Russia Profile: “Who Controls Russia’s Economy?”

The Composition of Russia’s New Cabinet Dampens Hopes for Economic Reforms
By Tai Adelaja
Russia Profile

Despite having a government firmly in place, Russia’s economic outlook remains uncertain because key economic decisions remain the prerogative of the Kremlin, economists say. Hopes for prosperity through economic reform and modernization may also be at risk as the Kremlin exerts its influence over economic policy through a highly selective and secretive process of ministerial appointments. While Russian President Vladimir Putin promised to embark on policies designed to make Russia a great economic power by the end of the decade, many economists say the composition of the new government suggests a continuation of the status quo.

President Putin approved the appointment of some reform-minded ministers on Monday, raising the prospect that the government will steam ahead with its well orchestrated modernization program, including pension reform and the privatization of state assets. “Work will be difficult given the concrete situation in the world economy – there are very many factors of uncertainty,” Putin told the new cabinet during a televised Kremlin meeting. Along with Anton Siluanov, who stays as finance minister, Putin retained his ally Igor Shuvalov as first deputy prime minister in charge of economic policy, but passed over former power industry boss Mikhail Abyzov and picked Alexander Novak for the energy minister’s job.

Business executives welcome the appointment of Arkady Dvorkovich, a former presidential economic aide who replaced Putin’s close ally Igor Sechin as a deputy prime minister in charge of energy. The appointment of ex-Deputy Moscow Mayor Olga Golodets, another pro-market reformer, as deputy prime minister in charge of social policies also elicited a positive reaction on the market on Monday. “The market sees the appointment of some deputy prime ministers, like Dvorkovich and Golodets, as evidence that reforms will continue,” said Alexander Morozov, the chief economist for Russia at HSBC in Moscow.

Nevertheless, other appointments, including that of a pro-Putin economist Andrei Belousov as economy minister and Alexander Novak as energy minister have both raised cautious optimism and genuine concern over the future of economic reforms. Belousov has repeatedly advocated increased state involvement in the economy, Vedomosti reported on Tuesday. His appointment is a sign of tight state control over the economy, Natalia Orlova, the chief economist at Alfa Bank in Moscow, told the paper.

Other economists agree. With the appointment of Andrei Belousov there should be no new impetus in the area of privatization, said Irina Vorobyova, an analyst at 2K Audit-Deloviye Konsultatsii/Morison International. “It’s more likely that the cabinet would place more emphasis on state investment in public companies,” Vorobyova said. Her opinions were echoed by Mikhail Khazin, the president of a consulting firm Neokon, who said the new government, like the old one, is “stillborn.” “It’s completely obvious that the personnel changes in the government will not produce new changes except perhaps in the sphere of health and education,” Khazin said.

The composition of the cabinet appears to give ammunition to president Putin’ critics, who have accused him in the past of stifling economic reforms in the world’s largest country. “The composition of the new cabinet suggests that it is likely to focus on budget stability rather than a pro-market agenda,” Moscow-based Alfa Bank said in a research note. “We also view the new cabinet as reflective of efforts to maintain a balance of power between the president and the prime minister, which may make it difficult to deliver a united economic agenda.”

Former Finance Minister Alexei Kudrin, who was fired by President Dmitry Medvedev for public statements opposing the president’s economic policies, believes that all the key decisions will continue to be made by president Putin, while the cabinet’s power was bound to wane. “It’s a forgone conclusion,” Kudrin told Business FM radio on Tuesday, because former Russian ministers, who failed to get positions in the new government on Monday, have followed former rime minster and now president Putin to the Kremlin. “He will allow some freedom in certain fields, but nevertheless he will make the key decisions,” Kudrin said.

New evidence of the Kremlin’s tinkering and tampering with the economy has already emerged and could well define the shape of things to come. For instance, Putin has made the Federal Service for Financial Monitoring or RosFinMonitoring answerable to himself, Vedomosti reported on Tuesday. The powerful service, set up in 2004 to fight money laundering and prevent illegal offshore financial activities, also collects information on monitored financial transactions, conducts inspections and can suspend financial operations. Unnamed sources cited by the paper said the service could become the basis for the creation of an anti-corruption agency with broader powers, including tracking public procurement, which exceeds five trillion rubles ($167 billion) per year.

With the government’s hand seemingly everywhere, some business executives are putting a positive spin on the dire situation. The positive change in the new cabinet is not so much the appointment of new people, but rather the removal of long-term Kremlin operator like Igor Sechin, said Nikolai Solabuto, an asset manager for the holding company of the brokerage firm BKC. “One can now expect a drop in lobbying activities by well-connected lobby groups, and government funding can trickle down to medium-sized businesses that are not connected to the Kremlin,” Solabuto said.

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