Sat, Jun 13, 2009 page9

• In Russia, recession means reform

  Some Russians fear that rising oil and commodity prices could pull their country out of recession too quickly, leading to the crippling of a reformist agenda

  • By Michael Stott / REUTERS
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  Russia’s economy is mired in a deep recession, unemployment is soaring and industrial production is collapsing — but some policymakers and economists fret that the Eurasian giant may recover too quickly.

  They fear long-delayed reforms to make business more competitive and the state more efficient will not happen if Russia bounces back rapidly, burying its problems once again under a gusher of oil money.

  The global financial crisis hit Russia with unexpected ferocity last year, knocking it from growth of 7 percent or 8 percent a year into a contraction of 9.5 percent in the first quarter of this year — a bigger shock than in any other major world economy.

  

  In most countries, such a dramatic downturn would trigger social unrest and threaten political stability.

  Some commentators abroad rushed to make dire predictions about new revolutions in Russia, or claimed to detect splits in the country’s dual power system between Russian President Dmitry Medvedev and his powerful patron, Russian Prime Minister Vladimir Putin.

  But such speculation is largely unfounded. Inside Russia, where the mainstream media is state-controlled, civil society barely exists and the Kremlin dominates politics. So discussion of politics is focusing not on the risk of mass unrest, but on the danger of missing a historic chance for change.

  Liberal business groups and some officials close to Medvedev are using the crisis to argue the need for sweeping reforms: a crackdown on corruption, stronger guarantees for property rights, a more independent judiciary, reform of the pensions system to create domestic pools of savings, better transport infrastructure to lower companies’ costs and a reduction in costly regulation and bureaucracy.

  Ultimately, such reforms could help to wean Russia off its dependence on natural resources and lead to a more diversified, and more stable, economy.

  “The fear is that the oil price will go back up, there will be no reforms and this will expose Russia to a continuation of the same boost and bust cycle of the last 20 years,” said Roland Nash, head of research at Moscow’s biggest investment bank, Renaissance Capital. “Right now is a perfect time to do a reform program.”

  HAPPY CRISIS

  A government minister, speaking on condition of anonymity, agrees.

  “We are really happy about this crisis,” he said. “Our history shows that structural reforms only happen when things are bad.”

  Because of the closed nature of the Russian system, most of the debate about policy is conducted well away from the public eye. Gossip abounds of secret meetings where nationalists confront reformists, of clashes over assets between factions in the ruling class and of fights for survival between oligarchs. Hard facts are elusive.

  But it is clear that Russia’s economic fate remains for now almost entirely in the hands of the oil and commodity markets. Oil and gas make up most of the country’s exports and form the backbone of government revenues.

  Russia’s benchmark Urals blend of oil rose above US$60 per barrel at the end of last month for the first time since November, from around US$40 at the height of the global financial panic. So some analysts already think the worst of the economic pain is over.

  “The economy clearly bottomed in [the first quarter] and has a great chance to rebound later in the year,” Moscow-based investment bank Troika Dialog said in its latest monthly survey.

  A senior investment banker with a Western firm based in Moscow said: “The most likely scenario right now is that they’ll muddle through the crisis, unless the oil [price] collapses to the mid-[US$]20s.”

  LOSING THE DEBATE

  An early exit from the recession could undermine the reformers’ claim that change is necessary to support an extended economic recovery. So far, they appear to be losing the debate in some key areas.

  Since last year the government has cut back plans for major investment in creaking Soviet-era roads, ports, airports and railways. Only projects deemed national priorities — such as the Sochi 2014 Winter Olympics and the US$6 billion revamp of a Pacific island off Vladivostok for an Asia-Pacific heads of government summit in 2012 — will survive. Both have been criticized by private investors as expensive white elephants.

  Also, the government has been stepping up its intervention in the corporate world, forcing boardroom changes at national flag carrier Aeroflot, taking control of aircraft engine maker Saturn and boosting the state’s stakes in energy concerns such as oil firm Sibir Energy and gas concern Novatek.

  Russian Deputy Prime Minister Igor Sechin, who oversees the energy sector, worried investors last month when he headhunted Natalia Tsukanova, head of JP Morgan’s Russian investment banking operation, to work as an adviser on acquisitions.

  Sechin is seen as a standard-bearer for the nationalist wing of the government, which favors greater state control over the economy and a smaller role for Western capital.

  “The government is totally lacking in management ability to run these large resource companies,” the investment banker said. “In the long run, the risk is that this place will be very inefficiently run and could end up looking like Venezuela or [Brazil’s state-controlled energy firm] Petrobras in the 1980s.”

  Igor Yurgens, an influential banker and business lobbyist who runs Medvedev’s think tank, the Institute for Contemporary Development, concedes that the crisis has strengthened the hardliners’ hand in the short term.

  But longer-term, he believes Medvedev — with Putin behind him — wants to return to the reform agenda for the economy that was pursued by Putin in partnership with business from 2000 to 2003, before the jailing of oil oligarch Mikhail Khodorkovsky marked a change of course by the government.

  Yurgens said Medvedev has been pragmatic in pursuing small, cautious reforms to open up society, cut red tape and bureaucracy, fight corruption and improve the business climate.

  If Medvedev fails and hardline nationalists prevail in the longer term, Russia will end up in a standoff with the West and be forced to turn to the Chinese for help, Yurgens said.

  “And the cost of this will be enormously higher than the cost of the same operation with the EU and the United States,” he said.
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