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To Reform or Not to Reform

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Expectations were high after Alexei Kudrin, Russia’s former finance minister, unveiled an ambitious economic reform plan. But a look at Russia’s track record dampens hopes of a far-reaching overhaul.

© REUTERS/Alexander Shcherbak/TASS/Pool

Russia is once again pondering its economic future. At this year’s St. Petersburg International Economic Forum, a new economic reform program topped the agenda. Developed at the request of Russian President Vladimir Putin by former Finance Minister Alexei Kudrin, the program is ambitious: it demands not only the privatization of the state-owned oil sector in the next eight years, but also reform of the judicial and administrative systems and cuts to the defense budget.

Some of these ideas sound like déjà-vu. Nine years ago, then-President Dmitry Medvedev’s modernization agenda captured the imagination of many European politicians and businesses hoping for a jackpot of economic opportunities, paired with improvements in the investment climate, the rule of law, and governance. These hopes were ultimately dashed with the return of Putin to the presidency in 2012. The innovation center Skolkovo on the outskirts of Moscow – originally intended to become Russia’s Silicon Valley – is a reminder of how grand economic designs à la russe can end in the dustbin of history. Will Kudrin’s reform plans share the same fate?

Kudrin is an ambiguous figure in Russian politics. He has been in and out of favor with the Kremlin, but remains one of the few critical voices allowed inside the echo chamber of Putin’s inner circle. In March 2014 he publicly calculated the costs of Crimean annexation as amounting to between $150-160 billion in capital flight alone.

Kudrin’s political career started in the 1990s in the city administration of St. Petersburg. Both Kudrin and Putin began working for the presidential administration in 1996. From 2000-11 Kudrin served as finance minister and has been credited for steering Russia through the financial crisis of 2008. In the eyes of Western financial institutions, he was a popular proponent of a market-oriented economy, representing the faction of moderate economic liberals within the Russian political elite.

Careful Navigation

In 2011, after Medvedev and Putin announced their decision to swap positions again, Kudrin refused to serve as finance minister in a cabinet led by Medvedev. He cited concerns about mounting defense expenditures, and was dismissed by Medvedev in a public spat. Since then, Kudrin has carefully navigated the Russian political arena. During the protests following the Duma elections in 2011 he sided with the protesters by criticizing the election procedures, but stressed the need for dialogue with officials. Subsequently, he founded the Civil Initiatives Committee, a civil society organization that falls short of being a political party, but represents a potential base for any future political ambitions.

Speculations about Kudrin’s return to politics, such as replacing Medvedev as prime minister, have never ceased. For the moment, being outside the government seems a convenient position because it allows for outspoken criticism of the current government’s economic policies. Unofficially, however, Kudrin has already returned to politics: In April 2016 he was appointed chairman of the board of the Center for Strategic Research Moscow, a think tank close to the Russian president, and tasked with developing economic proposals for the next presidential term.

Putin has so far avoided taking ownership of Kudrin’s reform plans and has also asked a rival faction around Boris Titov, the presidential commissioner for entrepreneurs’ rights, to develop parallel proposals. This allows for convenient cherry-picking. In contrast to Kudrin’s ideas, the proposals of the Titov faction advocate for greater state intervention – a Keynesian steering of the economy.

It is important, however, to consider the likelihood that either of these economic reform proposals will be implemented. Back in 2008, against the backdrop of the financial crisis, Medvedev’s reform plans enjoyed at least some credibility in the West. This was the reason why so many European countries forged so-called modernization partnerships with Russia, a concept Germany had been particularly keen on. Conventional wisdom had it that Russian economic reform was urgently necessary, otherwise the country would risk economic decline or collapse.

Reform for Legitimacy

In recent years, however, the Kremlin has demonstrated the opposite: a mediocre oil price and a comfortable buffer of stabilization funds – built up in better times by Kudrin himself – have kept Russia afloat without significant economic reforms. And a new social contract has emerged: In the absence of economic growth and prosperity, the pill has been sweetened with foreign policy adventurism and patriotic fodder for the hearts and minds.

Given Moscow’s wish for “normalization” of relations with the West, a new foreign policy adventure seems unlikely. And with Putin preparing for a fourth term in power, he must offer a substitute to entertain the population and the elites. More of the same is not the fabric grandiose victories are made of. The question of whether to reform or not to reform hence runs the risk of becoming the Potemkin facade in a play staged for the 2018 presidential election to simulate activism and debate in an otherwise stagnating domestic environment.

While Putin’s “winning” a fourth term is certainly not at stake, questions of voter turnout and legitimacy remain important. Discontent among Russian youth is simmering, as demonstrated by the protests following corruption revelations by opposition politician Alexei Navalny.

For European policymakers, the lesson to be learned from this is that Russia’s economic reform plans should be taken with more than a grain of salt. German politicians in particular, having met the Russian president for a personal tête-à-tête in St. Petersburg, should adopt a realistic perspective on the current state of the Russian economy. While Russia’s position in the world has changed fundamentally since 2008, the economic problems have remained the same.

In an economy where direct and indirect state involvement amounts to seventy percent, the vested interests of the political elite are too entrenched for significant changes to the current model to be made without endangering its power basis. In the best case, one can hope for some minor positive adjustments. In the worst case, Kudrin’s reform plans become just another chapter in the eternal play of Russian pondering about their economic future.