to secure his own legacy and ease the way for his successor. Although surprises are possible, Putin is widely expected to follow his predecessor Boris N. Yeltsin's example and name a favorite toward the end of his term who would then run for President. "There is no doubt that the team around Putin is looking for an instrument to stay in power beyond 2008," says Andrei Ryabov, a political analyst at the Gorbachev Foundation in Moscow. "These programs will be used as the main instrument for the next election campaign."

By boosting the livelihoods of millions of Russians, Putin could all but ensure that his handpicked successor wins the presidency. Both doctors and nurses would see their meager salaries double. Scientists are expected to win a pay rise of 300%, to $1,000 per month. By 2008, Putin wants half of Russia's 60,000 schools to have Internet access. He has called for 10,000 municipal clinics to be equipped with modern diagnostic equipment, plus the construction of new high-tech regional medical centers. On top of all that, he wants a 33% rise in housing construction by 2007 and "special attention" paid to the housing needs of soldiers, policemen, war veterans, and the disabled.

To achieve such ambitious goals, Putin will probably have to spend much more than he has projected. At the moment, Moscow can afford it. The government is on course for a surplus of 7% of gross domestic product for this year and expects a surplus of 3% of GDP next year, even though state spending is set to soar 14% in real terms. Nevertheless, Putin's strategy involves inherent risks for Russia. For starters, economists worry that inflation, now 11%, could take off as Moscow primes the pump. Prices are already a source of social discontent. In an August survey by Russia's Levada Center, 52% of respondents identified inflation as the government's biggest failure. Putin's program "is bound to have inflationary consequences," warns Roland Nash, head of research for Moscow investment bank Renaissance Capital. Another worry is that the country's corrupt and inefficient bureaucracy will end up wasting or stealing promised cash.


The biggest fear, though, is that Putin's oil-financed spending boom could become a substitute for crucial economic reforms. Since Putin's reelection in March, 2004, little has been done to implement the sweeping reform program drawn up by his liberal economic advisers during his first term in office. Back then, the plan was to slash red tape, boost competition in Russia's inefficient national utilities, improve financial regulation, and stimulate the growth of a private pension system and private health insurance. But only a poorly handled overhaul of the social benefit system was attempted. The mass protests that erupted earlier this year may well have encouraged Putin's change of tack.

Putin's spending plans don't necessarily exclude reform progress. In presenting his program, the President also called for "structural changes" in public services, including more competition for municipal services, public transportation, and communications. But the overall populist tone of his current approach is loud and clear. With the Kremlin ever more preoccupied with the 2008 succession issue, the window of opportunity for tough reforms is rapidly closing.

By Jason Bush in Moscow

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