Putin’s Economic Model Has Run Its Course, Kremlin Advisers Say

April 30 (Bloomberg) -- The economy President Vladimir
Putin has created since coming to power 13 years ago will
stagnate without a major reallocation of resources, according to
two advisers who briefed the Russian leader last week.
Putin must shift spending equal to 3 percent of gross
domestic product from defense, law enforcement and utilities to
education, health care and road maintenance over the next three
years to stoke growth, Sergei Sinelnikov-Murylev, head of the
All-Russian Academy of Foreign Trade, said in his presentation,
a copy of which was obtained by Bloomberg.
Russia’s $2 trillion economy is growing at the weakest pace
in Putin’s three terms in office as he scales back pre-election
outlays and Europe’s debt crisis curbs exports. Putin, 60, told
Prime Minister Dmitry Medvedev’s government to settle
differences among officials and submit a revival plan by May 15,
pointing to “alarming signals” that Economy Ministry Andrei
Belousov warned may presage a recession later this year.
“The problems of the Russian economy show not a fleeting
but a chronic character and their treatment requires structural
measures,” said Evsey Gurvich of the Economic Expert Group, and
one of four outside economists who presented recommendations to
Putin at the meeting, which was also attended by Medvedev and
Elvira Nabiullina, the incoming central bank chief.
In a budget shift termed “333,” Sinelnikov-Murylev
proposed a three-year switch of state funding from industries
including defense toward areas more conducive to long-term
expansion, allocating funding equivalent to 1.2 percent of GDP
for education, 1 percent of GDP on health care and 0.8 percent
of GDP on roads, according to the report.

Slowing Economy

Growth slowed to 2.1 percent in the last three months of
2012, the lowest rate since the economy contracted in 2009, when
Medvedev was president. The May 15 plan can’t include additional
spending because restraining inflation remains a priority, Putin
said at a meeting with senior policy officials last week, First
Deputy Prime Minister Igor Shuvalov said in an interview in
Moscow.
Spending on defense and state companies is
“counterproductive for growth,” while budget outlays on
education, health, transport and communications carry the
potential to generate long-term expansion, according to
Sinelnikov-Murylev. The fiscal rebalancing must be combined with
industry reforms that include higher wages for teachers and
health-care workers and staff reductions in law enforcement and
the military, including halving the number of people in the
armed forces, he said.

State Distortion

The budget moves are necessary because “substantial state
support distorts market conditions and leads to lower interest
on the part of private investors to particular sectors of the
economy,” Sinelnikov-Murylev said in the report.
Russian companies majority-owned by the government account
for half the economy, with their share growing from about 42
percent in 2008 and 38 percent in 2006, BNP Paribas SA estimated
last year.
Russia, which Putin wants to vault into the ranks of the
world’s five largest economies, placed 112th of 185 countries in
the World Bank’s annual competitiveness study last year, lagging
behind Pakistan and Palau. The world’s biggest energy exporter
held the penultimate 184th rank in the “getting electricity”
component and its construction permits took 344 days to acquire,
compared with 26 days in Singapore, placing it at 178th,
according to the World Bank.
Poor competitiveness, not a shortage of money, is hobbling
the economy, according to Gurvich. Russia entered a steady
growth trajectory of 3.5 percent to 4 percent, with continuing
capital outflow providing evidence that the economy doesn’t
suffer from lack of funding.

No ‘Collapse’

While the economy is stagnating and domestic demand wanes,
it’s not nearing a “collapse,” according to Gurvich. Short-
term stimulus measures only threaten to fan inflation, capital
flight and country risk, Gurvich said. The biggest fundamental
problem is falling labor productivity, with real wage growth of
8.4 percent last year almost triple the 3 percent advance in
productivity, according to his report.
Putin must embark on “energetic measures” that rule out
tax increases, rein in monopolies and increase labor
productivity, he said.