<p>During his two terms as president, Vladimir V Putin muscled a new kind of capitalism onto the Russian stage, blending government and private business, jailing tycoons and demanding control of the ‘commanding heights’ of the economy, the petroleum companies that now pump more oil than Saudi Arabia. As Putin announced his intentions on Saturday to run for a third term, economists were not expecting Russia to swivel sharply back to such policies, in what would be yet another shift between state control and privatisation in the country’s recent economic history.<br /><br />Russia has already embarked on reforms under his successor, Dmitri A Medvedev, to diversify away from oil dependence and foster a high-technology sector, in all likelihood with Putin’s blessing. This is not because of any discernible change in Putin’s economic beliefs, but because the profits from oil and other exports can no longer sustain the rising living standards.<br /><br />Foreign lending<br />Over the next decade, oil output in Russia is projected to be flat, at about 10 million barrels per day. Meanwhile, rising demand for consumer goods will outpace Russia’s ability to pay for them, opening a current account deficit by about 2014. Then Russia, like the United States, will rely on foreign lending to finance a trade deficit. In a speech on Friday, also at the congress of his United Russia Party, Putin hinted at the changes that make a return to the ‘Putinomics,’ or state capitalism, of his first two terms unlikely.<br /><br />“The task of the government is not only to pour honey into a cup, but sometimes to give bitter medicine,” he said. <br /><br />“Russians will continue down the road of privatization and diversification away from oil, not because they like to, but because they will be forced to,” Ivan Tchakarov, chief economist for Renaissance, a Moscow investment bank, said in a telephone interview.<br />Chris Weafer, the chief equity strategist at Troika Dialog Bank, went further in a research note published after Putin’s announcement, suggesting the former KGB agent was now likely to recast himself as an economic reformer. “I expect Putin will establish a very pro-business and pro-reform cabinet,” Weafer said.<br /><br />Cliff Kupchan, a senior analyst at the Eurasia Group in Washington, writing before the announcement on Saturday, said of Putin that “even if he is not as fully committed to change as others,” he might be Russia’s best chance to weather a decline in oil output because he “can get initiatives implemented.” Many Russians still associate Putin with the end of the economic depression that cast millions into penury in the 1990s.<br /><br />During his time in power, Putin, who has a graduate degree in economics from the St. Petersburg Mining Institute, seesawed between reforms hailed by liberal economists — like a flat income tax — and policies verging on Soviet-style command management.<br /><br />Putin’s critics have pointed out that insiders benefited along with the state, leading to the rise of a new class of ultrawealthy bureaucrats among the security service officials and former St. Petersburg city government functionaries who moved to Moscow with Putin a decade ago. Under Medvedev, in contrast, the government announced a plan to privatize $10 billion in state assets annually for five years to draw in Western capital and expertise during the global financial crisis.<br /><br /> Under his watch, the economic pendulum swung back toward reform. The authorities drastically reduced the number of enterprises considered strategic and off limits to foreign investment and came close to negotiating Russia’s entry into the World Trade Organisation.<br /><br />Oil and natural gas constitute 17 per cent of Russia’s gross domestic product, but taxes on these resources make up 44 percent of the federal budget. As Siberian oil production declines, new sources must be developed. To allow for vast capital outlays, new, lower taxes on the industry take effect next month, further diminishing the government’s share.<br /><br />On Saturday, Putin suggested raising taxes on the rich. During his first term as president, Putin implemented a flat, 13 per cent income tax that improved collection. The new proposal would not raise income tax but increase consumption and estate taxes on the wealthy.<br /><br />“We won’t be able to grow the economy by simply increasing oil production anymore,” Aleksei L Kudrin, the finance minister, said in an interview this year. “More complicated work is ahead of us.” <br /></p>
<p>During his two terms as president, Vladimir V Putin muscled a new kind of capitalism onto the Russian stage, blending government and private business, jailing tycoons and demanding control of the ‘commanding heights’ of the economy, the petroleum companies that now pump more oil than Saudi Arabia. As Putin announced his intentions on Saturday to run for a third term, economists were not expecting Russia to swivel sharply back to such policies, in what would be yet another shift between state control and privatisation in the country’s recent economic history.<br /><br />Russia has already embarked on reforms under his successor, Dmitri A Medvedev, to diversify away from oil dependence and foster a high-technology sector, in all likelihood with Putin’s blessing. This is not because of any discernible change in Putin’s economic beliefs, but because the profits from oil and other exports can no longer sustain the rising living standards.<br /><br />Foreign lending<br />Over the next decade, oil output in Russia is projected to be flat, at about 10 million barrels per day. Meanwhile, rising demand for consumer goods will outpace Russia’s ability to pay for them, opening a current account deficit by about 2014. Then Russia, like the United States, will rely on foreign lending to finance a trade deficit. In a speech on Friday, also at the congress of his United Russia Party, Putin hinted at the changes that make a return to the ‘Putinomics,’ or state capitalism, of his first two terms unlikely.<br /><br />“The task of the government is not only to pour honey into a cup, but sometimes to give bitter medicine,” he said. <br /><br />“Russians will continue down the road of privatization and diversification away from oil, not because they like to, but because they will be forced to,” Ivan Tchakarov, chief economist for Renaissance, a Moscow investment bank, said in a telephone interview.<br />Chris Weafer, the chief equity strategist at Troika Dialog Bank, went further in a research note published after Putin’s announcement, suggesting the former KGB agent was now likely to recast himself as an economic reformer. “I expect Putin will establish a very pro-business and pro-reform cabinet,” Weafer said.<br /><br />Cliff Kupchan, a senior analyst at the Eurasia Group in Washington, writing before the announcement on Saturday, said of Putin that “even if he is not as fully committed to change as others,” he might be Russia’s best chance to weather a decline in oil output because he “can get initiatives implemented.” Many Russians still associate Putin with the end of the economic depression that cast millions into penury in the 1990s.<br /><br />During his time in power, Putin, who has a graduate degree in economics from the St. Petersburg Mining Institute, seesawed between reforms hailed by liberal economists — like a flat income tax — and policies verging on Soviet-style command management.<br /><br />Putin’s critics have pointed out that insiders benefited along with the state, leading to the rise of a new class of ultrawealthy bureaucrats among the security service officials and former St. Petersburg city government functionaries who moved to Moscow with Putin a decade ago. Under Medvedev, in contrast, the government announced a plan to privatize $10 billion in state assets annually for five years to draw in Western capital and expertise during the global financial crisis.<br /><br /> Under his watch, the economic pendulum swung back toward reform. The authorities drastically reduced the number of enterprises considered strategic and off limits to foreign investment and came close to negotiating Russia’s entry into the World Trade Organisation.<br /><br />Oil and natural gas constitute 17 per cent of Russia’s gross domestic product, but taxes on these resources make up 44 percent of the federal budget. As Siberian oil production declines, new sources must be developed. To allow for vast capital outlays, new, lower taxes on the industry take effect next month, further diminishing the government’s share.<br /><br />On Saturday, Putin suggested raising taxes on the rich. During his first term as president, Putin implemented a flat, 13 per cent income tax that improved collection. The new proposal would not raise income tax but increase consumption and estate taxes on the wealthy.<br /><br />“We won’t be able to grow the economy by simply increasing oil production anymore,” Aleksei L Kudrin, the finance minister, said in an interview this year. “More complicated work is ahead of us.” <br /></p>