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#11 - JRL 9131 - JRL Home
Date: Mon, 25 Apr 2005
From: James Beadle <jamesdbeadle@yahoo.co.uk>
Subject: A straight clear patch on the long winding road?

Scepticism is the order of the day in Moscow, and by all accounts today’s State of the Nation speech has shown the depth of the hole that the Russian authority has dug itself. If there is a consolation, though, it is that a positive opportunity is finally beginning to emerge.

At best conservative bull, I am relieved that the case for investing in Russia has been held back this year. Putin allowed the Yukos affair, I have often argued, because he thought he could get away with it. Oil demand has a habit of lowering the expectations placed on exporting countries, so it is easy to imagine the administration expecting the investment community to turn a blind eye to such an arbitrary and politically motivated attack.

Against that perspective it is reassuring to see that the administration being forced to work so hard to re-establish its credibility in the international investment market. Today, even the offer to validate the dubious privatisations of the 1990s lacks credence. Yukos was not destroyed by a reversal of privatisations, but by the arbitrary application of poorly designed tax laws. Thus, even Putin’s offer to call off the tax police sounds hollow. It was undermined by the TNK-BP back tax claim and the underlying lesson was that the administration can always find a way to do what it wants.

So, where can we expect things to go from here? For the present, growth should remain acceptable, and given that high commodity prices are functioning as a proxy dollar revaluation, current drivers can be expected to retain support, at least until China loosens its currency peg. But growth is slipping regardless, and considering the extent to which capital expenditure has been cutback, the decline will likely accelerate as we progress through the year.

These consequences, predictable to many at the beginning of the Yukos affair, finally seem to be registering and the government has launched a pro-business offensive. Although he remains aloof and on the fence, Putin has lent considerable weight to the liberal economic ideals that did so much to drive his first term.

Today’s speech, peppered with recurring if elusive dreams, only surprised with its talk of democracy. But let’s be fair about that: Much of the division reported between the Russia and the West over peaceful revolutions across the former Soviet space has been over-exaggerated. True, Russia found itself on the wrong side of a few arguments, but it swiftly appreciated the danger of pointlessly alienating itself within its home territory. Problems aside, Russia is a democracy, and Putin has often reiterated his hopes for a fairer election in 2008.

Going forward, I predict that Fradkov will be ever more sidelined, returning to the low key Prime Ministerial role originally expected of him. This is the least we can hope for – the incongruity between his high spending budget and aggressive inflation targets does little to help the government’s credibility. The liberals have their chance, but they must seize it decisively because their opponents will be eagerly waiting for the first opportunity to claw back some power.

Putin can close the whole Yukos affair by pushing through the Gazprom merger and tearing down the ring fence, as he promised to in the weeks after Khodorkovsky was arrested. But he will need to go further, pushing through legislation to legitimise the privatisations of the 1990s and reigning in the bureaucrats, not least those in the department of taxation. With luck, commitment and focus such moves might get him back to where he was pre-Yukos: on the right road, but with far to travel.

Over the months these changes will take, Putin will need to reinforce another of his first term successes - stability. If the country performed well at the turn of the millennium, it was down to stability as much as commodity prices. For a brief period, Russia felt like a safe place to invest.

Six months from now, it is conceivable that the country might be ready to move forward. With legal and bureaucratic barriers being chipped away, taxation at an attractive level and the turbulent past disappearing around the corner. Accession to the WTO will begin move into view, bringing with it a further round of administrative and legal responsibilities, adding more support to the development synopsis.

It will take focus, commitment and luck to get there, none of these are traditional Russian characteristics, but the will is there. The question is can it dominate long enough to pick up the momentum it needs?