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Moscow Times
April 25, 2005
Investors Weary of Presidential Promises
By Alex Fak
Staff Writer
While some investors hope that President Vladimir Putin will reiterate recent promises to business during his televised state of the nation address Monday, others say they will not be tuning in at all.
The reason is that the main changes investors want -- less state interference in business; property rights guarantees; banking reform; less red tape for small and medium-sized enterprises; and a diversified economy -- have all been promised by Putin in his previous five addresses.
"Everyone is interested in the contents of the speech. We carefully analyze what is being said, but ... after a while, we [have started to] see that what has been promised has not become a reality," said Michel Perhirin, chairman of the Association of European Business and head of the board at Raiffeisenbank's Russian subsidiary.
Perhirin's disappointment finds echoes in boardrooms, trading pits, analysts' cubicles and even kiosks scattered across the country. This is a dramatic -- and very recent -- departure from the days when an apt word from the president could rally markets and silence skeptics.
"There is not much legal credibility left with Putin," said Anders Aslund, director of the Russian and Eurasian program at the Carnegie Endowment for International Peace in Washington. "Putin's problem is that if he doesn't say anything [on Monday], it won't be interesting, and if he does say something, people will say, 'Well, we've heard it all before.'"
Normally, the expectations for Monday's speech, which will begin at 12 p.m. and be broadcast live on state television, would not be too high to begin with. After all, Putin is addressing the whole nation, not just the government officials, lawmakers and other dignitaries who attend the speech in a Kremlin hall.
But this changed after Putin made several proposals -- such as a promise in 2003 to double gross domestic product within a decade -- that became mantras for members of the government.
Now, the speech has become "the signal upon which the legislative and executive branch do their work," said Igor Yurgens, vice president of RSPP, the big-business lobbying group, and first vice president at Renaissance Capital.
If so, many investors will be hoping to hear more about the same issue that worried them at this time last year: relations between business and the state.
A lot has happened over the past 12 months to severely shake reformist expectations for Putin's second term, including the near demise of Yukos, unexpected back tax claims against companies such as VimpelCom and TNK-BP, last-minute cancellations of natural resource auctions to prevent foreign companies from bidding, and consistent attempts by government agencies to interpret the laws their own way.
But some analysts expect the president to explain on Monday that the past year's events are not a sign of things to come.
"The short-term priority ought to be concrete steps to repair the damage to the investment climate done since the middle of 2003," said William Tompson, a senior economist who tracks Russia at the Organization for Economic Cooperation and Development in Paris. "A statement from the top that the government is committed to the rules of the game, to curtailing the arbitrary behavior of bureaucrats and officials, is crucial."
Others, however, recall that Putin was making this very statement at a trade fair in Hannover on April 11 as TNK-BP was announcing that it had been presented with $1 billion in back tax payments for 2001.
Analysts are divided on what has undermined Putin's credibility over the past year. Eric Kraus, chief strategist at SovLink Securities, said expectations had always been overinflated. "Putin never declared he was going to the American-style, free-for-all, totally free-market model," Kraus said. "But look, after the Gazprom-Rosneft merger, the oil sector is going to be 80 percent privately owned. Russia is the only major hydrocarbon exporter where that is the case."
Several analysts, however, argue that Putin never really needed to keep his promises, because a windfall of oil revenues has allowed him to wing it. On the sidelines of an investment conference in late March, Yevgeny Yasin, the head of the Expert Institute and a former finance minister, said that if Putin had been promising things he did not mean, he would soon have to start meaning what he promised.
"There is a professional characteristic of a spy, and that is to lie," Yasin said of Putin, a former KGB official. "But then, there comes a moment of truth when he realizes that further lies are useless, that you need to do something to build trust. Misinformation works only so far."
Yurgens said he believed that Putin was trying to push through reforms but many of them ended up drowning in Cabinet infighting. "Putin does not have to be worried about an Orange Revolution here; he has to be worried about the internal squabbles," he said, in a nod to the popular uprising in Ukraine that brought a reformist opposition leader to power last year.
But the real problem, said several analysts, is that the president tends to propose ambitious targets without mapping out how he wants officials to reach them.
For instance, after Putin announced in 2003 that the size of the economy should be doubled within a decade, he went a step further and said in last year's address that the doubling could be achieved within eight years, basing his new target solely on preliminary figures from a single quarter.
Putin also promised last year to bring inflation down to 3 percent per year -- although he did not provide a time frame for that to take place. The very next day, Economic Development and Trade Minister German Gref called the goal "hardly expedient." A year later, the government still has no specific plan to tackle rising prices, and 2005 inflation is on course to surpass last year's 11.7 percent.
Economic pledges are not the only ones that remain unfulfilled. Putin has repeatedly expressed his commitment to overhauling the military, but conscripts continue to be hazed and the armed forces remain demoralized. The president floated medical care reforms as far back as 2001. A whole term later, one in 30 male adolescents aged 15 to 19 perishes each year from a preventable cause such as violence or suicide, according to a UN report released in November, while the wait for an ambulance, even in Moscow, tends to run into the hours.
Putin might secure better control over his own policies if he provided more details when he announced them, some business leaders said.
Noting that Putin talked about raising entrepreneurship in last year's speech, Sergei Borisov, president of OPORA Russia, a lobbying group for small businesses, said that this year "we'd like to see how exactly he suggests doing it, what mechanisms and what projects he would offer."
Unless Putin offers more specifics, his state of the nation addresses will be platitudinous orations that address everyone and no one in particular, some investors said. "We won't have the TV on. I will not cancel my meetings to see it," said Jacques von Polier, who manages Russian equity fund Atria Advisors Ltd.