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Stepping Away From a Fight

On August 15, Prime Minister Mikhail Kasyanov finally signed the government's medium-term economic program. The program was posted at the government's official website at the start of this week
Attention should be given to the fact that the prime minister signed this document a full-half year after the Cabinet formally discussed the draft submitted by German Gref's Ministry of Economic Development and Trade. Even a causal review of the government's program shows that the original draft submitted is significantly different from what the government projects for the economy as well as for further structural reform efforts. Simply put, most of what can be found in the government's medium-term economic program sidesteps several key reform initiatives - initiatives publicly supported by President Vladimir Putin.

For most in the media and analysts, the economic program was received with little fanfare. This lackluster document offers little in the way of new initiatives, though it does contain some interesting amendments to the original version. Specifically, the program includes higher forecasts for the main macroeconomic indicators of the Russian economy. This can be interpreted as responding to the challenge of doubling GDP in 10 years - a goal President Putin announced in his Presidential Address to the nation in May. The program is short on how this can be achieved, but it clearly claims that it is possible.

If one had to sum up the two most important goals of the report, they would be the following. First, the present pace and content of the current reform policies will continue to improve the economic climate in Russia. Second, state involvement in the economy should and will decrease, which, in turn, will enhance economic efficiency. While both goals are hoped for and expected by almost all analysts, they are hardly new or even dynamic. Actually, in the scheme of things, these goals are not much more than generic.

What most of the media and few analysts have commented on is what is missing, wrong, or contradictory in the report. The most important and glaring gaps in the program concern natural monopoly tariffs. Gref's original document proposed specific targets and timelines - for real-term hikes during the period 2003-2006 of 100% and 50% for gas and electricity, respectively (with most of the increases occurring in 2005). This very important policy initiative, more or less agreed to six months ago, is missing in the revised program. Instead, what can be found in the new version of the program is an inexplicable contradictory design of Putin's call for no tariff increases in real terms with a scheme about increasing tariffs to market-based levels necessary to guarantee sufficient production. Reading the document closely, one cannot help but come to the conclusion that either the government does not know what it is talking about or that it is simply not interested in broaching the issue of reforming the country's natural monopolies until the next government takes office next year.

In Gref's original program proposal, there were sections devoted to gas market liberalization and the reform of the country's natural gas giant Gazprom. The program Kasyanov signed into law replaces both with an opaque section entitled 'Gas Sector Development.' Not long ago, Putin publicly called for increased efficiency and transparency at Gazprom to silence calls that the company should be restructured along the same lines as United Energy Systems. What Putin called for in public cannot be found in the report. Something is amiss here: are government functionaries unwilling or not allowed to quote the president in this regard?

Other issues concerning Gazprom and the gas sector are indirectly covered as well. Domestic gas supplies are to be encouraged to increase production, but through Gazprom's pipeline network? Is the government supporting third-party access to this network? Maybe yes, maybe no. The report is unclear on this issue - an issue of great importance to the government, Gazprom, and Russia's oil companies exploring ways to sell natural gas domestically and beyond the country's borders. Maybe the Cabinet's meeting on September 25 on these issues will shed some light on how the medium-term economic program should be interpreted.

What conclusions can be drawn from a report that is so incoherent concerning the country's economic policies? The fact that Gref's original version of the program has been ignored in the areas that count most point to political concerns. Kasyanov knows that his government's days are numbered. Kasyanov also knows that his boss' days are numbered. Vladimir Putin's first term, for all intents and purposes, is already over. Important policy decisions and initiatives have been put on hold until the election season runs its course.

The economic policy program finally signed by Kasyanov also may give a hint of the future. The present government is not particularly interested in proposing a new economic program, as that mission will be part of whatever new government is empowered after the Duma elections on December 7. The report also informs us that Russia's political and monied elites have yet to agree to natural monopoly reform - the last great area of contention between the government and the oligarchs.

Lastly, Kasyanov may have come to the conclusion that supporting an economic policy program that continues to push Russia forward (and in the process creates conflicts among the country's political and financial elites) does not serve his personal political interests. Kasyanov has performed poorly during the Yukos fracas; one has to wonder if he is a spent political force attempting to support his boss while protecting his patrons known as the oligarchs.

One thing seems to be clear, the economic program Kasyanov signed this week signals an end of an era. One has to ponder if the pragmatic and hard-hitting Gref approach to Russia's economic needs has any meaningful future.

Peter Lavelle.

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