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New year, new expectations - further economic liberalization is expected in 2008

January 09, 2008 | RBC

The key problem to be faced by Dmitry Medvedev if he is elected President of Russia in 2008 will be the overcoming of Russia’s economic inertia of the past few years. A 2-3 percent rise in inflation, expected in January, will require urgent measures, as well as problems with the implementation of national projects. Replacing Vladimir Putin, with his huge popularity, Medvedev will have to grant certain concessions to businesses, but the reforms will be complicated by the conflict of interests between Medvedev and Russia’s ruling elite, as well as paternalistic attitudes among Russians.

It is difficult to say what will change in the country if Dmitry Medvedev comes to power. Little is known about him, but it is clear that he is not an ordinary member of Putin’s team. Medvedev played an important role in Russia’s economic and political reforms of the past few years, which are usually attributed to Putin’s credit, says Elena Matrosova, an expert at BDO Unicon. Typical in this respect is the civil service reform, which Medvedev carried out in his soft manner, without radical changes. “Unlike Dmitry Kozak, who offered a revolutionary system of distributing powers within the government, Medvedev achieved significant changes in legislation without changing anything formally,” said Alexei Makarkin, Deputy General Director of the Political Technology Center. Makarkin also praised Medvedev for the liberalization of Gazprom’s share market. He is expected to continue in the same quiet and effective manner, without much noise in the media.

Medvedev will have to overcome the country’s economic inertia, which will require urgent action, partly due to spiraling inflation. “In theory, Medvedev could fight inflation using Zubkov’s methods of cutting exports and forcing price freezes. But in January or February, the authorities could get a cold shower of a 2.5 to 3 percent inflation, and Putin and Medvedev will have to admit the mistake,” Makarkin said.

If he wins the presidential vote, Medvedev will not want to be a scapegoat. “Medvedev is stronger than people think,” the analyst added. “He will have to further liberalize the economy, lifting bureaucratic burdens, to reform the judicial system and pass effective laws against corruption. Otherwise, even if oil and gas prices remain high, the national projects, which are associated with Medvedev, are doomed to fail,” Makarkin argues.

Russia’s new economic policy will be guided by the so-called Putin plan, experts say. According to Elena Sharipova, at Renaissance Capital, the authorities will use it to justify any economic measures.

In the long term, the economy is set to be liberalized, but in the short term, the government will continue its policy of controlling certain industries. “First, the government took under its control raw material industries, which are the most lucrative. After that it announced interest in the hi-tech sector, and now it’s turning to the areas which are unpopular with commercial investors,” Matrosova said. Supporting the problematic assets, Russia is following the example set by Japan, Germany and some other countries, she believes. “The government will support those industries, filling them with cash, after which it will give them back into private hands,” she said approvingly.

Even under the most optimistic scenario, real economic recovery is unlikely before 2010. “2008 is not a good year for reforms, with the presidential election and transfer of power. And it will take another year for a new government to tune in,” Makarkin warned. Among other obstacles for reforms analysts point to the conflict of interests between Medvedev and Russia’s ruling elite, and to paternalistic attitudes among Russian people, who expect handouts from the government.

Analytical department of RIA RosBusinessConsulting

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