Expect pressure to rise.

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Putin Badly Needs a Domestic Plan

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The Russian government has approved a sober, and sobering, economic forecast for the next three years. The country's prospects look so joyless that President Vladimir Putin may finally start listening to the mainstream economists who have stuck with him despite his unconcealed preference for a huge public sector tempered with a dose of crony capitalism.

Today's Russian leaders appear to exist in a parallel universe, where Russia is besieged by a hostile West and fighting for survival against a sinister global hegemon. In another era, this would have led them to embrace unorthodox economic theories or start hiding data about the true state of the national economy from the world and from ordinary Russians. That, however, is not happening.

The economy ministry, led by Alexei Ulyukaev, tries to find reasons for optimism, stressing first-quarter growth in some manufacturing industries that were previously uncompetitive with imports, a slowdown in inflation to an annualized 7.2 percent in the year to date, an increase in corporate profits, a growing stock market, a strengthening currency and ample liquidity in the banking sector. Yet Ulyukaev makes little effort to gloss over the continued recession, the falling real wages, the moribund retail sector further choked by one of the highest saving rates in the industrialized world, 15.7 percent in March: Banks still pay high interest on deposits and Russians don't believe the recession will be over anytime soon, so further hardship is never far from their minds. 

The ministry's forecast for 2016, a 0.2 percent contraction of economic output, is more optimistic than the 1.3 decline predicted by economists polled by Bloomberg.  Yet for 2017, Ulyukaev sees only 0.8 percent growth in the base scenario, while the Bloomberg consensus forecast speaks of a 1.3 percent expansion. Though the economy ministry expects wages and retail turnover to move cautiously into positive territory, the forecast, based on $40 per barrel of Russian oil, the country's main export commodity, promises no miracles. "Further dynamics are possible if the structure of the economy and the institutions are enhanced," Ulyukaev told the cabinet. This is a decorous, carefully worded formula, but the minister is clearly telling his colleagues that if nothing is done, Russia will keep lagging behind the rest of the world in economic development. 

There's clearly anxiety within the Russian government about the lack of growth in the foreseeable future: Even in 2019, it's only expected to reach 2.2 percent, based on an unchanged oil price. There's also a certain directionless itch to do something about it rather than sit and wait for commodity prices to rise. Prime Minister Dmitri Medvedev recently wrote Putin a letter proposing a governance reform that would create a system of transparent key performance indicators for ministers. "Agreed," Putin wrote on the letter.

The idea is one of several proposed about a year ago by German Gref, chief executive of state-owned Sberbank and one of the key architects of the Putin reforms in the early 2000, which included a hugely successful low, flat income tax. Gref also spoke of setting up a quasi-independent center to design necessary reforms. That, apparently, is going to happen now under former finance minister Alexei Kudrin.

Kudrin will head up the Center for Strategic Development, where the reforms of the early 2000s were planned under Gref. The think tank, set up in 1999 with the help of then-powerful oligarchs, has not stopped functioning, working on consulting projects for a number of Russian state corporations and government bodies, but its influence has long since waned. Kudrin is enough of a political heavyweight to revive its importance, and his appointment has Putin's blessing. During his annual call-in show with voters last week, the president talked about the appointment. "He's a very good specialist, a brilliant expert," Putin said of Kudrin. "And if he wants to contribute to resolving the problems facing the nation, why not?"

Kudrin discussed his vision of the necessary changes in an April 20 speech. He called the current state of the judicial and law enforcement systems and the government's style of interacting with society "key obstacles for  further development."

"The institutions that have emerged lead our system toward long-term stagnation if we don't reform them," Kudrin said. "I am certain that we are on the threshold of some societal shifts or centralized reforms."

Like Ulyukaev, Kudrin formulates his agenda in the mildest possible manner. In plainer language, his statement means the Kremlin needs to reform the corrupt, violent, self-serving system than has congealed under Putin -- or face popular unrest.

In his speech, Kudrin warned that no matter what brilliant plans economists might draw up, they would "run into a wall of political constraints." He expects Putin to understand the necessity of making the system more humane and investment-friendly before worse things happen.

Putin hasn't promised him anything -- his "why not" is a shrug, not a bear hug -- but at least he's approved the appointment and is aware of Kudrin's intentions.

One of the words the ex-minister used in his speech was "perestroika" -- the term for Mikhail Gorbachev's attempt to modernize the Soviet system in the late 1980s, during another spell of low commodity prices. It's not an accident that cautious Kudrin used this word: He clearly believes drastic measures are needed to make sure Putin's regime remains viable. I doubt that the president himself thinks so. He is visibly nostalgic for the Soviet Union, and he's no Gorbachev fan, especially given the end result of his haphazard reforms. Yet Putin hasn't had a coherent domestic action plan since he returned to the presidency in 2012. His no-strings-attached arrangement with Kudrin suggests he's at least open to the idea.

It's better than nothing, but the regime will fight hard against any attempt to make it less repressive. While Kudrin and other sober economists do their best, Russia will keep falling behind other major economies.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net