Putin must overhaul economy or risk Brezhnev-era stagnation

MOSCOW — Vladimir Putin must overhaul Russia’s public finances and wean the economy from its dependence on oil while staving off social discontent. If he doesn’t, his return to the presidency, which may overtake Leonid Brezhnev’s 18-year rule, risks an era of stagnation.

Putin, 58, said last week he’ll seek to return to the presidency in March elections, pushing aside his protégé, Dmitry Medvedev, who replaced him in the Kremlin for four years because of a constitutional ban on three consecutive terms. Medvedev may take the role of prime minister, a move which Finance Minister Alexei Kudrin, respected for promoting budget discipline, said would prompt him to quit.

Putin would take the country’s job just as the global slowdown threatens to throttle demand for oil, the lifeblood of the Russian economy. The risk is that Putin, an officer in the Soviet-era KGB who says economic-policy makers must avoid liberal “experiments,” will struggle to combat challenges that threaten the country’s long-term growth prospects.

Economic changes “will entail political risks, unpopular decisions, and I’m afraid that will stop Putin,” said Yevgeny Yasin, who worked as economy minister between 1994 and 1997 and is now the director of the Higher School of Economics in Moscow. “Russia has yet to reform many institutions which are the legacy of the Soviet era.”

Concern over the global economy and Europe’s sovereign-debt crisis has roiled markets in Russia, which saw its economy contract 7.8 percent in 2009, its worst recession on record. The country is vulnerable to swings in oil prices and will have to cut spending, including pensions, to bring its budget into line and reduce its dependency on commodity exports, the International Monetary Fund said Sept. 21.

The world’s largest energy exporter saw the price of its main export, Urals crude oil, fall more than 7 percent last week to $104.93 a barrel. Russia needs oil to average $109 a barrel this year and $112 in 2012 to balance its budget, Kudrin told reporters in Washington Sept. 24.

Speculation over who would run for president pushed Russian equity valuations to the lowest in emerging markets. The ruble has slumped 10 percent against the dollar in September and is poised for its worst month since January 2009, according to Micex prices compiled by Bloomberg.

Putin’s first two terms as president were marked by efforts to centralize power and increase state ownership of the country’s biggest companies. Buffeted by a booming global economy, Russia’s economic growth averaged 7 percent a year during Putin’s 2000-2008 presidency.

Mikhail Kasyanov, a prime minister under Putin until he was fired in 2004 and now an opposition figure, predicts Russia may see its reserves dry up and record a budget deficit of as much as 5 percent if crude prices fall by a third from their current levels. Putin said Sept. 21 that there will be no budget shortfall this year.

“If the price of oil falls to $70, that means the ruble will sink, the price of food and medicine will go up 30 percent as most are imported, and there will be a wave of social discontent,” Kasyanov said by phone.

While Putin said in April that Russia must avoid liberal “experiments” to ensure stable economic growth, he struck a more conciliatory tone at the weekend party congress, acknowledging tough decisions lay ahead.

“The task of the government is not only to pour honey into a cup, but sometimes to give bitter medicine,” he said. “This should always be done openly and honestly, and the overwhelming majority of people will understand the government.”

Still, the prospect of Putin serving two more 6-year terms, which would give him 24 years at the helm, may reinforce the authoritarian system and make him more vulnerable to unrest.

The ruling United Russia party has seen its support fall to around 40 percent from the two-thirds of the vote it won in 2007. Billionaire Mikhail Prokhorov quit as leader of the pro- business party, Pravoye Delo, last week after the Kremlin withdrew support for his bid to get the party into the lower house of parliament, where 87 percent of seats are held by pro- government forces.

Prokhorov, who had committed $80 million of his money for campaigning in the December elections, said Aug. 26 that Russia is becoming a “farce and parody of the Soviet Union,” stifled by bureaucracy and authoritarian rule. On Sunday, Medvedev removed him from a commission on economic modernization.

Medvedev, 46, a former corporate lawyer from Putin’s hometown of St. Petersburg, made the rule of law, the fight against corruption and reversing Putin’s policy of increased state ownership to attract greater foreign investment the cornerstones of his time in office.

“Even though everybody knew that Putin de facto led the country during Medvedev’s presidency, Medvedev was associated with more liberalism and more investor-friendly rhetoric,” said Sergey Dergachev, who helps manage $8.5 billion in emerging- market debt at Union Investment in