Investors haven’t been too amused with Russia of late, caught up as they are in the latest power battle. It’s rather tragic, since Russia has been one of the best-performing emerging markets over the past few years, and the two main protagonists engaged in the battle, Khodorkovsky and Russian President Vladimir Putin, were, not too long ago, cast as the mascots of a new Russia. Putin apparently orchestrated the incarceration of Khodorkovsky on tax charges last October for political reasons, reopening the debate over where the president is leading Russia. The Western intelligentsia now trace Putin’s authoritarian side back to Russia’s tsarist days. The international press plays up his KGB past, his recent efforts to muzzle the electronic media and the “Yukos affair” as confirmation that he will do whatever he can to crush his opponents, whatever the consequences.
Perhaps, then, the recent comments by Putin on the Yukos affair should give international critics cause to pause and reflect on his full four-year record in office. The Putin administration is seeking $3.4 billion in back taxes from Yukos, raising fears in the market that a company held up as a model of modernizing corporate governance in Russia could be driven into bankruptcy. Putin’s statement came last Thursday, on the eve of a key court decision in the case, and sent a strong signal. Putin said his government had “no interest in the bankruptcy of a company such as Yukos”–a remark that conveyed a lot for a man of few words. Yukos stock surged 34 percent, lifting the Russian market to its largest one-day gain ever.
While Putin undoubtedly wants to settle some political scores with Khodorkovsky, his overarching objective remains to turn Russia into an economic power. That came through in his speech on Thursday. Putin’s track record and reform initiatives decisively show that he is one of the few emerging-market leaders in the world today who understand the connection between economic and political success.
Little wonder that Russia’s macroeconomic fundamentals have never looked stronger. Russia should once again be one of the fastest-expanding economies in the world this year, with GNP growth north of 7 percent. Inflation is the lowest in recent memory. Russia’s twin surpluses–a 4 percent budget surplus and an 8 percent current-account surplus–mark a new high for any emerging market and should help Russia further reduce its shrinking debt burden.
To be sure, the high price of oil has played a significant role in improving Russia’s economic profile. Still, Putin’s policies and emphasis on stability have been more important contributors to the country’s economic transformation. After all, Saudi Arabia and much of the Middle East have never been able to make much out of oil booms. Putin has focused on carrying out genuine reforms and maintaining fiscal rectitude to strengthen Russia’s economy instead of using the windfall from Russia’s oil exports as an excuse for inaction.
His successful experiment with a low, flat tax should be a model for many developing countries struggling to raise their tax-GDP ratios. The Putin administration is now working on restructuring the banking sector while the social sector is relying less on government subsidies and more on individual payments. Progress on cutting bureaucracy has been slow, but the intention to reduce the role of government in society is evident.
Despite projected images to the contrary, the government is in secular retreat, and the KGB sleuths aren’t stalking the street to keep a watch on Russians. Swanky new restaurants and nightclubs are mushrooming, some right next to the KGB headquarters in Moscow. The spectacularly ugly Ladas are making way for Mercedeses and BMWs. Slowly but surely, the latest fashion trends are replacing the hard-to-kick 1970s look in Russia. The erstwhile high-end department store of the communist era–GUM–now houses leading designer names.
Of course, Russia’s budding capitalist system would be even better off within a more democratic framework and without the power battles. But then, that is Russia’s history. Democracy in the country is an evolutionary concept, especially as its society has little experience with it. Even Putin’s powers are kept in check by the country’s complicated structure. Now that Russian society has tasted the benefits of economic freedom, there is no appetite for regression. Putin’s success at home, manifested in sustained high popularity ratings, lies in the fact that he is delivering on the economic front. He deserves credit for being a proponent of the notion that good economics makes for good politics.
