Vladimir Putin’s economic plan: Bread and vodka
President Vladimir Putin needs two years to fix Russia’s current economic mess. At least that is what he gave himself at his December end-of-year news conference.
To date, Putin’s actions have concentrated on shoring up the financial sector, with bank bailouts and sporadic, largely ineffective currency interventions. Putin has offered relatively little, however, for Russia’s Main Street – just tired old proposals that he hopes will buy time until the Russian people adapt, in Putin’s words, to their new “fact(s) of life.”
Indeed, Putin’s economic plan can be reduced to two historical essentials — bread and vodka.
Putin’s seemingly relaxed attitude was on display during his December state-of-the-nation address, where his “new” economic initiatives included reforms for small business, a complete amnesty to return Russian capital from abroad and support for Russian technology. Yet none of his proposals possess the urgency — and the details –that would soften Russia’s looming deep recession.
Putin has never shown much interest in promoting the development of small- and medium-sized enterprises, even though they are widely recognized as key engines of economic growth. They make up only about 22 percent of the Russian economy, as opposed to 46 percent in the United States. One drain on the small- and medium-sized sector has been repeated inspections — and demands for extortion — by a host of government agencies, including health, fire and tax.
Putin’s proposed remedy — which includes a public registry to record each inspection, as well as an inspection “holiday” for businesses with three years of clean records — looks inadequate in light of the endemic corruption surrounding the inspection process. Indeed, with impending budget cuts, government inspectors will most likely extract more money from private businesses, not less.
In any case, with interest rates jacked up to 17 percent to defend the ruble, the small- and medium-business sector will be starved of credit for the foreseeable future and will have to fight for its survival — no matter what regulatory changes Putin introduces.
Putin’s address also included a full amnesty for capital returning to Russia — provided that a person has “legalized” his or her property in Russia. Capital flight from Russia remains at record levels, with an estimated $120 billion leaving the country in 2014. Finding a way to stop this outflow has been one of Putin’s top priorities since returning to the presidency. For example, he just signed a crucial law that would tax offshore holdings of all Russian-owned companies and individual citizens.
Putin’s proposed amnesty, however, offered no details. It remains unclear whether the repatriations would be subject to Russian taxes. Indeed, the amnesty law is not scheduled to be drafted until July 2015, at the earliest.
Some of the new offshore tax-reporting requirements would have already kicked in by then — placing Russians with money abroad at legal risk. Even if they had lawfully moved the money out of the country.
Russians with offshore accounts reportedly are busy finding ways to get around the new requirements, including changing their official places of residence to different countries. The treasury has never quantified how much money it expects to return onshore. But Russian amnesties usually come with major strings attached, and Russians abroad will face the difficult decision of whether or not to reveal their confidential offshore financial information to the tax authorities.
A third proposal in Putin’s state-of-the-nation address concerned the need to increase investment in technology. Putin specifically asked businesses and academics to inform the government of what assistance they need to expand Russia’s high-tech sector.
Yet noticeably absent was any mention of Russia’s most prominent technology project, Skolkovo, which has already received billions of dollars of public and private investment. Former President Dmitry Medvedev’s inspiration, Skolkovo was envisioned as a neo-Silicon Valley on the outskirts of Moscow. Several prominent Western companies (Cisco, Intel, Siemens, Samsung) and universities (Massachusetts Institute of Technology) initially signed up for Skolkovo, enticed by a combination of state research grants, tax exemptions and special legal privileges.
Yet Putin has rolled back all Medvedev’s major reforms — and Skolkovo is no exception. Several fraud investigations targeting Skolkovo have now been opened, which have raised big doubts about its ability to avoid government interference and even its long-term viability.
Despite significant government investment, Russian companies still prefer to buy their technology abroad for the obvious reason of better quality at a cheaper price. No state-imposed import-substitution policy would likely change this reality. In addition, much anecdotal evidence suggests that Russia’s true technology entrepreneurs are voting with their feet and leaving Russia for more stable business environments overseas.
Putin’s appeal for more investment in technology sounds more like a tired refrain than a new call to action.
So what is Putin offering Russia’s Main Street to weather this crisis — other than the promise that what goes down must inevitably go up? Why, the traditional Russian staples of bread and vodka.
The government announced just before Christmas that it intends to impose export duties on grain, specifically to lower domestic wheat prices. Putin also ordered that vodka prices be kept low, in part for genuine public health concerns. As the cost of vodka rises, Russians often turn to homemade moonshine that contains dubious — and lethal — alcohol substitutes. More likely, however, Putin knows that high vodka prices invariably correlate to low public-opinion ratings.
Though Putin remains politically unchallenged, he continues to look over his shoulder — and not without reason. Vladimir Lenin famously came to power on promises of peace, land and bread. Tsar Nicholas II, the last Romanov, and Soviet President Mikhail Gorbachev share little in common — except for major anti-alcohol campaigns, grain shortages and presiding over the collapse of their respective empires.
So Putin clearly is hunkering down. Though he still has almost $400 billion in foreign currency reserves, no one knows how long they will last and how much social tranquility they can buy.
Even if Putin can get his two years — a questionable assumption at this point — that will bring Russia right up to the next parliamentary election in 2016. Putin’s defensive turn inward began when his United Russia party was only able to retain its parliamentary majority through serious ballot manipulations in the 2011 Duma elections.
Would Putin allow for a genuine referendum on his economic policies in 2016? Unlikely. But if the recession hits the Russian Main Street as severely as many now predict, he may not be able to avoid it.
PHOTO (TOP): Russian President Vladimir Putin gestures as he watches the launch of the newest heavy-class Angara-A5 rocket at Plesetsk cosmodrome in Arkhangelsk region, via a video link at the Russian Presidential Situation center at the Kremlin in Moscow, December 23, 2014. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin
PHOTO (INSERT 1): An employee places a bottle of vodka on a counter during the agro-industrial exhibition “Agrorus” in St. Petersburg April 4, 2014. REUTERS/Alexander Demianchuk
PHOTO (INSERT 2): Russian President Vladimir Putin speaks during his annual end-of-year news conference in Moscow, December 18, 2014. REUTERS/Maxim Zmeyev
PHOTO (INSERT 3): An exterior view shows the Skolkovo Hypercube at the Skolkovo Innovation Centre on the outskirts of Moscow May 20, 2014. REUTERS/Maxim Shemetov