Mission Impossible II Putin's economic challenge

In five years time, Russia will be one of the top five economies in the world with growth of up to seven percent based on a thriving and innovative business sector. Russian strongman Vladimir Putin vowed to make this vision of economic transformation -- until now a distant dream -- a reality when he announced he would stand for a second stint as president in March 2012 elections. But economists this past week questioned Putin's appetite for reform after moves to encourage business and end dependence on oil came to a standstill in his first presidency from 2000-2008, especially from 2004. Putin had been able to boast of propelling Russia to stellar growth rates up to the 2008 crisis after its 1998 financial meltdown but these were driven largely by high crude prices rather than the fruits of economic change. "Putin said these words but I have a feeling that I have heard this all before," said Yevgeny Yasin, a Russian economy minister in the 1990s and now director of research at Moscow's Higher School of Economics. Shortly after Putin first rose to the Kremlin in 2000 after the shock resignation of Boris Yeltsin, his reformist economy minister German Gref presented a "Strategy 2010" for wholesale change of the economy in the decade. "If you ask me what needs to be done now, I say take the Gref programme and carry it out. They say it has been fulfilled to 35 percent, for me no more than 15 percent. On many questions there has been no progress," Yasin told reporters. President Dmitry Medvedev, who is to stand aside for Putin and swap jobs to become prime minister after the elections, embarked on a much-trumpeted modernisation programme that has so far failed to make headway. But reform has historically been tough in Russia. The reforms of tsarist-era prime minister Pyotr Stolypin ended with an assassin's bullet in 1911 outside the Kiev opera while efforts of Russia's post-Soviet reform champion Yegor Gaidar made him a public hate figure. Stalin's massive industrialisation programme of the 1930s was pushed through with a horrific cost in human life while the Soviet Union after World War II settled into stagnation until the perestroika of Mikhail Gorbachev. On the surface Russia has a relatively stable economic position in 2011, in particular a narrow budget deficit forecast to be just one percent of GDP this year that is the envy of its debt-ridden European partners. But investors have repeatedly diagnosed ills that could spell major trouble -- chronically low labour productivity, a lack of business activity outside the energy sector, overspending on pensions and still endemic corruption. An immediate cause of concern is the amount of money investors are taking out of Russia at a time of renewed economic uncertainty with net capital outflows of more than $30 billion in the first half this year. "In his 12 years in power, Putin was for four years a reformer and then he went into stability, stagnation mode," Sergei Guriyev, rector of the New Economic School told a conference organised by Rennaisance Capital. "We don't know which Putin we will see in the next years." Credibility in Putin's reform agenda was immediately eroded with the ousting of finance minister Alexei Kudrin, the government's last remaining holdout from the liberal reform era who had served in his post since 2000. Kudrin succeeded in decimating Russia's national debt as well as building up massive reserve funds that helped the country overcome the potentially dangerous 2008 economic crisis. The finance minister broke ranks with Medvedev's plan for a 20 trillion ruble ($620 billion) military spending programme which he said created budgetary risks that would "extend to the entire domestic economy". He also appeared unimpressed with Russia's future political construction. "On September 24 the structure of power in our country was determined for the long term. I have also determined my future," he said in a bitter parting shot. Kudrin was seen as a talismanic figure in the markets -- not only was he a liberal with an acute understanding of Russia's problems, but he also had the ear of Putin, an old colleague from Saint Petersburg. In his place, Putin appointed two men -- little known finance ministry bureaucrat Anton Siluanov as finance minister and First Deputy Prime Minister Igor Shuvalov as the government's economic pointman. Shuvalov, who is already overseeing some of the government's biggest spending projects, is not seen as sharing Kudrin's fiscal hawkishness. "His abrupt resignation creates a risk of substantial deterioration in Russian budget discipline, which is particularly dangerous in the event of a crisis," said Alfa Bank economist Natalya Orlova. Nevertheless the Kudrin era may not be entirely over. Some observers predicted a rapid comeback at the central bank and despite his angry dressing down from Medvedev he is holding on to jobs on official commissions.