Russian economy needs revolutionary reforms

The article by The Financial Times is dedicated to the Russian economy. Considering reforms that are needed, the periodical refers to arguments by Alexey Kudrin, the Head of the Center for Strategic Developments, the former finance minister.

When Alexei Kudrin was tasked last year with drawing up a new economic strategy for Russia, there were good reasons for the country’s leadership to countenance previously unpalatable reforms. With the crash in oil prices, the effects of sanctions and the fall in the rouble eroding real incomes and squeezing public finances, there was a fear of protest from a middle class accustomed to greater comfort.

Vladimir Putin’s decision to enlist the former finance minister seemed a hopeful sign to Moscow’s liberal faction and to international investors. A year on, the Russian president is in the ascendant: with his goals in Syria accomplished, Europe in disarray and with grounds to hope for a deal with Donald Trump, the incoming US president, to ease sanctions over Ukraine.

At home, Mr Putin won a large majority in September’s parliamentary elections. The economy has fared better than many predicted and is now pulling out of recession, due in large part to sound macroeconomic management, including a free float of the rouble that has helped manufacturers and made Russia better able to withstand external shocks. The brighter outlook complicates Mr Kudrin’s task because it makes it less likely that the Kremlin will consent to the reforms needed to attract investment and avert stagnation. To address the investment problem, Russia would not only have to drive through unpopular structural reforms, such as raising the retirement age, which are highly unlikely before next year’s presidential election.

Any attempt to rescue the economy from inertia would require a fundamental change in the role of the state and overhauling state institutions.

Mr Kudrin is doing his best to make the case for reform in geopolitical terms, arguing last week that Russia would face “threats to national sovereignty” if it continued to fall behind in technology and productivity. With a veiled reference to the stagnation of the Brezhnev era, he suggested that, without reform, Russia was doomed to second-rank status.

Kudrin went into far more detail on proposals to digitise parts of Russia’s unwieldy bureaucracy, measures that would undoubtedly help to cut corruption but would hardly attack the roots of the problem.

Mr Kudrin realizes the reforms Russia needs to restore its economic potential would be threatening to the authorities. Without them, however, the long-term outlook will remain dismal. Forecasters think growth is unlikely to reach 2 per cent this year or next. If they are correct, the economy will have grown a mere 1 per cent over the entire six-year period of Mr Putin’s extended third term. It is a far cry from the annual average of 7 per cent growth that transformed living standards during his early years in power.