Citing "alarming signals" of an economy slowing to a crawl, Russian President Vladimir Putin is reversing course and calling for fiscal stimulus to boost investment and arrest the slide.
"I expect specific proposals for measures that would help us ensure stable economic growth, protect ourselves from negative fluctuations in the world economy, reduce risks of production decline in key industries and stimulate business activity," Mr. Putin told an economic meeting he chaired Monday in Sochi, site of the next Winter Olympics.
The government has some room to manoeuvre, thanks to low public debt (only 12 per cent of GDP), a roughly balanced budget and moderately tight monetary policy. But Mr. Putin's sudden embrace of the anti-austerity message is no elixir for the nearly moribund economy. And that's mainly because it won't address one of the biggest problems – Mr. Putin, his business cronies and their outsized role in the economy. They have successfully squelched or gobbled up competition, siphoned off capital, made a mockery of the rule of law, driven away foreign investors and allowed infrastructure to crumble. The country has not expanded its road network in nearly 20 years.
"The Russian economy is grinding to a halt, because of too much red tape and too much corruption, and Putin is not prepared to face up to it," says Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington, who keeps close tabs on Russia and its former Eastern European satellites.
What's really needed – and we won't see any time soon – is structural reform to boost private investment and competition, a reduction of the state's heavy-handed interference, privatization of inefficient state-controlled enterprises and an assault on endemic corruption.
Russia, which depends on resources for 90 per cent of its exports, sailed along for years on high oil and gas prices and a modicum of economic modernization. Falling demand for some commodities and drastically reduced investments have taken a toll. The economy grew at an annual pace of only 1.1 per cent in the first quarter, down sharply from more than 4 per cent a year ago – a steep decline that cannot be explained by slightly lower resource prices in that period.
It's a sorry record that has more than a few analysts calling for the country to be kicked out of the BRIC club. While other big emerging economies are attracting huge inflows of investment capital, Russia is watching money flow the other way as investors seek greener and safer pastures. An estimated $350-billion (U.S.) net has fled for the exits in the past five years.
"I'm growing more strongly of the view that Russia no longer should be categorized as an emerging market," risk expert Ian Bremmer, president of Eurasia Group in New York, said in a note Monday.
It doesn't help that monopoly gas exporter Gazprom and other state-controlled enterprises are being forced to make uneconomic investments, such as construction related to the Olympics. Gazprom's market value has plunged to about $85-billion from nearly $370-billion at its peak in May, 2008.
Mr. Putin won't find much relief on the monetary policy front. The central bank, which hiked rates last September, has just cut borrowing costs on some long-term credit facilities. And departing central bank chairman Sergey Ignatiev told the meeting that further interest cuts would be coming in May.
But the bank has long resisted pressure for more aggressive easing, not least because it remains focused on reining in inflation, which remains about 7 per cent annually, nearly double the level of a year ago. The goal is to get price increases down to between 5 and 6 per cent this year. A more expansive approach toward monetary policy could be coming when Mr. Ignatiev is replaced in June by a top Putin economic aide, Elvira Nabiullina. But she, too, recently affirmed that controlling inflation will be her top priority.