Putin Promises Infrastructure Spending, Investors Skeptical

Russian economic policy seems increasingly statist under Vladimir Putin’s third term.

President Vladimir Putin of Russia addresses the plenary session of the St. Petersburg International Economic Forum, June 21, 2012
President Vladimir Putin of Russia addresses the plenary session of the St. Petersburg International Economic Forum, June 21, 2012 (Presidential Press and Information Office of Russia)

President Vladimir Putin on Friday promised to invest more than $13 billion in updating Russia’s infrastructure but cautioned that there was no “magic wand” that could resolve the nation’s economic problems altogether.

Speaking at a business forum in his hometown of Saint Petersburg, the Russian leader announced plans to build a new ring road outside Moscow as well as a high-speed rail connection from the capital to Kazan, an industrial hub in Tatarstan. He also seeks to update the Trans Siberian railway to Russia’s Far East.

To finance the projects, the government will tap into the $87 billion National Welfare Fund, otherwise intended to provide for pensions.

But with inflation at 7.4 percent and growth forecast to be 2.4 percent this year, even the promise of a lucrative energy deal with China valued at $270 billion might not lift the nation’s spirits. Foreign investors worry that liberals are increasingly marginalized in favor of conservatives in Putin’s government who advocate a more statist economic policy.

Less than two months ago, the rector of Moscow’s New Economic School Sergei Guriev fled to France after pressure from state prosecutors. In May, Deputy Prime Minister Vladislav Surkov, once the Kremlin’s chief ideologist, was dismissed.

Earlier, Putin’s longtime finance minister Alexei Kudrin left the government, dismayed by its lack of liberal economic reforms. He publicly disputed the president’s claim that the slowdown in Russian growth should be attributed to weakened demand for its export products in a television interview last month. Rather he urged the government to finally wean itself off oil and gas sales.

While liberal economic and fiscal reforms were enacted during Putin’s early years in power, including dramatic income tax cuts, debt stabilization and education and infrastructure spending that helped fuel economic growth, there has been little progress since Kudrin’s resignation. Both Putin and his deputy Dmitri Medvedev have repeatedly stressed the need for diversification but done little to reduce the state’s role in, and reliance on, hydrocarbon industries.

Instead, Putin has consolidated the energy sector almost under his personal control through the Gazprom conglomerate. He defied some of the tycoons who had been able to take control of entire industries in the wake of the Soviet Union’s collapse but otherwise did little to revise the clientelist power structure that is largely fueled by oil and gas sales.

Igor Sechin, formerly a Soviet intelligence officer who has been among Putin’s closest advisors since he served in the Saint Petersburg mayor’s office, was put in charge of the state oil major Rosneft which has grown into the world’s largest publicly traded energy company measured by output under his stewardship.

The statist shift might be one of perceived necessity. Increased oil and gas production in North America and Gazprom’s antitrust battles with the European Union prompted Putin to shield the company from foreign legal investigations in September, deepening its dependence on the state and preventing investment from flowing into other industries. Gazprom has also been slow to adapt to the changing energy market, pursuing hugely overpriced projects for political ends that are unlikely to ever pay for themselves while missing out on the shale revolution.

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