Business
Russia's Medvedev Gets Down to Business
By Jason Bush, Reuters 9/5/08
May 10, 2008 - 10:37:13 AM

Russia's new president inherits a booming economy, but faces many tough challenges.

On May 7, a few minutes before noon, millions of Russians turned on their television sets to watch the dawn of a new political era. At a sumptuous Kremlin ceremony, Dmitry Medvedev, Russia's newly elected President, solemnly took the presidential oath, becoming just the third President in Russia's history.

As he uttered the words in front of the assembled dignitaries, Medvedev must surely have pondered his remarkable good luck. Still something of a mystery to the Russian public and just 42 years old, Medvedev knows full well that he owes his ascent to one person. That man, of course, is outgoing President Vladimir Putin, a figure now so influential that his recommendations are invariably taken as gospel by politicians and voters alike.

In other ways, too, fortune has smiled on Dmitry Medvedev. Compared with the dismal situation that faced his two predecessors, Medvedev inherits a country that is in remarkably better shape. Fueled by record high prices for oil and gas --Russia's main exports -- the Russian economy is in its ninth year of solid growth. Last year the growth in gross domestic product accelerated to more than 8.1 percent, fueling an impressive consumption boom and a growing middle class.

Turning Point

It's certainly an enviable starting point for any incoming leader. But perhaps not quite as enviable as it seems. Medvedev still faces plenty of tough challenges in the months and years ahead. His tenure will determine not just the fate of the Russian economy but will also heavily influence the future of its homegrown businesses and the foreign companies that continue to pour into the country.

Even Russia's oil-fueled growth has its downsides. Inflation is rising, exacerbated by the inflow of petrodollars, as well as global trends on food and fuel markets. Last year inflation was officially 12.9 percent -- well above target -- and it's set to get worse as the effect of preelection price controls wears off. The problem is now far and away the biggest concern of ordinary Russians, according to opinion polls. Rising prices are, in turn, fueling wage demands, causing growing labor unrest.

It's not an easy problem to fix. As Medvedev ponders the conflicting advice of his ministers, he will face some tough policy choices over politically sensitive matters such as government spending and the exchange rate. Whatever he does, he's sure to displease someone.

While day-to-day economic issues such as inflation are becoming increasingly complex, they ultimately reflect even deeper problems concerning the very structure of the Russian economy. Worrisome bottlenecks are appearing, and could well slow growth unless something is done about them. Even as shiny glass skyscrapers rise up in Moscow, the city's roads are so awful that two-hour traffic jams are routine, costing the economy tens of billions of dollars each year in lost productivity and wasted energy.

Repairing the Infrastructure

Travel to Russia's far-flung regions, and the situation is even worse. To fix Russia's crumbling infrastructure, Medvedev has pledged to invest hundreds of billions of dollars in roads, railroads, and airports. But with so much money being spent so liberally, it will be no easy matter to ensure that it isn't stolen or wasted.

Like most other Russians, Medvedev also is well aware that Russia's long-term prosperity depends on weaning the country away from its heavy dependence on oil and gas and encouraging the growth of innovation. In developed economies, that role is typically played by small businesses, but in Russia, these still represent only around 15 percent of the economy.

That in turn reflects the continued pervasiveness of corruption and bureaucratic harassment. Medvedev, a former law professor, has already singled out the theme of legality as his No.1 priority. He promises to fight something he calls "legal nihilism." That's a reference to widespread disrespect for the law, including corruption of the courts and the police, which the new President describes as the biggest barrier to Russia's economic development.

In one of his first policy initiatives, Medvedev has proposed a radical measure to help small business, backing legislation that will make it illegal for government officials, such as fire and safety inspectors or the police, to enter business premises without a court order. The idea is to stop them from extorting bribes. Business warmly welcomes the plan. But under Putin, too, various attempts were made to rein in inspectors and clamp down on petty corruption. Like hardy weeds, corrupt officials always seem to find ways around them.

Property Rights

Nor is it just small business complaining. At a meeting in April, Medvedev also heard a long list of grievances from big business leaders, who urged him to do more to ensure that property rights were protected. The President-elect gave reassuring replies. Yet so far, at least, Medvedev's election hasn't eased the state's legal pressure on business. In March, TNK-BP, an Anglo-Russian oil company 50 percent-owned by BP, was raided by police, and one of its managers was subsequently arrested for spying.

Another recent controversy concerns Moscow's Domodedevo Airport, widely acknowledged as Russia's most modern and efficient. Company owners have complained that state officials are trying to renationalize their property without compensation. Such cases suggest that, at the outset of Medvedev's Presidency, conflicts between the state and business are, if anything, getting worse. Many analysts believe that rival governmental clans, fearful of losing out in the political transition, are now battling to stake out claims to property and power. Medvedev's most pressing problem may be reining them in.

It's still far from clear whether the new President has what it takes to establish his authority over warring barons. For now at least, he is living in the shadow of his popular predecessor, Putin, whose economic record will be hard to beat. What's more, Putin will continue to wield huge political influence as Russia's new Prime Minister, and leader of the largest political party, sowing confusion about where power really lies.

Ironically, the same factors that have underpinned Medvedev's rise to power also make it difficult for him to emerge as a strong and independent leader. After the remarkable boom times of the Putin years, people will be quick to blame Medvedev if anything now goes wrong, yet continue to credit his predecessor if they don't. Perhaps Medvedev isn't so lucky after all.