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. Last Updated: 07/27/2016

Battling for Position




Five months in the making, the Center for Strategic Research's economic blueprint was finally handed over to the government Monday. Will Prime Minister Mikhail Kasyanov finally read the document, and if so, will he respect it? Catherine Belton reports.


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For the Center for Strategic Research, a presidential think tank set up to draft a 10-year plan for economic growth, last week brought one nightmare after another. It was a week that began amid talk that "The Plan" would finally be handed over in all its glory to President Vladimir Putin. Blessed by visiting International Monetary Fund economists, the plan would then be endorsed by the president. Its architects, some of the country's sharpest economic minds, would then assist the government in implementing their program - the nation's economic future would be assured.


Instead, speaking to the State Duma last Wednesday before the 325-55 vote that confirmed him in office, Prime Minister Mikhail Kasyanov belittled the think tank and its leader, German Gref, asserting that the plan would receive "consideration" as the government worked up its own plan, to be ready in June.


International Monetary Fund missions have flown in and out of Moscow over the past few months, usually to check on the center's progress. It seems they are far from overwhelmed by what they have been shown. At a conference last week for foreign investors, the head of the Fund's Moscow office, Martin Gilman, questioned whether the plan would find its way into government strategy. He also queried whether Russia has the political will to push through the Gref plan.


"The key question now is what policies will be adopted by the government and whether reforms will be implemented," Gilman said.


"Most of the center's policies existed before in former government programs. ... If they have been tried in the past and are being proposed again, the question is why should they work now?" he asked. "The big question we are all waiting for is whether Mr. Gref's proposals will actually be implemented."


And when Gref only just squeaked into the government as economic strategy and trade minister, some doubted whether he would be able to save his plan from being a mere paper guide to a tiger economy, and become another one of the curious might-have-beens littering the country's recent economic history, like Grigory Yavlinsky's ill-fated 500 days program.


However, Kasyanov on Monday was much more accommodating toward the plan as he presented Gref to workers at his new ministry, saying the document will be used as the basis for drawing up the government's program.


"I have given orders to the ministries and departments that this groundwork be reviewed, and by the middle of June we should draw up the governmental economic program,'' Kasyanov was quoted as saying by Interfax.


It was a warmer welcome than Gref might have expected just six days earlier.


Panic in Heaven


In the palatial lobby of the recently completed Vatutinki complex, German Gref, the head of the center, padded nervously around in track suit trousers and slippers last Tuesday, his mobile phone constantly ringing. Late May snow spotted against the windows of the retreat, a lavish country hotel owned by the presidential administration. Located about 40 kilometers to the south of Moscow, some have described its grandiose structure as corruption-tainted property chief Pavel Borodin's swan song for the Kremlin - it is hardly the mere "dacha" of earlier press reports.


Kasyanov was about to go before the State Duma for last Wednesday's vote on his candidacy as prime minister, and the Moscow press had been filled with rumors for days that he was fighting for ascendancy with Gref's center over economic policy. Kommersant had reported Kasyanov was moving to adopt an old plan penned by former first deputy prime minister, Communist Yury Maslyukov, and was looking to diminish Gref's position in the future government.


Aides at the retreat Tuesday said Gref was only just beginning to wake up to the danger of being usurped by the new prime minister after months of quietly planning economic policy in theory alone. A meeting with pro-Kremlin Duma faction Unity was hastily arranged for later that day and a meeting with the Communists was planned for Thursday in a last-minute bid to shore up political support for Gref. Other economists at the retreat said there was a danger there would be no one in Kasyanov's new government to make sure their plan was followed.


"Gref, or a sound economist from the center, has to get the post of deputy prime minister, otherwise there will be no one able to realize the strategy," said Oleg Vyugin, the former firstdeputy finance minister who is now in charge of mapping macroeconomic policy for the center.


"This all depends on the president, but it should happen as long as he remains a serious supporter of the center's plan," he said.


Two days later, the announcements were made on who had made it into the Cabinet. Gref was given a post as head of the newly merged Economic Development and Trade Ministry. He did not get the rank of deputy prime minister.


"Without the status of deputy prime minister, Gref cannot coordinate the work of other ministries to make sure they are following the strategy," Vyugin said in a telephone interview later Friday. "I can only pity Gref because he has a very complicated task ahead of him. He has a huge administrative burden trying to merge the work of the two ministries [economics and trade], and he's going to have to tread on a lot of toes, because it's going to mean sacking a lot of officials."


However, Vyugin said hope for coordinating the work of the plan was not lost because Alexei Kudrin, an ally who also originated from Gref's hometown of St. Petersburg and who had just been appointed deputy prime minister and finance minister, appears to have gotten that brief.


But the new government announced over the past few days appears to keep many of the fault lines between opposing financial clans that stymied the government of former President Boris Yeltsin. It also retains large numbers of officials who rose to power at a time when the circle of Kremlin insiders led by Boris Berezovsky - and known as "the family" - and many observers deem to be allied with Berezovsky.


Gref and Kudrin are seen as having close ties to the former architect of the state privatization program, Anatoly Chubais, the chief executive at electricity monopoly Unified Energy Systems and the main force behind the creation last fall of the Union of Right Forces, or SPS, political movement.


Kasyanov, who will be the undisputed head of the government, is reported to be linked to old-guard Kremlin power broker Berezovsky and his main instrument, Alexander Voloshin, acting Kremlin chief of staff.


However, the prime minister has denied having strong links to any one oligarchic group, saying he consults regularly with all of the main business leaders.


Alexei Zabotkin, who watches politics and economics at United Financial Group, a Moscow brokerage, said recently that Kasyanov was "a product of the economic system where a small circle of power brokers use political clout for their own financial gain."


That system of "favoritism" has blocked Russia's economic development over the last 10 years, Vyugin said. Wiping out the local version of crony capitalism is therefore one of the center's main aims.


Snakes and Ladders


Several key points of the plan have already been put forward by Putin and his government as future policy .


Indeed, part of the Gref center's plan to redress the problems caused by over-mighty regional leaders was announced Wednesday by Putin, when he said he would propose legislation for sweeping changes to the powers of regional leaders, changes to wipe away their automatic status as lawmakers in the upper house and their accompanying immunity before the law. The measures also aim to provide a mechanism for firing regional bosses should they break federal law or the Constitution.


The appointment of presidential representatives to watch over seven districts across the Russian Federation was also part of the center's plan to increase control over policy in the regions, to remove the court system and other federal institutions from the governors' sphere of influence, and to make sure regional legislation is in line with federal law.


However, that legislation, which will significantly reduce regional leaders' power bases and cut back regional limits on movements of goods across local boundaries, is likely to face delaying tactics in discussion in both chambers of parliament despite lawmakers' cautious approval so far.


And there are no guarantees that the heads of the new federal super-districts will act to lower the burden of bureaucracy and arbitrary rule on local businesses. They might just add to it.


Picking and Choosing


Other parts of the plan have been forwarded by the government as priorities for legislative change this year.


These include the passing of a zero-deficit budget for next year and tax cuts to lower the punitive burden that now strangles enterprises and gives them a reason to misreport financial data.


In a speech before the Duma vote on his candidacy for prime minister last week, Kasyanov said the government was actively searching for ways to cut the tax burden. He said that turnover tax should be eliminated and the payroll tax burden should be lowered to 35 percent. Even though Kasyanov, when quizzed by the Duma before the vote, said he had "yet to read" Gref's plan, both those tax proposals had already been included in the Center for Strategic Research's draft program.


He did not comment on the center's plans to chop income tax to a flat rate of 13 percent, a proposal that has been widely touted as a cornerstone of government tax policy. First Deputy Finance Minister Sergei Shatalov said Monday, however, that the income-tax cut measure, along with the others, would be forwarded to the Duma in the next few days.


Kasyanov appeared to jeer at the Gref plan in his speech to the Duma - even talking of his interest in a potential rival plan from Maslyukov - saying he did not know which parts of it would become government policy.


Nevertheless, Kasyanov culled many of his main policy proposals to the Duma from the Gref program.


In his speech he called for better oversight of the banking system, the introduction of banking deposit insurance and mortgages, and simplification of the process for registering small businesses. He also called for wage hikes for state officials as part of a plan to wipe out corruption, strengthen the court system, cut back regional barriers obstructing the movement of goods and the targeting of social subsidies for those most in need.


He also tapped another suggestion mapped out in the plan - the creation of individual pension accounts to replace the existing system, under which a series of large pension funds, each covering different industries and professions, accumulate and invest contributions from today's workers in order to pay today's retired population a flat pension.


Without a change of policy along these lines, the country could face a crisis because demographic trends show that the number of elderly citizens as a proportion of the total population is growing. This kind of social security crunch is already a major talking point in many countries, with Britain and the United States just two of the more prominent examples of societies dragging themselves toward changes in the way they provide for their citizens in retirement.


Kasyanov also agreed with the center's proposal to liquidate the Road Fund. Part of all profit taxes collected in any particular region is allocated to the federal and local road funds. This money is supposedly earmarked for repairing and maintaining existing roads and for helping to build new ones. However, there have been numerous examples of "vanishing" road funds - and almost as many examples of overambitious local governments overspending and sending their road funds into debt, meaning that the local budget is left to pick up the pieces.


The main areas where the prime minister differed from the Gref center's ideas, came in his calls for greater state support for agriculture and greater state oversight over the so-called natural monopolies - Gazprom, the Railways Ministry, Unified Energy Systems and Sberbank - in order to increase their transparency and effectiveness.


Theory and Practice


It remains to be seen, however, which parts of the plan Kasyanov will take on board as government strategy and attempt to implement. He said Monday that the government economic policy would be ready by mid-June after taking in proposals from Gref's think tank and other political forces.


He has called for "energetic, consistent and balanced" policy changes. But his handling of the main policy "babies" he has cradled during his time as finance minister and Putin's acting prime minister suggest that Kasyanov is more interested in gaining control of financial flows and continuing the practice of handing out big state subsidies to industry and agriculture.


The Gref center plan calls for eliminating subsidies and nonpayments.


Kasyanov, on the other hand, has been one of the main engines behind creating a state bank for crediting agriculture, Rosselkhozbank, out of the ashes of SBS Agro's branch network. He has persuaded Putin to call on the Central Bank to halt bankruptcy proceedings against Promstroibank in order to use the bank's structure as the basis for a state bank for crediting industry.


An official decree for creating Rosselkhozbank was signed in mid-March. And, at the beginning of April, the Moscow Federal Court of Arbitration overruled a decision by a lower court last year that found Promstroibank bankrupt, and returned it to the lower courts for further consideration, Interfax reported. There has been no final ruling as yet.


Both banks would be managed by the Agency for Restructuring Credit Organizations, or ARKO. Kasyanov became chairman of the board of the agency in mid-February, just before the fortunes of both banks began to change.


A World of Doubts


Some observers have expressed doubts over how "radical" the plan is and whether it can perform the miracles Gref and his colleagues claim it can. If Kasyanov and others were to water the program down, would it really matter?


Vyugin was sure of one thing: This new plan is different to previous government programs - and most definitely superior to them.


"The program is a lot better than others and has been much better planned. But the question of whether it will be implemented does not have any answers," he said.


The plan maps out a strategy for sweeping change under three headings: modernization of the economy, social policy and restructuring of the power system itself.


If implemented it could boost the country's gross domestic product by 70 percent over the next decade, according to the center's estimates.


However, the plan has not only come under fire from leftist factions in the Duma, who have criticized it as being too liberal and as being potentially "catastrophic" for the economy, presidential economics adviser Andrei Illarionov has said it does not go far enough.


He called the plan "very restrained and cautious" and said that it maps out "gradual steps to push forward the economic policy that has been pursued over the last two years and brought the country to the stage of recovery and economic growth, however small."


In essence Illarionov does not see the plan as anything that's going to radically change the situation.


The old man of Russia's reform years, Yevgeny Yasin, has also warned against expecting too much from the Gref program