Leaders have few answers to Russia's stagnant economy

Russian Prime Minister Dmitry Medvedev says he recognises the problems holding back the country's economy. Sadly, nobody has much confidence in his plans to address them.

Russian Prime Minister Dmitry Medvedev says he recognises the problems holding back the country's economy. Sadly, nobody has much confidence in his plans to address them.

With the rate of economic growth declining towards zero, Mr Medvedev is making a renewed effort to show the business community that he knows what to do. In an unusually long article in the business daily Vedomosti, he acknowledged that the country's growth was largely artificial, the government was too dependent on revenue from the oil industry and that Russia offered a terrible environment for investment.

"Output growth is supported almost exclusively by large investment projects financed by the government and state-owned companies, salary rises in the public sector, an expansion of subsidies to agriculture and other sectors fuelled by the high oil price," Mr Medvedev wrote.

In other words, Russia's economy might not be growing at all if the government was not pouring oil money into subsidies and infrastructure projects such as the preparations for the Sochi Winter Olympics in 2014 and the soccer World Cup in 2018.

The private investment needed to replace the government spending, Mr Medvedev wrote, was not coming, in part because investors had an "understandable lack of trust in public institutions".

"We are at a crossroads," he said. Russia can continue going forward in slow motion, with economic growth close to zero, or it can take a serious step forward."

The second path "is fraught with risk", while the first "leads to a precipice". Few economists would argue with the diagnosis. The biggest flaw in Mr Medvedev's article, critics said, was the paucity of solutions. All he offered was a slowdown in tariff increases at state-owned utilities and some support for small business in the form of tax breaks, loans and government contracts. He also expounded on the need to turn Moscow into an international financial centre.

"What about safeguarding property rights and the quality of the judicial system, shrinking the state and using government resources effectively?" said Sergey Aleksashenko, at Moscow's Higher School of Economics. "What about privatisation and infrastructure?"

Mr Medvedev's article does not mention the word "corruption" or address capital flight, expected to reach $US70 billion this year. It offers no measures to foster competition, the focus of the latest World Bank report on Russia.

"Every month the Russian statistics committee surveys 25,000 entrepreneurs, trying to find out what obstacles they face, and every time they give the same answers: taxes, bureaucratic pressure, corruption," said Igor Nikolaev, head of strategic analysis at the audit firm FBK. "How long will the government close its eyes to that, merely pretending that it's doing something?"

Some worry Russia could be entering a new era of stagnation.

"A crisis is a situation you can enter and exit but stagnation is a situation with unpredictable consequences," Economics Minister Alexei Ulyukayev said.

Both the economy and the bureaucracy seem to be marking time, with the latter unable to take the radical action needed to break the impasse. All power belongs to one man, President Vladimir Putin, who recently indicated he intends to stay in power to 2024.

Even if Mr Medvedev had a bold plan to restart growth, he would lack the authority to implement it.

As the journalist Alexander Polivanov put it: "Medvedev is prepared to change separate parts of the government machine, but not the machine itself."

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