Welfare the Big National Idea for Medvedev

Itar-TassDmitry Medvedev, the first deputy prime minister and presidential hopeful, touring a an electric-metallurgical plant Thursday in the Urals city of Chelyabinsk.
After a decade of rapid economic growth fired by the animal spirits of unfettered capitalism, Russia isn't about to turn back into a Soviet-style cradle-to-grave welfare state.

But, judging by the rhetoric of presidential candidate Dmitry Medvedev and his patron, Vladimir Putin, life may be about to get better for the millions of Russians still scraping by.

Medvedev, who leads Kremlin initiatives to fix housing, health care, education and agriculture, is poised to win election by a landslide on March 2 after Putin endorsed his 42-year-old protege.

In an already one-sided campaign, Medvedev is touring the country telling Russians they deserve a better deal. Visiting a naval base in the Arctic port of Murmansk, he vowed to shake up the country's "extremely unsuccessful" pensions system this year.

Critics might dismiss Medvedev's pledge as cheap propaganda targeted at a voter constituency numbering nearly 30 million, out of Russia's population of more than 140 million, that could rally to Communist challenger Gennady Zyuganov.

But Russia would have to act to shore up living standards even if there weren't an election around the corner.

The incomes of working Russians are rising rapidly as export petrodollars trickle down into the economy. Pensions, however, average less than one-quarter of the typical monthly wage of nearly $600. Many old people still work or rely on their families for support.

"The gap between pay and pensions is growing and the most pressing need is to correct that," said Yevsei Gurvich, who heads the Economic Expert Group and advises the government.

Inflation, meanwhile, is on the rebound after ending last year at 11.9 percent. Without remedial action to correct the situation, today's pensioners could suffer a fall in living standards.

And Russia's attempt to create an additional "funded" pensions pillar, to enable people born after 1967 to save for their own retirement, has flopped.

Only a fraction have opted to take out a private pension. The rest still pay into the Pension Fund, whose returns fail to keep up with inflation because it is only allowed to invest in highly rated bonds.

Reforming pensions is the right thing to do because incomes and pensions have lagged growth in company profits during the Putin boom, said Roland Nash, chief strategist at Renaissance Capital in Moscow.

Money is no object either, as the country has a huge oil windfall from which it can draw. But get it wrong, and higher inflation and a further widening of the yawning gap between rich and poor could be the unintended results.

One proposal already aired is to reform the main payroll tax, the unified social tax, to make it a flat-rate 26 percent charge. The tax is now regressive, falling as earnings rise.

That, Gurvich said, would be enough to peg pensions to pay at current levels but not enough for them to catch up. He said the reform debate was unlikely to be wrapped up before the presidential vote.

That makes the prospective lineup of a Medvedev government critical to the country's reform prospects -- especially as he has already offered the job of prime minister to Putin, by far the more powerful and popular politician.

Putin has thrown his weight behind social reform, telling lawmakers on Tuesday that his goal of turning Russia into the world's No. 5 economy by 2020 would facilitate a social development strategy worthy of the name.

A Cabinet reshuffle in September has strengthened an economic team headed by Finance Minister Alexei Kudrin that could be ready to hit the ground running on social reforms as soon as the political transition is complete.

But with Kudrin's pivotal deputy, Sergei Storchak, in jail facing charges of fraud and embezzlement, one of Russia's periodic bouts of institutional paralysis could yet derail a fresh attempt to tackle social reforms.

"The fact that a deputy finance minister can be charged with those offenses is not comforting," said Ed Parker, a sovereign analyst who follows Russia for Fitch Ratings in London.