Vladimir Putin opened the panel discussion on Russia's economic policy and outlined several challenges facing the Russian economy, including over-reliance on oil and gas exports. He proposed reforms to improve the investment climate in Russia by reducing bureaucracy and protecting business interests. If implemented, the reforms would be on par with previous successful reforms under Putin but would require decentralizing state power. Other panelists discussed the need to invest in human capital to drive growth, the role of inequality and globalization in economic crises, and how cutting government spending could exacerbate recessions.

1. RUSSIA
FEBRUARY 2 3, 2012
Russia Forum Buzz
Plenary Session: Russia Economic
Policy in the Time of Global
Changes
█ Vladimir Putin opened the panel with a speech, which, given his status as a
candidate for president for 2012 18, can be viewed as a long term program of
economic policy if he wins the election in March. The prime minister started with
an analysis of the situation in the global economy. He stated that the major reason
for the current crisis was huge imbalances at the state and corporate level, which
caused incredible debt accumulation. Russia is in better shape, as its debt/GDP
ratio remains extremely low. The country last year demonstrated the most
dynamic development among G 8 countries, with growth of 4.3%, record low
inflation of 6.1% (still rather high compared with developed countries) and a
budget surplus of 0.8% of GDP. Russia is the fifth largest economy in the world
and has the third highest gross international reserves. The demographic situation
is also improving, and life expectancy is on the rise.
█ However, the Kremlin realizes the challenges that the country may face in the
future; it is not only the debt problem in the developed world. Nobody can
rule out a technological revolution, which would reduce the demand for
traditional fuels. The economy’s dependence on the oil market should be
reduced, and the economy itself should shift from natural rent reallocation to
modernized growth based on technological improvements.
█ Russia has a unique natural resource base and human capital, but these are
not being used properly. As result, although Russia’s GDP is comparable to
Germany’s, the former’s labor productivity is a third of the latter’s. One of the
key problems is the poor investment climate. According to international polls,
Russia ranks 120th globally. Mr Putin tasked the next government with
moving Russia to 20th place.
█ The prime minister formulated six necessary changes in Russian legislation.
First, an institution of commissioners to defend the rights of businessmen will
be established in the near future. The commissioners will have the power to
halt implementation of current legislation if it hurts the investment climate and
provides grounds for corruption. They will guarantee the protection of
business interests at the institutional level. Second, legal procedures for
examining deals between businesses and the state will be simplified. The state
will bear the responsibility in case of incorrect claims and can be forced to
compensate for a business’ financial losses that are incurred as a result of such
an examination. Third, the possibility to classify a business’ activity as criminal
will be substantially limited. Fourth, control of business activity will be eased.
This implies a reduction in various checks and approvals that make the life of
small businessmen unbearable and force them to pay bribes. Fifth, businesses
will be able to initiate mutual claims against the state. And finally, legislation
will be harmonized with the best practice in developed countries.
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2. FEBRUARY 2 3, 2012 RUSSIA FORUM BUZZ – PLENARY SESSION: RUSSIA ECONOMIC POLICY IN THE TIME OF GLOBAL CHANGES
█ This program should be welcomed. The scale of reforms is comparable with the so called
“Gref program”, which was successfully implemented during Putin’s first presidential term
and which created a basis for economic development (though not ideal, it was a
breakthrough after the chaos of the 1990s). Very symbolically, Sberbank CEO Herman Gref
moderated the panel at which Putin presented his program. However, the implementation of
this program implies a de concentration of power (i.e. a completely different strategy from
what the Kremlin has been doing over the past decade). Only time will tell whether the
political elite is able to take such a radical turn.
█ Paul Krugman continued the discussion about economic policy. In his view, budget
expenditures should not be cut. Over recent years, debt growth was accelerating due mainly
to corporate borrowing. Now corporates are paying off debt and reducing costs. This has
already negatively affected economic activity. Cuts to budget expenditures would have
multiplied this problem. Mr Krugman also stressed that 10 years ago, he was strictly against
increasing the budget deficit. He does not believe that the current situation can be classified
as a crisis of overproduction. Anytime people want to buy more, the crisis is a result of
collapsing debt and demand.
█ Raghuram Rajan focused on inequality as a major reason for populist decisions in economic policy
that led to the current crisis. In his view, inequality increased in industrialized countries for several
reasons. Technological changes increased the importance of education, especially in technological
spheres. As a result, people with poor education did not have a chance to earn good salaries and
became poor from a financial standpoint. Second, deregulation increased competition and, as
result, inequality. Globalization also contributed to heightened competition and inequality.
█ There are some arguments against this position. Competition can be seen as the reason for
inequality, but it is also a driver of economic growth. Economic growth that is based on
competition does not guarantee equity in revenues, but average incomes will most likely increase
in this case. Russia is a good example of this process. In 1990, personal incomes were much more
“equal” than in 2011, but they consumed much less.
█ Michael Milken discussed the importance of human capital for economic growth, providing very
impressive statistics. In 1960, Singapore and Jamaica had the same GDP per capita ($2,500).
However, Singapore invested a lot more in human capital (e.g. education and health), while
Jamaica concentrated on developing tourism infrastructure. In 2011, GDP per capita in Singapore
reached $50,700, while that in Jamaica was only $5,400. Russia could be an incredibly rich
country if it properly uses the human capital that it already has. The proper policies can reduce the
emigration of talented people to Europe, the US and Israel. If Russia succeeds, it could become a
new world leader.
Panel
Herman Gref Chairman of the Management Board, CEO, Sberbank of Russia
Vladimir Putin Prime Minister, Russia
Paul Krugman Professor, Princeton University
Michael Milken Chairman, Milken Institute
Raghuram Rajan Professor, University of Chicago, Booth School of Business
2 TROIKA DIALOG

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