Publication: Eurasia Daily Monitor Volume: 2 Issue: 130

Russian economic policy has never been so entertaining as in recent weeks, particularly in comparison with the dull and monotonous political discourse. Every weekly meeting of the government delivers a new verbal clash of economic titans often sparkling with rich metaphors. Prime Minister Mikhail Fradkov recently ordered his minister of economic development, German Gref, to collect the oil shower in the buckets of investment programs and then pour it gently and smartly on the “seedlings” of economic growth (Kommersant, June 24). The persuading power of this dacha-inspired economic doctrine was lost on Gref, who stubbornly insisted that the economic growth would continue to decline (Vedomosti, June 29).

President Vladimir Putin himself took the floor at the recent St. Petersburg economic forum and explained that the debate between the schools of “paternalism” and “liberalism” was productive for securing stable growth (Kommersant, June 15). Several experts elaborated on this thoughtful observation but agreed on only one point: The “liberals” in the government are so dependent on “paternalist” recipes that their models could only be characterized as schizophrenic (Vremya novostei, June 23). As for the outspoken presidential advisor Andrei Illarionov, he seeks to offend in equal measure Fradkov and Gref with his exotic diagnosis: The notorious “Dutch disease” caused by sky-high oil prices is now aggravated by the massive state interference in the oil business; that leads to the “Venezuela disease” of declining productivity in the energy sector, which still pours into the budget so much cheap cash that the vast state bureaucracy has developed a “narcotic dependency” (, July 1).

To an outside observer it might appear that all these rhetorical exercises are actually about very little. Indeed, GDP growth has slowed, but it may still reach a respectable 4.5-5% for 2005, while the EU cuts its forecasts below 2% (Vedomosti, June 29; Ekspert, June 27). Inflation in the first six month came close to 8%, a level that was “planned” for the whole year, but by Russian standards it is still not that bad, and the ruble holds steady against all major currencies (Ekspert, June 20). Despite these not-too-bad macro-economic indicators, there is a fast-spreading, and often more intuitive than informed, perception that something is fundamentally wrong with the poorly formulated economic policy. Expert quarrels about this “something” hardly have much of an impact on public opinion — but it has also clearly shifted: In May 2004, 48% of respondents were sure that the country was going in the right direction, but now only 25% express such an opinion (Vedomosti, June 20).

The Kremlin knows only one answer to these concerns: more and louder propaganda. One after another, Putin’s aides are dispatched with “life-is-good” PR missions. Last week it was Igor Shuvalov’s turn to juggle macro-economic indicators and promise investments in “human capital” (, June 30). This sincere and irreducible belief in the magic of television, which has proven its power in many elections and thus should work for simpler matters like the GDP, drives both liberal-minded and paternalist-oriented economists to desperation. Gref, for that matter, instead of advancing strategic investment programs, now proposes to cut down much heralded undertakings, such as administrative reform, that result only in the multiplication of bureaucrats (Nezavisimaya gazeta, June 17). Usually cautious and composed Igor Yurgens, vice-president of the Union of Industrialists and Entrepreneurs, bitterly complained about the “bureaucratic racket” at a recent oil-and-gas focused conference in Paris (, July 1). The “oil shower” described so hopefully by the prime minister, in fact brings the strong growth of only one structure — the presidential “vertical power structure.”

This growth can hardly be described as “healthy,” but it is quite understandable that Putin remains unconcerned about too much success of this “strategic investment program.” He continues to court big Western investors while emphasizing that Russia’s place in the exclusive G-8 club and its applications for membership in the OECD and WTO are based on its unique role as the main non-OPEC energy supplier (Nezavisimaya gazeta, June 29). Despite many authoritative warnings, for instance, from the Deutsche Bank, that stability in Russia remains precarious, some investors may decide that a word from the summit of power shields them from the risks of bureaucratic abuse (, July 1). Putin might even enjoy the role of supreme arbiter in business conflicts, restraining Russian tax authorities and remaining the “best friend” of the multinationals trapped by Russian quicksand.

These simple joys of the presidential job could not help in resolving one essential problem: the investments go to the wrong places. Putin may keep fingering the Super Bowl ring in his pocket and whispering “My precious…” for all he wants, but Western money would go only to the high-return sectors, primarily the export-oriented oil-and-gas projects. As for the Russian money, the potential investors prefer to move it out of the reach of tax authorities, acquiring, for instance, Russian art at the Sotheby’s auctions or the Stalin dacha near Gagra (, June 28). It is, however, the energy infrastructure where the money is indeed badly needed. The May blackout in Moscow made plenty of headlines, but in fact minor disasters — explosions on pipelines, derailing of oil-transporting trains, collapses of electricity grids — strike nearly every week. The Audit Chamber estimates that up to 58% of Gazprom’s transportation and distribution systems are worn out, but this behemoth operates at a loss in the internal market and has no funds to invest in modernization (, July 1).

The overgrown presidential “vertical” has become a self-serving institution that not only deprives Russia of economic dynamism, but it also vastly increases the risks of technological and human catastrophes.