Putin circles Russia in search of elusive growth

Russia's Prime Minister Vladimir Putin runs the country from a plane and his journeys have a clear pattern: he strives to win back the economic growth Russia lost last year.

Russia was hit harder by the global crisis than any other major emerging economy, its gross domestic product shrinking by 7.9 percent in 2009 compared with growth in China, India and Brazil, the other major emerging economies in the BRIC group.

Putin, rated as the world's third most powerful person by Forbes magazine, promised to double Russia's GDP within a decade when he first won power as the country's president in 2000. The crisis has left him barely halfway to that goal.

Now leading the nation as its prime minister after completing the maximum two terms as president, Putin often plays a far more visible role than President Dmitry Medvedev in telling Russia's business leaders what they are expected to contribute to the economy.

"I'm asking you for a third time, when are you going to sign this contract, do you not hear me?" Putin lashed out at deputy chief of gas monopoly Gazprom (GAZP.MM) Alexander Ananenkov, an elderly man wearing a hearing aid, at a meeting last December.

The deal was for Gazprom to buy Russian vessels and Ananenkov wanted to sign only a letter of intent instead of a firm contract.

The meeting, held in the Pacific port of Vladivostok, focused on the shipbuilding industry, one of the sectors identified by Putin as growth drivers. The sector, which suffered a post-Soviet collapse, grew by 68 percent last year.

Russia's pre-crisis growth model was based on a rising oil price and cheap foreign loans. Putin's new stick and carrot growth recipe includes state financial aid, deals mediation, regulatory changes and outright orders.

Desire Creates Reality

Jim O'Neill, a Goldman Sachs economist who invented the term "BRIC," says Putin's policy may pay off "if it is genuine and not just hype." Russia is one of Goldman Sachs' favorite trades this year.

"Everyone assumes that Russia will always be status quo but as with any supply side policies, desire creates the reality," O'Neill told Reuters.

"So it is just a matter of people getting correctly focused on the key issues, and one of the key issues is to create an environment to encourage and help non-energy based ventures."

Russian industrialists, nostalgic about Soviet industrial might, say that monetarist policies in place since the collapse of the Soviet Union ignored industrial development and turned Russia into a petro-state.

Since becoming Prime Minister in May 2008, Putin has turned his attention to sectors where he sees potential for growth such as nuclear power, defense and auto sectors, plane-making, petrochemicals, shipbuilding, utilities and agriculture.

The new industrial policy should lead to the emergence of competitive Russian-made products such as the Sukhoi Superjet 100 medium-range passenger plane or a fifth generation fighter invisible to radar like the U.S. F-22 Raptor stealth fighter.

Another of Putin's projects is the diversification of Russia's energy export supply routes which, apart from their geopolitical role, will also swell the investment plans of state monopolies such as Gazprom and Transneft.

The multi-billion projects serve as growth drivers as they translate into orders of pipes, turbines and other equipment.

"I was recently at a (Russian) electrical transformers factory. A remarkable enterprise, new, very beautiful, modern. So why are you importing 70 percent of all transformers?" Putin asked the head of the Federal Grid Company, Oleg Budargin.

Heat Economy up

Most of Putin's foreign visits are related either to energy diplomacy or the lobbying of deals on behalf of Russian defense or nuclear power firms.

During his March visit to India, Putin signed deals worth $10 billion including to build up to 16 nuclear reactors, saying Russia wants to control a quarter of the global nuclear power market.

Putin is also keen to support construction which achieved double-digit growth during the oil boom years and where asset price bubbles had formed before the crisis hit.

"We need to heat up this sector a little bit, although I am not talking about overheating," Putin said of the construction industry, where he plans to introduce a government-backed mortgage scheme with subsidised interest rates for home buyers.

Growth sectors receive lavish funding from state-controlled banks whose chief executives accompany Putin on his trips.

A risk for the growth revival is a new oil-fueled rouble rally, which undermines local industries' competitiveness.

Still, Putin has repeatedly resisted re-imposing capital controls to solve this problem, which should bring benefits in the long-term for the investment climate.

"They've had a good start to the year. I'm impressed," Goldman's O'Neill said.

[Source: Reuters, Moscow, 28Mar10]

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