20 years under Putin: a timeline

In September, the Russian government started to actively discuss the country's 2013 draft budget. The key issue is how to reduce the gap between the state's social responsibilities and its financial resources. On the eve of the new political season IMR's Olga Khvostunova spoke with Sergei Guriev, President of the New Economic School, about the government's future economic policies and their impact on the country's political development.



O.Kh: Russia officially joined the WTO at the end of August. What changes will it bring to Russian producers and foreign investors?

S.G.: Russia negotiated the terms of  its accession to WTO in a way that will have little impact on the Russian economy during the several years transition period. Later, there will be no serious game change either. The New Economic School and Ernst & Young have recently published a report on the potential outcomes of Russia's joining the WTO. Our studies have shown that one should not expect catastrophic consequences or significant changes whatsoever either in any sector of the economy, or in any region of Russia. To the contrary, our calculations reveal that accession to the WTO will have a positive impact on the Russian economy and on Russian citizens' welfare. In the long-term, joining the WTO will attract foreign investors to Russia. The WTO is an important tool of predictability that allows them to protect their interest against arbitrary actions by the Russian authorities. The Russian government is known for adopting economic measures that are considered illegal from the WTO’s point of view.

O.Kh: What kind of illegal measures?

S.G.: They are measures that support Russian producers at the expense of foreign ones. An example of such arbitrary action is the automobile use tax for imported vehicles imposed by the Russian government starting from September 1st.

O.Kh: The WTO's opponents point out that low-quality products will flood the country, and Russian producers will be pushed out of the market. Is their argument justified?

S.G.: It’s pointless to fear competition with producers of low-quality products – no one will buy them. The problem of Russian producers is that they will have to compete with cheap high-quality products. Still, negotiations were carried out in a way that hardly reduces import tariffs, so in fact there is nothing to be afraid of. All these fears are based on rumors and lack of information. Most people are just too lazy to read the accession terms.

O.Kh: What is the purpose of this political discussion, then?

S.G.: Accession to the WTO is an important political decision. It is a step forward for Russia, it formally puts Russia back in the circle of civilized countries. The next step should be joining the Organization of Economic Cooperation and Development (OECD). But the discussion is actually pointless: even if someone thinks that Russia is unique, it doesn't mean that it shouldn't follow international trade rules. And the WTO is a key institution that determines these rules. Some people just think that economic laws are not applicable to Russia, and therefore do not want to follow the rules.

O.Kh: Who are these people?

S.G.: They are the people who believe that Russia has its unique path. But they prefer to drive good foreign cars, not the Zhiguli.

Putin's presidential campaign promises are simply impossible to keep.

O.Kh: Both Vladimir Putin and Dmitri Medvedev have made public statements on the modernization of Russia. Now that they have exchanged offices, what kind of economic policies are they more likely to adopt – modernization or conservative development?

S.G.: First the decrees that Vladimir Putin signed on May 7th, right after his inauguration, were quite liberal and very consistent with a modernization course, as well as was his speech at the St. Petersburg [International] Economic Forum. But Putin and Medvedev have both made these public statements before. Today, the business community wants to see actions, not just hear words. Some promises are being fulfilled, like joining the WTO, while many others are being postponed, like the privatization programs. Russian leaders made statements about reducing administrative barriers, which is important for the investment climate, but nothing has been done yet. Moreover, the road maps, developed as a part of the so-called National Entrepreneurship Initiative, were redesigned by the government without taking into account suggestions made by business. Until we see concrete results, it’s impossible to judge the government’s economic policies.

O.Kh: When do you expect to see first results and draw first conclusions?

S.G.: The state budget will be an important indicator. It is being discussed at the moment and will soon be adopted. Another indicator are what measures are being taken to improve the business and investment climate. These would include implementing the privatization program and fighting corruption not just in words, but in practice.

O.Kh: Taking into account Russia's experience to date, do you have any reasons to believe that real actions will actually follow?

S.G.: Let me give you an example from everyday life. If you gain weight, your cholesterol level becomes high, and eventually you start asking yourself if it's time for you to start a healthy lifestyle and go to the gym. Even if you never were into sports before, it doesn’t mean that you never will. It’s the same with government. For two years Russia has been experiencing huge capital flight, but oil prices are still high, while debt, unemployment and inflation rates are very low, and there is economic growth. Still there is capital flight from Russia to Europe and the U.S. where there are plenty of problems such as high debt, lack of growth… It means that the Russian situation is worse in terms of the investment climate.

O.Kh: Financial analysts have recently calculated that capital flight has more than doubled in 2011 and totaled more than $80 billion. What caused this high rate?

S.G.: Capital flight intensified not only in 2011 but also in the first half of 2012. There are several possible explanations for this, but at the moment it's hard to pin-down which is the correct one. One explanation is the high political risk caused by the election period in Russia. But now the uncertainty is over: Putin has replaced Medvedev, and it seems that the protest movement has abated. Also there is a possibility that capital flight will decline. In June, it in fact decreased. On the other hand, it could be a cyclical phenomenon; therefore we have to watch closely what happens in July, August and September. Another explanation is that the investment climate in Russia has deteriorated to the point that despite great economic potential, investors are afraid of losing their investments.

O.Kh: Do you think that the Russian authorities will fight corruption? For a long time it has a leitmotiv of Russian political leaders in their  public discourse, but according to Transparency International’s CPI (Corruption Perception Index), Russia still ranks among the worst countries.

S.G.: The Russian authorities are becoming increasingly aware that corruption is not only an economic or a social issue, but a political one. It's an issue of power. If the current political elite does not fight corruption, very soon it will be replaced, because it is the corruption issue that unites the opposition. If the authorities can win this fight, they can weaken the opposition movement. But if corruption is not overcome, the regime has no future.

In terms of corruption level, Russia is unique.

O.Kh: The paradox of struggling with corruption is that the authorities will have to fight against themselves and against the system they created. Are they capable of doing so?

S.G.: I remind you of my argument about being overweight and sports. When you lose weight, you lose a part of yourself. It’s hard, but not impossible.

O.Kh: Do you think that Putin will send his friends to prison or voluntarily go there himself?

S.G.: If it does not start fighting with corruption, it is not clear how this regime can survive. By the way, Putin had already fought corruption when he first came to power. In 2000 his rhetoric and actions were both anti-corruption. There is no reason to think that he is not capable of change. If the Russian government and Vladimir Putin's friends start to play by the rules, I don't think that Russian citizens will demand anything more from them.

O.Kh: Are you saying that if Vladimir Putin has to make a choice—either to change the rules of the game and keep the regime safe, or not change the rules and face the possibility of being replaced—he will choose the former?

S.G.: It's hard to say at the moment, but he is already facing this choice, even though he might not be aware of it. In democratic countries, the government changes in a predictable manner. In regimes, like Russia, it will be hard to predict. Anything is possible: a peaceful scenario, in which the regime transforms itself into a democracy, a violent scenario, or one in between. History provides various scenarios for the way this type of situation could develop.