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Protests push Putin toward economic reform

11 march 2012, 12:40
A demonstration in Moscow. ©RIA NOVOSTI
A demonstration in Moscow. ©RIA NOVOSTI
The economic dilemma facing Vladimir Putin in his third term as president may be familiar from his first two times around: crippling corruption and a dire dependence on natural resource exports, AFP reports.

But the added dimension of the middle class flexing its muscle in protests reminiscent of the late Soviet era is making Putin's mission more urgent and his failure to act increasingly fraught with risk.

Economists are now looking to see if this street-driven energy can stir Putin into committing to reforms he omitted while profiting from record oil prices as Kremlin chief in 2000-2008.

Russia's "urban middle classes have evolved from being consumers to being members of a civil society," note the economists at New York's Citigroup.

"The key question, then, is whether signs that Putin's popularity is slipping will trigger a wave of much needed economic reforms," London's Capital Economics consultancy adds.

The list of curses plaguing Russia's growth has changed little since Putin emerged from the depths of the KGB spy agency to take command of Russia after its decade of early post-Soviet economic mayhem.

Russia since 2000 has recorded the lowest rates of foreign direct investment of all nations in Eastern Europe and seen its manufacturing sector play a steadily diminishing role in the overall economy.

The first problem is explained at least partially by Western mistrust of Russian justice while the latter is rooted in the ruble's unnatural oil export-driven strength.

Both Putin and Dmitry Medvedev -- a close ally who has kept the president's seat warm for the past four years -- have promised to fix these setbacks through a commitment to court independence and an economic diversification drive.

But economists fear that they have largely failed on both fronts because Russia's malaise runs much deeper than either Putin or Medvedev dares to admit.

Estimates from local and foreign watchdogs show corruption now swallowing between a third and half of Russia's gross domestic product and state spending rising on inefficient projects.

"Rapid growth in spending has already widened Russia's non-oil and gas fiscal deficit to 10 percent of GDP, and pushed up the fiscal break even oil price to around $117 per barrel for 2012," the Fitch rating agency said this month.

London's main oil contract, Brent North Sea crude for April, rose 51 cents to $125.95 in late trading on Friday.

Economists worry that things may grow even more troublesome if Putin keeps his promise and spends around $170 billion on a six-year social programme he touted during his election campaign.

Some estimate that these added costs would push the oil price that Russia needs to break even as high as $130.

Putin himself has already hinted he may not spend as loosely as he made out in the campaign by cutting the programme off at 1.5 percent of GDP -- about a quarter of the actual price tag estimated by economists.

Analysts at Moscow's Renaissance Capital see this as a good sign of "Putin's desire to retain power" through reform.

"Those that underestimate Putin's ability to transform himself into a modest reformer in order to maintain his clout and popularity may be in for a rough surprise," Renaissance Capital says in a post-election report.

"The new political constraint added by the opposition will also serve as a useful corrective to reform inertia."

But others remain gloomy about the prospects of Putin being able to wean the state sector off its corrupt habits and end the practice of papering over Russia's economic cracks with petrodollars.

"But the upshot is that as long as oil prices remain high, we are unlikely to see a marked shift in policy during Putin's third term in office (so-called Putin 2.0), despite the recent rhetoric," London's Capital Economics concludes.

"High oil prices create an illusion of good government policies, papering over the cracks in Russia's growth model and its ailing public finances. In fact, the picture today looks increasingly similar to the Soviet economic stagnation in the 1980s."

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