Russia's Economy Stabilized Under Putin

[March 01, 2008]  MOSCOW (AP) -- On one side of central Moscow's Kievskaya Street, the gleaming European Center mall stands tall - seven stories of boutiques, cafes and an ice rink.

On the other side stand huddled women, their arms draped with cheap scarves, clumsily knit sweaters and heavy-duty plastic bags they hope to sell to people streaming toward the mall.

Both sides of the street are emblematic of outgoing Russian President Vladimir Putin's economic policies during his eight years in office.

Analysts credit Putin - whose successor will be chosen in elections Sunday - with policies that brought an immense boom to Russia, but say he could have done much more. The women on Kievskaya Street are just as ambivalent.

"Life is getting sweet for many; in general, it's getting better," said a scarf-seller who gave her name only as Maria.

But Natalia Mironova, laden with bunches of roses wilting in the cold, butted in with a loud "No!" "I milked cows for 20 years. Now my legs hurt and I can't find work," the 53-year-old former collective farm worker said. "They have cheated me."

When Putin took office on New Year's Eve 1999, there were a lot more people like Mironova on the streets. Some sold rusty tools that they had scavenged or incoherent assortments such as a woman who traded in smoked fish and brassieres. The lot where the European Center now stands was then strewn with collapsed drunks and stray dogs nursing pups.

Russia owed tens of billions of dollars in foreign debt. The ruble had collapsed the previous year. The classic image of a Russian businessman was someone with a bulletproof vest, a hot girlfriend and zero ethics.

Eight years later, not only is the debt paid off but Russia has such a budget surplus that it's considering strategies for how to invest $32 billion in a sovereign wealth fund - and it has another $125 billion stashed away in a stabilization fund.

The ruble is stable and even being touted as a potential reserve currency. The economy grew 8.1 percent last year, and the middle class has grown dramatically. Russia stands 79th on the World Bank's ranking by gross national income per capita at $5,780 - behind Mexico but ahead of EU members Romania and Bulgaria.

The single most important factor in this stunning transformation has been skyrocketing prices for oil and gas. Oil was about $20 a barrel when Putin took office, roughly a fifth of current prices. Russia has earned about $1 trillion in oil and gas revenues during Putin's years, according to calculations by Moscow's UralSib bank.

"There's no doubt about it, they got extremely lucky with the oil price," said UralSib research head Chris Weafer. But "they did a couple of positive things as well, such as reforming the tax system from what was a real upturned plate of spaghetti in terms of all the various options and routes and exceptions that were in the system."

Andrew Somers, head of the American Chamber of Commerce in Moscow, said Putin first boosted the economy by establishing a sense of order.

"When he came in, it was close to chaos, at least in the minds of most business people. He brought basic stability and then he introduced some far-reaching legislation, most primarily the tax legislation ... a corporate tax system that is basically consistent with the way the rest of the world treats business," Somers said.

The simplified system - including a 13-percent flat income tax - encouraged longtime scofflaws to pay taxes, which in turn brought a predictability that spurred growth, the analysts said.

But Putin's penchant for imposing control may have caused him to miss economic opportunities. After his first term of focusing on political stability and rationalizing tax legislation, much of the next four years focused on bolstering state-dominated "champion industries" in oil, gas, weapons and other sectors.

The politically charged prosecution of oil tycoon Mikhail Khodorkovsky, which briefly shook investor confidence in Russia, appeared to be part of that drive: Khodorkovsky's Yukos oil company was eventually auctioned off by the state, with most of its assets going to the state oil company Rosneft.

That focus has slowed Russia's attempts to diversify its economy, to establish viable industries to supply the domestic market, earn export income and create jobs.

"They really should have been using this money as they were earning it to push for growth and create incentives in the broader economy," Weafer said. "They could have been targeting these industries four years ago."

Somers in turn criticized Putin for hesitating to put more money into infrastructure, education and general social welfare programs.

Putin's anointed successor, Dmitry Medvedev, who is almost certain to win Sunday's election, is expected to step up emphasis on such programs.

Putin himself has expressed dissatisfaction that he was unable to curb inflation - 11.9 percent last year - and that corruption remains endemic.

Others suggest that Putin has undermined Russia's economic development by pursuing an aggressive foreign policy that discourages investors.

That could be particularly important as Russia aims to broaden its economic base beyond oil, where huge foreign investors tend to have thick skins about political tensions, said Weafer.

"The Exxons of this world and the Shells of this world really don't care," he said. "But the likes of HSBC and Wal-Mart and Microsoft ... they are generally much more risk-averse."

"These are exactly the sort of industries and companies that Russia needs to attract as its partners if it is going to be able to develop a more diversified economy."

[Associated Press; By JIM HEINTZ]

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