Putin's Economic Advisers: Time for Big Change in Russia

Economists urge a radical change in funding priorities
Putin must embark on “energetic measures” Photograph by Rainer Unkel/REA/Redux

On April 22, in the resort city of Sochi, Russian President Vladimir Putin convened an emergency meeting of economic advisers, government officials, bankers, and others to discuss alarming signals of a slowdown and to hear proposals on how to rev up growth. At least some of the 18 allies in attendance told Putin his policies need an overhaul.

From 2000 to 2008, Russians enjoyed what former Finance Minister Alexei Kudrin, a meeting attendee, has called “the fat years.” Robust exports of gas, oil, and minerals helped fill the government’s coffers and fostered the growth of a middle class. The economy contracted in 2009, then recovered. In the run-up to the March 2012 presidential election, the government ramped up stimulus spending, which is still increasing. Russia’s $2 trillion economy probably grew only 1 percent or so in the first quarter, Economy Minister Andrei Belousov said on April 7. Europe, mired in recession or stagnation, is not buying as much natural gas and oil from Russia as it once did. Inflation has edged up above 7 percent. The prospect of a long period of soft energy prices puts pressure on Russia, which relies heavily on its giant oil and gas companies.

“The problems of the Russian economy show not a fleeting but a chronic character, and their treatment requires structural measures,” says Evsey Gurvich of the Economic Expert Group. He presented recommendations at the meeting, which was also attended by Prime Minister Dmitry Medvedev and Elvira Nabiullina, the incoming central bank chief. Gurvich says real wage growth of 8.4 percent last year was almost triple the 3 percent advance in productivity. Putin must embark on “energetic measures” that rule out tax increases, rein in monopolies, and increase the ability of the workforce to operate more efficiently, he says.

Another presenter at the meeting was Sergei Sinelnikov-Murylev, head of the All-Russian Academy of Foreign Trade. According to a copy of his presentation, he proposed that over a three-year period the government shift funding from sectors including defense, law enforcement, and state-controlled companies. He suggested allocating the equivalent of 1.2 percent of GDP for education, 1 percent of GDP for health care, and 0.8 percent of GDP for roads. The fiscal rebalancing must go hand in hand with higher wages for teachers and health-care workers, an overhaul of education and health care, and staff reductions in law enforcement and the military, including halving the number of people in the armed forces, Sinelnikov-Murylev’s report says. According to the document, there are 10.5 military personnel for every 1,000 Russians, twice the rate in the U.S.

The budget moves are necessary because “substantial state support distorts market conditions and leads to lower interest on the part of private investors to particular sectors of the economy,” the report says. Russian companies majority-owned by the government account for half the economy, up from about 38 percent in 2006, according to BNP Paribas estimates.

The liberal economists at the meeting said that without a major shift in budgetary policy the economy will stagnate. In contrast, Sergey Glaziev, one of Putin’s advisers, advocated a 1 trillion ruble ($32.2 billion) stimulus, according to a participant in the meeting. Glaziev favors increasing the state’s role in the economy.

Putin wants Russia to be one of the world’s five largest economies—it ranked ninth in 2011 according to the International Monetary Fund. Yet Russia placed 112th out of 185 countries in the latest issue of Doing Business, the World Bank’s study of competitiveness around the globe. Russia held the 184th spot in the category of supplying its citizens access to electricity. A Russian construction permit takes 344 days to acquire, vs. 26 days in Singapore. Putin wants a plan from Medvedev to revive growth on his desk by May 15.

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