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. Last Updated: 07/27/2016

Putin Pledges Economic Reform

President Vladimir Putin laid out in his state of the nation address Tuesday an economic action plan calling for a lifting of currency controls and a split in the federal budget.

Putin, who presented the most detailed plan ever made in such a speech, also told the Cabinet to work harder on restructuring state monopolies and legislation for land sales and tax reforms.

The plan came with a warning: Putin told attending Cabinet ministers that they have not yet proved themselves capable of steering the economic rudder without foreign loans.

"The government has assumed an obligation to fulfill an economic program without a formal agreement with the International Monetary Fund," Putin said.

"I think that the Cabinet is able to control itself, but it will have to prove whether it can indeed do so without supervision from international financial organizations," he said, giving a sidelong glance at the Cabinet members.

Putin said Russia's past practice of borrowing money without a clear strategy of how to spend it should be used as a lesson.

Shortly after the speech, Finance Minister Alexei Kudrin said the government would probably try to get by without IMF funds in 2002. Kudrin told the IMF last week that Russia would not need any loans this year.

In recent days, speculation has grown in political circles that Putin was planning a major reshuffle of the Cabinet's economic team shortly after Tuesday's speech.

No personnel decisions followed the address.

Instead, Putin told the nation what the government needs to do over the next 12 months.

Perhaps the most revolutionary suggestion the president made Tuesday was to split the budget into two parts. One portion would include regular line items like social, military and public administrative spending. Surplus revenues would be diverted into a separate fund for investment into large-scale projects or emergency spending.

"This would prevent the waste of additional budget revenues," Putin said.

Observers said such a split would mostly shelter the Russian economy from external shocks, which in the past have made it swing together with global oil prices.

Putin also called on the government to scrap remaining foreign exchange barriers, saying that sticking to arrangements that don't work is illogical and that capital flight still rings in at $20 billion a year.

The Cabinet for weeks has been reviewing plans to liberalize foreign exchange controls that, among other things, limit the flow of currency in and out of the country and forbid Russians from opening bank accounts abroad.

Putin also said steps must be taken to speed up the restructuring of opaque state monopolies — like national power giant Unified Energy Systems and the railways — and the passage of the Land Code, which will allow the sale of nonagricultural land.

Reaction to Putin's remarks ranged from Kudrin vaguely saying, "I heard responses to many questions in the president's speech" to a protest from the head of the Central Bank, Viktor Gerashchenko.

"There's a contradiction between the liberalization of foreign exchange controls and the requirement to pass money-laundering laws," the central banker said, referring to previous government orders to crack down on money laundering.

Yevgeny Gavrilenkov, deputy head of the Bureau of Economic Analysis, said Putin appeared to have made up his mind about what he wants accomplished over the next year.

"Last year, Putin also sounded liberal-minded during his state of the nation address, but the general impression was that he wanted to appease everybody," Gavrilenkov said. "Now we have a more detailed plan."

Gavrilenkov added that he had two concerns about the program: "First, there is often a large gap between what people say and do. Second, it is not clear how attempts at [political] power consolidation can be successfully combined with a liberal economic program."

The markets barely reacted to Putin's speech.

"It met expectations. People heard what they wanted to hear," said Oleg Martynenko, head of sales at Alfa Bank.

The RTS index finished the day down 2.34 percent at 163.65, taking guidance from the Nasdaq, which had tumbled 1.42 percent to a 28-month low of 1.757.74 on Monday. The Nasdaq opened 3.43 percent down at 1,721.73 Tuesday morning on lingering corporate profit concerns in the United States.

"We are following the same pattern as in previous months," Martynenko said. "Good domestic news is outweighed by global concerns."

Russia's benchmark 30-year Eurobond ticked up 12.5 basis points to 40.625 Tuesday afternoon.

Andrei Zolotov contributed to this report.