Putin sets the path for change (606 words)

Published: 4/4/2001

President's Putin's state of the nation speech yesterday offered few surprises to investors in Russia, but encouraging reassurance of the path being taken by the Putin administration. Putin has been on record for sometime as supporting a wide-ranging reform of government and his political clout has promised the ability to deliver the legislation. Overall, the speech had a strong conceptual framework: (i) Economic growth is slowing (ii) Capital continues to leave due to a shortage of profitable investment opportunities inside the country (iii) The solution is structural reform, which means above all reforming the bureaucracy which blocks that reform in defence of its corrupt practices (Putin described the present ”apparat stagnation' as “sham stability”) The various propositions in the speech can be divided into four groups, of increasing significance. Public recognition of a problem and call for action. Demonstrated by the statement that “the work of the law enforcement agencies must be improved”. Such general statements are not worth very much unless matched by action. Putin did however single out one discredited part of the system through a pointed aside - “especially the Prosecutor's Office” (which may be slated for effective abolition as part of the thoroughgoing reform of the law enforcement agencies) suggesting targets have been identified. Public recognition of a problem accompanied by an insightful diagnosis of present problems. For example, the urgency of judicial reform was related to the crisis of trust between the citizen and the state, and a description of the present state as being a kind of “shadow justice” mirroring the shadow economy. Likewise, it was impressive simply to hear long passages devoted to public health and education, and in particular the illegal and socially unjust grey markets in these core public services - with the state being identified as responsible for the abuse. In the past such fundemental issues have not been a focus for the Russian leadership and the problems are huge, but Putin has set it firmly on the agenda. Clear, strong signals of support for specific structural reforms along previously announced lines. Including land reform, deregulation, judicial reform, and pension reform (with a fairly clear bias to towards the more radical position of the Gref team on personal pension investment accounts). Given Putin's track record, there is good reason to suppose that this legislation will reach the statute book this year. The first public support for specific policy measures, of which there were three: · Introduction of a two-tier budget, separating out windfall revenues from higher than average commodity prices. This would smooth cycles, so promoting medium term fiscal sustainability: so good for the country risk. · Real exchange control, and wider capital account, liberalisation. This coincides with the growing idea that the real appreciation of the rouble is already a substantial threat and official figures understate the real exchange levels, and thus higher capital outflows may be desirable at this stage · Deep reform of the bureaucracy: focussing on functions rather than just rationalising structures and reducing headcount - to strip away counter-productive bureaucratic rules and activities. Putin was vague on the details, but we may have the beginning here of a real model for public service reform. The risk is focussing on functions instead of reducing headcount — this would not help the efficiency of the state bodies much. The omissions of the policy statements were: on macroeconomic policy, exchange rate policy and inflation (in particular, tariff rebalancing) — and on structural reforms, housing and communal reform. The reference to natural monopoly reform was also less than convincing. It was however, clear from Putin's statements that he means business and that ministers jobs are on the line if they fail to perform.

Article ID: 2457