Medvedev: Glasnost and Perestroika all over again?

Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev's speech this week.  Source: www.russiablog.org

Not so fast.  President Medvedev has resounded the main themes of reform for some time now, without his government (or, rather, Putin’s) following through.  See a NYTimes article from yesterday on President Medvedev’s annual address to the Russian nation, as well as a report on the matter below in a CSFB Emerging Markets report.

Reducing Russia’s humiliating dependence on energy exports and the role of state enterprises in the economy, and adding flexibility to labor markets and greater pluralism to Russia’s proto-democracy were all laudable goals mentioned in his speech, delivered at the Kremlin with Putin in attendance.  Mere platitudes devoid of concrete measures, critics say.  Maybe so, but the first step toward change is talking about it openly. 

Russia may have a positive future and a greater potential to join Fukuyama’s end of history in terms of being a functioning liberal democracy and market economy than other authoritarian countries, such as China, Saudi Arabia, Iran, to mention a few, where the lack of nascent democratic institutions distinguishes them (though Iran has a few).  Russia looks a bit like the Iberian, Greek and Latin American authoritarian regimes just before their transitions to democracy in the 1970s-80s; these societies yearned for the freedoms and prosperity of the West.  One day, Russia will join Europe and the West, if Europe and the West will have them.  Institutions such as the EU and NATO remain closed to Russia.  Remember what Kissinger said about NATO expansion — alliances have to be against somebody.  That way of thinking has to change in the West, and then maybe Russia will accelerate Medvedev’s reforms.    

From CSFB today:

Sergei Voloboev
+44 20 7888 3694
sergei.voloboev@credit-suisse.com
President Medvedev’s annual state of the union address yesterday contained criticism of past economic policies and some specific economic and political reform proposals. With a reference to his “Russia, Forward!” article published on 10 September, Medvedev has called for the country’s comprehensive modernization, based on democratic principles. Referring to the reasons for Russia’s particularly painful economic contraction during the recent economic crisis, the president mentioned the economy’s primitive structure, “humiliating dependency” on raw materials and general reliance on export receipts, appallingly low competitiveness of Russia’s manufacturers, as well as insufficient efforts to adopt a new growth model. Medvedev stated that even though the situation in the banking system has stabilized, it remains weak and insufficiently capitalized.
Medvedev mentioned the following specific directions for economic reform:
– further reform of the financial sector, which needs to be brought in line with the modernization requirements;
– a long-term reduction in the size of the state sector (from about 40% at present);
– transformation of state corporations operating in competitive environments into joint stock companies and liquidation or sale of all other such corporations by 2012; and,
– introduction of tax benefits for innovation-related activities and of a transition period to higher levels of mandatory insurance contributions.
– The president has offered a detailed view of the needed technological modernization, including the following:
– urgent commencement of technological modernization of the entire manufacturing base;
– creation of a modern technological centre – a Russian Silicon Valley;
– introduction of energy-saving equipment, bulbs, meters for use by utility services;
– wider application of space technology in the telecommunication industry;
– introduction of supercomputers;
– universal access to broadband Internet;
– development of strategic information technologies; and,
– a three- to four-month limit on granting approvals for new investment projects.
Encouragingly, the address contained specific proposals aimed at easing access to Russia’s labour market for qualified foreign workers, including a simplified visa regime and issuance of long-term visas, adoption of a more uniform approach to recognising foreign higher education diplomas and other educational degrees. Medvedev also mentioned certain measures in the area of political modernization, including a gradual phasing out of constraints on activities of small political parties and allowing such groups to occasionally participate in parliamentary meetings.
Overall, Medvedev’s policy address was fairly robust in criticising Russia’s recent economic policies, but it was predictably short on specific details on how to implement and observe the proclaimed reform objectives. It should nevertheless encourage the liberal-oriented part of Russian public that became very concerned about Russia’s democratic principles in the aftermath of the flawed municipal elections in early October. Representatives of the business/ investor community have likely noted the commitment to streamline the tax system further but were probably disappointed about the lack of more specific details.
October fiscal data points to rebalancing of revenue sources. This morning’s regular set of monthly fiscal data (for October) contained few surprises. There was another large monthly deficit (RUB179bn, 4.9% of monthly GDP, after 4.6% of GDP in September), taking the 12-month deficit to 6.5% of GDP from 5.5% in September. The monthly revenue/GDP ratio edged up to 18.4% of GDP from 18.3% in September on the annual basis; revenues fell to 17.5% of GDP from 18.0% in the previous month. Total expenditure was 23.3% of GDP, up from 23.0% in September and rose to 24.0% of GDP on the 12-month rolling basis from 23.4% in September.
An interesting observation on the composition of revenues in October: the data shows a weaker energy component of revenue (8.1% of monthly GDP, vs. 9.6% in September), while non-energy revenues (which have been declining progressively since June) jumped to 10.4% of monthly GDP from 8.7% in September. Overall, the data continue to point to a very large deficit for the full-year 2009, but its magnitude now looks likely to be materially lower than the government had anticipated (close to 7% of GDP rather than 8.3% assumed during the drafting of the 2010 budget).
The first official estimate for Q3 2009 GDP was better than the government’s provisional estimate. Rosstat reported yesterday that Q3 2009 GDP fell 8.9% yoy (after Q2 GDP was down 10.9%). This was better than the Economy Ministry’s previous 9.4% estimate for Q3. The statistics office has not provided a seasonally adjusted QoQ growth estimate, saying only that growth was 13.9% qoq in volume terms. Any seasonal adjustment would not be very reliable this year because of a structural break in series, but it is now clear that the original government estimate of 0.6% qoq SA growth in Q3 will be surpassed significantly (not adjusting for working day differences, we would estimate that qoq SA growth in Q3 was close to 3% – a very strong result, just slightly weaker than the 3.5% qoq growth in early 1999, after the economy bounced back from the H2 1998 meltdown).

Photo above:  Russian President Medvedev and his mentor, Vladimir Putin.  Note: this is not a photo from Medvedev’s speech this week.  Source: www.russiablog.org

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