In preparation for the Russian presidential election this month
Putin has promised to adjust the country's
economic grievances in his next term
However, how he plans to implement reforms
is yet to be determined as
two rival groups are working on conflicting roadmaps
My name is Shrivan and welcome to Caspian Report
Russia's wave of economic grievances accelerated
in the years between 2014 and 2016
when the country experienced
two financial complications
First, the price of crude oil, which is the core substance of the Russian economy
declined from 108 USD in September 2013 to nearly 30 USD in February 2016
Second, western sanctions on Russian banks and energy firms which were in response to the
Kremlin's annexation of Crimea crippled investment in the country
As a result, Putin's government used Russia's sovereign wealth funds to cover the budget deficits
. But in the process the government has nearly depleted it's capital reserve
In recent years, a dozen regional authorities have drowned themselves in debt
while the Central government in Moscow has maintained a low national debt level
The poor economic conditions in the regional administrations are so severe that in 2017
many of them failed to pay the federal taxes to Moscow
In response, the Kremlin purged a record 19 governors
What's more is that hundreds of banks have been nationalised and closed all over the country
due to the rampant corruption and the incompetence in the regional administrations
In response to the shortages, Moscow took on more responsibility and centralised the economy
Between 2008 and 2017, the average economic growth in Russia was about 1%
This is substantially lower than the growth in the Eurozone and the United States
Due to the underperformance in the last decade
Russian policy makers are working on roadmaps to revitalise the economy
However, there are two rival schools of thought
Former finance minister Alexei Kudrin, who has worked with Putin since the 1990s, leads the liberal faction
Together with the CEO of Sberbank, Herman Gref
and the chairwomen of the Central bank, Elvira Nabiullina
Kudrin wants to liberalise Russia's economy and decrease the role of Moscow
The liberals believe that the highly centralised bureaucracy deters investment in the country
As such, Kudrin has proposed to channel military and security funds, which has skyrocketed in recent years,
towards healthcare and education
The idea is that if Russians can work longer and gain better skills, it will improve the economy
In essence, Kudrin and his allies argue that Russia can only attract investment by making its private sector more appealing
Currently, Kudrin is working on an economic roadmap for Putin's next term
Among his proposals is to reform taxes on new businesses
decrease Moscow's bureaucracy
improve law enforcement, confront corruption
bolster the infrastructure, modernise manufacturing industries
and create a more sustainable pension system
Although the liberal group has powerful ties to the Kremlin
They are rivaled by the Conservatives and state-owned businesses
This group is led by Boris Titov
and they believe that the privatisation programme
and the reforms of Kudrin
will encourage social unrest across the country
As a counter proposal, Titov wants the government
to take an even greater role to protect national security
More specifically, he believes that
investment in Russia should come from the government,
not from foreign multinational companies
To that end, Titov wants Moscow
to sharply reduce interest rates
to enable the central bank to print more money
and subsequently tackle more debt
The idea is that this would allow
state owned companies to borrow funds
with a discount and invest that money
in their respective industries
This proposal for state backed investment
is supported by most oligarchs and industrialists
as this tend to gain significantly from government funded infusions of credit
In response to Titov's plan
Kudrin argues that such motions
would drastically devaluate the ruble
and allow for inflation to surge past acceptable levels
Essentially, the proposal by Kudrin and Titov contradict one another
and it's uncertain whose advice Putin will heed in his next term
Yet, modern Russia's economy is inherently linked to the country's political system
The truth is that the Russians have always put political security above financial growth
This economic policy, known as "Putinomics" can be examined in three dimensions
The first aspect of Putinomics is to maintain macroeconomic stability at all cost
This means low budget deficit, low inflation
and low levels of debt
Having experienced the economic meltdown of the 1990s
Russian policymakers know very well that a budget crisis can destroy a President's popularity
and even topple governments
When Putin first took office, he commited a large chunk of Russia's energy revenues
to pay back the country's foreign debt ahead of schedule
Even with the fall of crude oil prices
the Russian government maintains a budget deficit of about 1% of GDP
which is far lower than in the Eurozone
This is mostly possible due to the harsh austerity measures
Putin also support the Central Bank's increase in interest rates
which restrain inflation but also limited GDP growth
Putin's financial advisors argue that the Russian people want financial stability above all else
The second aspect of Putinomics is to prevent social unrest by assuring labour market stability
such as steady pensions and low unemployment
In the 1990s, salaries, social benefits, and government pensions often went unpaid for months
Not surprisingly, it led to protests and contributed to Yeltsin's political discredit
When the most recent crisis hit Russia
the government chose to decrease minimum wage by 10%
rather than allow unemployment to rise
By comparison to the West in the aftermath of the 2008 recession
average salaries in the United States maintained the same levels
but people were laid off
So again, the narrative in Moscow is that cutting wages is preferable to mass layoffs
The rationale is that the Russian people are more like to protest factory closures
than salary cuts
The preference of politics over economics
also determines Russia's social benefit policy
Putin has dealt with the current economic crisis
by reducing funds for education and healthcare to keep pensions and social benefits steady
This attitude, however, has come at the expense of Russia's human capital
Money, is simply not being invested in the future
but is redirected to political stability
The final point of Putinomics is to allow the private sector to operate freely
but only in sectors that do not compromise the government's geopolitical policies and capabilities
This is where the Russian oligarchy comes into play
As supporters of Putin, the oligarchs who dominate the state-owned companies
have embedded themselves in the government's effort
to maintain a stable labour market
So industries like energy, media, military, and other businesses that intersect with politics
are off limits
But someone who owns a supermarket franchise has fewer restrictions
Taken together, Putin's policies have shown that
the government appreciates growth, but prefers to retain power
As such, the aim of Putinomics is not to maximise household incomes and GDP
Such goals require a different set of policies
Yet, unlike many other energy dependent nations
Putinomics has kept Russia politically stable, and the ruling elite in power
In this context, the reforms by Kudrin, which are necessary for the long term
jeopardize the status quo
It could even anger some important groups
who have vested interests in government funded infusions of credit
Kudrin's reforms could even loosen Putin's hold on power
Meanwhile, Titov's outline for greater government investment
will keep the political system stable but in contraction
as human capital and the private sector will remain neglected
while vast amount of credits are wasted on corrupt state-owned companies
It's entirely possible that Titov's plan could double the GDP growth
but there is also a chance that it will boost inflation and crash the ruble
By comparison, Kudrin's reforms to invest in human capital and improve the private sector
is more sensible
But, to acquire the necessary funds without gaining additional debts
Putin will have to relocate spending from the security services and the military
toward education and healthcare
Clearly, this does not sit well with the Russian military industrial complex
and the state-owned companies which are some of the strongest backers of Putin
It's not exactly a group that the President wants to upset
since doing so would undermine his own political coalition
Moreover, the military industrial complex and the state-owned companies
control about two-thirds of the economy
They also provide employment to millions of Russians
So, Moscow's military and security spending is not just to fund foreign conflict
but, like its American counterpart, the Russian military industrial complex and the state-owned companies
form the backbone of Russia's economy
If Putin decrease military and security spending
not only will he expose groups defend what they consider is their turf
but it will risk layoffs and thereby increase social unrests
The arrangement between the government and the military industrial complex and the state-owned companies
renders the Russian leadership incapable of substantial reform
Even taking measures against corruption is not feasible
Most of the oligarchs that surround the President are enablers of corrupt dealings
as their business practices depend on extortion and monopoly power
According to the parameters of Putinomics
the conflicting reforms of Kudrin and Titov both present unacceptable risks
The president has built a hard-earned reputation as the provider of political and economic stability
If the reforms fail, the public will blame Putin
Considering all of these, the most likely outcome is that in his next term
Putin implements partial reforms from both camps
Yet, this will not be enough to substantially change the system
By comparison to other emerging markets, Russia's economy will continue to underperform in 2019
and in the nearby future
The truth is that in spite of the political promises
without a complete overhaul, the Kremlin is simply incapable of economic reform
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