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A woman walks by a panel made of cardboard boxes, displaying Russia�s President Dmitry Medvedev, left, and Prime Minister Vladimir Putin, at an innovation technologies exhibition in the city of Rostov-on-Don. (Stringer/Russia/REUTERS)
A woman walks by a panel made of cardboard boxes, displaying Russia�s President Dmitry Medvedev, left, and Prime Minister Vladimir Putin, at an innovation technologies exhibition in the city of Rostov-on-Don. (Stringer/Russia/REUTERS)

Dmitry Medvedev's battle with Kremlin Inc. Add to ...

Mr. Putin supports Mr. Medvedev's efforts at modernizing the economy but his backing appears tempered by a desire to keep hold of all levers of control. "The government understands that state companies are very important to political power," says Mr. Guriev. "Putin has no ideological preference for state capitalism but the government knows that private companies are harder to boss around."

The reform drive has been somewhat blunted by the high price of oil, which has flooded the state's coffers and made measures such as the sale of stakes in banks seem unnecessary. Oil at $120 (U.S.) a barrel has bought the government time to delay hard questions such as pension reform - Russia's pension system is already running at a loss and on its present course is expected to go broke in 2018.

Mr. Putin remains lukewarm on liberalization, tending to err on the side of political stability. He told the state Duma, or lower house of Parliament, last month that the country would have "no radical economic experiments," which resonates with most Russians' negative view of the "shock therapy" reforms of the 1990s under Boris Yeltsin. One economist close to the Prime Minister says bluntly: "I think Putin wants to know how long he can afford to do nothing."

Led by Arkady Dvorkovich, Kremlin adviser, the Medvedev team thinks that hard choices cannot continue to be put off. "There is a risk that if we do not bring spending under control, we will have to raise taxes," says Mr. Dvorkovich. A payroll tax imposed to pay for a 10 per cent rise in pensions this year has embroiled the cabinet and the Kremlin in another row. Mr. Dvorkovich and others close to Mr. Medvedev believe it places too much of a burden on small and medium-sized enterprises. But so far, Mr. Putin has successfully defended his tax increases.

The question of the 2012 election remains paramount, however, and it is unclear whether Mr. Medvedev has begun to assert himself too late in his term to do any good. Igor Yurgens, a key member of the Medvedev economic camp, says there was an opportunity about two years ago for Mr. Medvedev to start building his own political support base; the two men might then have competed for the presidency. Since that was not done, the President's only route to the nomination is through Mr. Putin rather than an independent bid.

"Anyway, it's a little too late now for that," Mr. Yurgens adds. "But I think that he is rehearsing and maturing himself and positioning himself for the election. I think it's pretty obvious."


Warnings about the need to wean a nation hooked on hydrocarbons

Alexei Kudrin, Russia's Finance Minister, startled economy-watchers last month with a sobering prediction: a further increase in oil prices might "have a depressive effect", Charles Clover reports. The rising price, he said, "used to act as an economic stimulus. Now, however, this model is exhausted."

As prices wobbled and dipped as much as $15 a barrel in a matter of days this month, many of his compatriots have joined him in taking a more critical look at oil's dominance.

The economy has long been linked to oil and gas. The Kremlin floated for most of the previous decade on a cushion of steadily rising oil revenue; it has earned about $1.5-trillion from oil and gas exports since 2000. They are today the source of roughly 50 per cent of federal budget revenues and made up 25 per cent of gross domestic product in 2010.

But rising oil prices "played a cruel joke on us", according to Mr. Kudrin, who says it fuelled inflation and created bubbles in economic sectors such as trade, finance and property, while more fundamental areas failed to develop.

"We paid for growth with inflation," he said, adding that some years the money supply rose 50 per cent per year, compared with GDP growth of about 8 per cent annually. To fight price rises, the central bank was forced to strengthen the ruble, which hurt trade in all sectors but oil and gas. This in turn further concentrated dependence on energy, he said.

Despite Mr. Kudrin's sometimes adversarial relationship with President Dmitry Medvedev, the two are agreed when it comes to reforms. Mr. Medvedev has frequently called for an end to dependence on energy exports. He called this economic model "primitive" in a 2009 article, seeming to contradict Vladimir Putin, the former president and now Prime Minister who praised Russia in 2007 as "an energy superpower."

Still, weaning the country off oil and gas will not be easy. It will require pervasive economic reforms, principally tackling endemic corruption and mismanagement, and liberalizing the state-run economy - a feat many in the government say they are already struggling to pull off.

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