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Medvedev urges change to "primitive" economy

The differentiation in Russian policy and politics between President Dmitry Medvedev and Prime Minster Vladimir Putin is becoming more accentuated.

The Russian economy and stock market have recovered from the desperate situation into which the global economic crisis thrust them over the past year, but the gains are largely linked to the increase in world prices for energy and other raw materials, on whose export the country's economic health so much depends.

The most recent evidence for the increasing divergence is Medvedev's nearly two-and-a-half hour "state of the nation" delivered late last week. In this, he criticized the "primitive raw materials economy" of the country as well as disorganized foreign and domestic policies based on "nostalgic superstitions". Medvedev, however, does not have, at least not yet, sufficient political weight to put behind his less and less implicit criticisms of what some outside Russia now call "Putinism".

In a nearly simultaneous interview with Der Spiegel, Medvedev again criticized the country's economic over-reliance on energy and raw materials exports. Although industrial production has recovered since it collapsed at the end of 2008, preliminary figures suggest a decline of no less than one-sixth in industrial output on a year-on-year basis throughout the first three quarters of the current calendar year.

By June of this year, there were indications of manufacturing expansion. The Russian Purchasing Managers Index (PMI) subsequently registered a neutral 50 in August, then 52 in September (a figure over 50 indicates expansion, under 50 contraction) but slipped to 49 last month. Even here, the growth of export orders suggests that overseas rather than domestic demand is behind the numbers.

Projections of rates of Russian economic growth into the future vary widely. The median figure (it is impossible yet to speak of a "consensus") seems to be for an increase of 2.5% in gross domestic product for calendar year 2009, and 4% for 2010. A consensus is forming that the rise of the rouble is inexorable into next year, due to the continuing strength of the advance of commodity prices, which may overpower attempts by policy-makers to moderate the currency, particularly also given the capital inflows into the country.

The stronger rouble makes consumer goods less expensive, and it appears that consumer demand is beginning to become a significant element in such decisions.

The Russian Central Bank began increasing its foreign exchange reserves about six months ago and has accelerated those increases in recent weeks. After the rouble depreciated earlier this year, it is now being supported by those new reserves as well as by the higher world price for oil. This is discomfiting the Russian authorities, and they are envisioning measures to seek to control it, but it is likely that the trend will continue.

The recovery in the Russian stock market has taken some political heat from the home-grown nouveaux riches off the leadership. The dollar-denominated RTS broke its key resistance level at 1,315 five weeks ago then returned to test it two weeks ago, bouncing off into the rise that has taken it to its present level, closing on Tuesday at 1,489.

This is its highest level in over 10 months and nearly three times its 498 medium-term low on January 23. It is now up against both a long-term and a short-term resistance at the current level, but the next resistance does not kick in until 1,657. There is no really strong support on the downside until 1,305.

The rouble-denominated MICEX, meanwhile, closed on Tuesday at 1,372, its highest in nearly 14 months and over two-and-half times its medium-term low of 514 last October 27. It penetrated a key resistance in mid-May at 1,096 before falling back to touch 927 four months ago and moving back up through that resistance at the beginning of August, not looking back since then. Tuesday's close signifies penetration of the key resistance level of 1,366. If this holds up, then the next major resistance is the 1,450-1,460 interval, followed then by 1,540-1,560.

Medvedev's criticism of the stock market's, and the economy's, reliance on natural resources is bound up with his criticisms of the endemic corruption in the country. At the same time, it is worth mentioning that domestic industry and transportation structures are still based on assets inherited from the Soviet period, which are not known for their energy efficiency.

Still, foreign and domestic policy divergences have become more explicit: Medvedev does not share Putin's contempt for non-governmental organizations, does not think that the situation in the Caucasus is satisfactory, and views cooperation with Europe and the West in general more favorably than the former president. He has also made a number of proposals for electoral reform, although it is difficult to see where these will find support, given that those in power at all levels draw advantage from the current setup.

These positions differentiate Medvedev more and more from Putin, without implying that there is, at least not yet, a split. Still, the bureaucratic and institutional circles around each of the two men are becoming better defined.

It is a truism of Russian history that domestic reform follows military defeats or weakness abroad. It follows that the improving international position of Russia, which gives Medvedev the domestic breathing space to state these positions, is not easily conducive to their implementation. The struggle continues.

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URL:  http://www.robertcutler.org/blog/2009/11/medvedev_urges_change_to_primi.html
First published in Asia Times Online, 20 November 2009.

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