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Moving Beyond Putinomics

MOSCOW – Dmitry Medvedev’s election as Russia’s new president was virtually guaranteed. Whether or not he can improve Russia’s economy after he takes office in May is far less certain.

To be sure, Vladimir Putin’s administration appears to have left Russia’s economy in a rosy state. Economic growth averaged 7.2% between 1999 and 2008. Foreign reserves stand at 30% of GDP and are the third highest in the world in absolute terms. The stock market has increased twenty-fold. The middle class is buying foreign cars, vacationing abroad, and dining at sushi restaurants, and surveys show that life satisfaction has increased across the board.

Russia’s economic success is partly attributable to high oil and commodities prices. But oil is not the whole story. The tax reform of 2001 improved incentives to work and decreased tax evasion by introducing a flat 13% income tax – one of the world’s lowest. Liberalizing the procedures for corporate registration and licensing, and limiting inspections, improved the climate for small businesses and entrepreneurs. Conservative macroeconomic policy and financial-sector reform lowered interest rates and fueled an investment and consumption boom. Real wages tripled, and poverty and unemployment fell by half.

Yet Medvedev’s most notable pre-election speech – unusually liberal even by Western standards – recognized several economic challenges. Medvedev seems to understand that sustaining growth will not be easy: oil prices cannot rise forever, and the “low hanging fruit” of basic economic reform and prudent macroeconomic policies have already been picked. According to Medvedev, the only solution is to empower private initiative and innovation.