Committee for Russian Economic Freedom

Nouriel Roubini

NYU economics professor Nouriel Roubini is predicting that Russia faces a “lost decade” economically when Prime Minister Vladimir Putin returns to the presidency this spring.

Tai Adelaja reports in the Moscow News that Roubini, who met with Putin earlier this month, is highly concerned with the Russian economy’s continued reliance on commodities like oil and natural gas and with its leaders’ inability to do more than pay lip service to much needed institutional reforms.

London-based Capital Economics notes that even if Putin were to follow through with his campaign pledges, it would cost the Russian government more than $160 billion by the end of his next president term. That would raise the oil price that Russia needs to balance its federal budget from about $117 per barrel at present to $130 per barrel.

All this means that Russia is likely to fall behind its BRICS counterparts in development with Putin leading the nation, as he won’t be able to “shake the Russian economy out of its doldrums,” Roubini said.

Adelaja concludes:

Roubini believes that Putin’s ambitious plan to accelerate growth by 6 percent or 7 percent over the next 10 years is unrealistic. While efforts to intensify reforms could bring some economic effects, they are bound to stumble on problems like aging infrastructure and poor investment climate, he said.

Alexei Kudrin

Former Finance Minister Alexei Kudrin and other prominent economists are rejecting calls from Prime Minister Vladimir Putin to levy a one-time tax on Russian business leaders who participated in the privatization deals in the 1990s.

Should the government implement this tax, Kudrin writes, “The legal and economic environment would deteriorate. If the privatization deals struck 17 years ago are encumbered, this would undermine new privatization and ownership rights as a whole.”

University of Houston business professor Craig Pirrong says there’s no reason to believe that extracting fines from those who profited during the rush to privatization would be a one-time thing. As Pirrong writes on Seeking Alpha, “As any victim of blackmail or a protection racket knows, the demands for payment never stop.”

He continues:

There is no dispute that there was a massive transfer of wealth from the public domain into private hands in the 1990s. […] But sunk costs are sunk. […] What Putin should be concerned about is the future, and this proposal […] will damage Russia’s future prospects. For it emphasizes the principle […] that property is held at the sufferance of the state, and is subject to the whim and caprice of the strongman.

Craig Pirrong

Economists say the privatization tax may suppress investment and encourage further capital flight.

And given how the rush to privatization has allegedly enriched Putin and his inner circle (more than almost anyone else), it’s not as if he and his cronies would to pay a fine themselves.

Instead, Pirrong concludes, Russia needs “more institutions, a real rule of law [that] constrains government fiat, and less unconstrained discretion in the hands of Putin and his ilk.”

Sergei Magnitsky

Courtney Weaver of the Financial Times reports that, in a development that defies words, Russian investigators are planning to posthumously prosecute Sergei Magnitsky, the Hermitage Capital lawyer and whistleblower who uncovered a $230 million fraud, only to be locked up in Russian prison, where he died after being beaten and undernourished.

Some Kremlin observers believe, and Interior Minister officials have acknowledged, that this prosecution is a way for Moscow to counter the various legal actions being brought by Magnitsky’s family and Hermitage Capital against those responsible for his death. But Hermitage chief Bill Browder believes a formal case against Magnitsky would have the opposite effect:

The lack of concern about how this appears abroad is astounding. This will only harden the position of foreign governments and parliaments who we have approached to impose sanctions across the world.

The implications extend to the investment community, which remains concerned that baseless actions like these demonstrate “the gap between Putin’s [pro-reform] rhetoric and reality,” said Tom Mundy of Otkritie Capital in Moscow.

Putin has been working overtime to attract foreign investment but has yet to see the fruits of his labor: the Russian equity market, Weaver writes, “still trades at a price-to-earnings ratio of 5.4, a 47 percent discount to the MSCI emerging market index.”

Click here for the New York Times article on the potential Magnitsky trial.

Business Insider has a first-person narrative from Ivan Tchakarov of Renaissance Capital who attended a secret meeting in Moscow last week between opposition leader Alexey Navalny and about two dozen investment bankers, analysts and fund managers, who together control about $20-$25 billion of capital.

[Navalny] appears all of a sudden, and the first impression is definitely positive. Smartly dressed, tall, imposing. […] There is this unmistakable aura of determination and decisiveness about [him].

Alexey Navalny

But despite this steely-eyed determination to lead a movement, he is “quite fuzzy” on his economic views:

He says his goal is now to fight corruption and fight for wider political participation, rather than write economic programs [but] he is absolutely sure that Putin is just throwing sand in people’s eyes and is not ready to loosen the political constraints and put his coterie of corrupt underlings in prison.

All of this adds up to Tchakarov’s assessment that Navalny is elusive and hard to understand, “but two things are clear: he adds an interesting flavor to the current political process and he has a very long road in front of him to ingratiate himself with the majority of Russians.”

Click here read the full story.

Billed as “a place where unusual individuals who are capable of influencing the fate of Russia and the world can meet,” the annual Russia Forum wrapped up in Moscow over the weekend, with participating economists calling on the Putin regime to take immediate, concrete steps to encourage investment in Russia.

At a “Russia 2018” panel, New Economic School Rector Sergei Guriev said the Russian government could send an important signal to the investment community by releasing its most famous political prisoner:

To really prove that the Russian state is interested in a better business climate, first of all, they should release Khodorkovsky and fire all of the executives that are involved in the Magnitsky case. This will prove that the Russian government is interested in improving the investment climate.

Also on the panel with Guriev was former finance minister Alexei Kudrin, who called the current political system “obsolete” and in need of much reform in order to build a new economy. Kudrin applauded the fact that political competition has grown in the last few months. “That’s a good sign” for the economy down the road, he said.

The World Economic Forum in Davos wrapped up late last week, with the head of the Russian delegation making some startling admissions about the ineptitude of his country’s political system, writes Anatoly Medetsky in the Moscow Times.

Deputy P.M. Shuvalov

At a meeting hosted by state-controlled Sberbank, First Deputy Prime Minister Igor Shuvalov said the way the state functions in Russia is “backward” and “one-dimensional” and that “Russia deserves a different political system.”

Adding insult to injury, Arkady Dvorkovich, a Kremlin economic aide, stated his belief that the state plays an excessively large role in the economy.

Meanwhile, former Finance Minister Alexei Kudrin, who fell out of the Kremlin’s favor last fall and is considering mounting an opposition campaign of his own, said he thinks businesses should have the right to finance political parties. “Only then,” he added, “will there be [political] competition.”

Read the full article here.

P.M. Putin

In the meantime, Putin was out with a 6,000-word article in Vedomosti (also excerpted in the Financial Times) making the case for why he should be elected for a third term as Russian president.

In it, he acknowledges a number of pervasive problems in the Russian economy and espouses a program of modernization. Yet to tackle Russia’s economic problems and implement an earnest modernization program would compel him to sacrifice the power system that has been in place since 2000.

He may say he wants modernization but it’s clear that any true actions in this direction would inevitably lead to self-destruction.