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. Last Updated: 07/27/2016

Putin Kicking Reform Drive Into High Gear

President Vladimir Putin is set to slash red tape, encourage small business and attempt to loosen a chronic dependence on oil exports with renewed vigor after he wins a second presidential term March 14.

In his first term Putin stabilized an economy still reeling from a 1998 domestic debt default, modernized a Byzantine tax system and put property rights on a legal footing.

Now he has set his sights on doubling the size of the economy in a decade, improving the lot of one-third of Russians who live in poverty and make the economy less dependent on oil and metals.

A top-to-bottom shakeup of his Cabinet on Tuesday visibly strengthened liberal economic reformers, giving the strongest signal yet that Putin is determined to steamroll reforms.

Analysts said Putin faces an uphill struggle over the next four years pushing through a reform program that is unlikely to grab headlines but will face formidable resistance from a mammoth, inert and often corrupt bureaucracy.

A top priority is taking the shackles off small business, as is laying the foundations for a modern banking system to channel funds to credit-starved corners of the economy.

"In some parts of the country money is overflowing and in others it is unobtainable," said Christof R?hl, chief economist at the World Bank in Moscow. "Lack of intermediation [of credit] is a limit to growth."

"The government's priorities are the right ones," said an official with an international organization who asked not to be identified. "We will see administrative reforms and some movement in the banking sector."

But the official added: "Cutting down on the civil service and government responsibilities, not least in local government, will be fiercely resisted.

"It is one thing to change the law but it is quite another to implement it."

With some economists forecasting growth of 6 percent to 7 percent this year after a 7.3 percent oil-fueled spurt in 2003, analysts say Putin's growth vision will be hard to achieve as long as Russia is at the mercy of export prices for oil and raw materials.

But few doubt that Putin has assembled a formidable Cabinet team to drive forward economic reform.

"Besides the retention of the reformist kernel of Finance Minister Alexei Kudrin and Economy Minister German Gref ... the reform team now appears in a more coherent and potentially effective configuration than in the previous government," said Chris Granville at United Financial Group.

The economic reformers have been greatly boosted by two key appointments -- of liberal economist Alexander Zhukov as the only deputy to Prime Minister Mikhail Fradkov and the elevation of the respected Dmitry Kozak to government chief of staff.

Fradkov, who was Russia's ambassador to the European Union in Brussels, is expected to make joining the World Trade Organization another top priority. Russia is the only major economy not to have joined the Geneva-based club.

With reformers driving economic policy, the government is less likely to be hamstrung by the sporadic infighting that plagued Putin's first term, say analysts.

Differences between key Cabinet members were believed to have played a part in weakening the government's resolve to take on one of Russia's most powerful state monopolies -- Gazprom, the world's largest gas company.

One stark contrast with Putin's first administration is the role of big business in influencing public policy.

Russia's once powerful oligarchs, who held sway over the Kremlin in the 1990s, have fallen from grace after the arrest on tax evasion charges of oil tycoon Mikhail Khodorkovsky in October and analysts say their influence is much reduced.

The Reform Agenda



Main Goals

• Double the size of the economy in a decade and reduce the gap between rich and poor in a country where a quarter of people live below the poverty line.

• Reduce dependence on oil by encouraging investment in manufacturing and high-tech industry, and services.

• Cut red tape, break monopolies and boost small business.

• Lower the tax burden, rationalize spending, bring down inflation and interest rates over time.

• Create a legal basis for a functioning property market.

The Numbers

• Growth to hit 5-6 percent in 2006, then topping 7 percent in 2008. Government sees 2004 growth around 5.5 percent.

• Inflation seen at 5.5-7.5 percent in 2006, down from 12 percent in 2003.

• Gradual real appreciation of the ruble.

• Budget surplus of 0.5 percent of GDP this year to enable $5-6 billion to be channeled into stabilization fund to insure against an oil price slump; keep meeting debt commitments.

Freeing Up Finance

• Phase out capital controls, making the ruble fully convertible.

• Reform state-dominated banks; privatizing non-strategic holdings; boost sector's capitalization; switch to international accounting rules by 2007; implement deposit insurance scheme.

• Encourage development of debt instruments -- treasury bonds, mortgages and asset-backed securities.

• Create financial market super-regulator; pass insider trading law; toughen corporate disclosure rules; boost market liquidity by beefing up market clearing and depository capacity.

• Use tax incentives to promote investment fund industry; introduce regulatory framework to support insurance sector.

• Join the World Trade Organization; streamline tariffs; create an export insurance scheme.

Breaking Monopolies

• Spin off and sell the generating units of state power utility Unified Energy System ahead of electricity market deregulation in 2006.

• Gas monopoly Gazprom to be subjected to regulation, with pipeline transport to be made more transparent and a national gas market planned.

• Other monopolies facing change are oil pipeline operator Transneft, phone company Rostelecom and the state railways.