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Putin will win next year despite, not because of, the economy

STANDING on stage at the Gorky Automobile Plant in Nizhny Novgorod in early December, flanked by factory workers in blue jackets, Vladimir Putin spoke of the region’s history. After volunteers from Novgorod helped 17th-century Moscow overcome the Time of Troubles, the president said, “the united, centralised and powerful Russian state began to develop rapidly.”

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He called upon the car workers to continue in the same tradition. “With the active participation of people like you,” he declared, “Russia will keep moving forward.” They in turn called upon Mr Putin to announce his candidacy in next year’s presidential election then and there. “Everyone in this audience, without exception, supports you,” said a worker. He duly obliged—surprising no one.

On the economic front, the Russian automobile is indeed moving forward again, if slowly. After two grinding years of recession, the economy will grow in 2017. Adept policy responses helped stabilise the situation following the dual shocks of falling oil prices and Western sanctions. The central bank has brought inflation below its target of 4%, after it soared above 16% in 2015. Budget discipline has kept deficits at manageable levels. Yet oil-fuelled growth had stalled even before the latest crisis: in 2013, with oil prices around $100 per barrel, GDP growth was only 1.3%. This year it will be under 2%. Without significant reform, the World Bank reckons it will hover around 1.8% in the coming years.

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Much will depend on what Mr Putin does after the election. “Every time Putin starts a new term, he begins with a new reform package,” says Alexander Ivlev of EY, an accountancy firm. Russia’s policymakers agree that change is necessary, “but there are strategists and tacticians,” says Natalia Orlova, chief economist at Alfa-Bank. “There are those who say we will only get moving with structural reforms, and those who acknowledge that structural reforms in this system are highly unlikely, and aim to take small steps forward.” The former approach is embodied by a respected ex-finance minister, Alexei Kudrin, at the Centre for Strategic Research. The latter camp is centred at the Ministry for Economic Development, led by its 35-year-old minister, Maxim Oreshkin.

Although the two groups work together closely, their priorities differ. The strategists regard deep institutional changes as essential to revving up the economy. They speak of reining in law enforcement (which is often used to settle scores); shifting resources from defence to education and health care; raising the pension age; and reducing the state’s share of the economy. “The main problems lie within Russia and they are structural and institutional,” Mr Kudrin has said. The tacticians emphasise improvements to the way institutions work, without radical change, such as better staff, greater efficiency, more predictable business conditions and finding better ways to target investment. “There won’t be a big plan, because big plans nowadays don’t work,” says Mr Oreshkin.

The government hopes that gradual changes will create the conditions for more diversified development. A new fiscal rule, imitating Norway, aims to isolate the economy from volatility in the oil price. When it is above $40 per barrel, additional revenues will be used to rebuild reserve funds that have been depleted in recent years. Russia has been climbing in the World Bank’s ease of doing business ratings, rising from 120th in 2012 to 35th in 2017, overtaking America in the ease of starting a business and enforcing contracts. A host of fresh-faced governors appointed by Mr Putin this year are also doing their bit.

Yet that alone will not be enough to jump-start growth. Even meagre gains are proving hard to sustain: after outperforming in the second quarter, the economy slowed again in the third. Looming questions over how America will implement its latest sanctions on Russia have made foreign investors squeamish. Domestic investment remains heavily state-dependent. Ms Orlova reckons that 90% of new investment in 2017 came from three large state-backed infrastructure projects: the construction of a gas pipeline from Siberia to China, the renovation of Moscow and the erection of a bridge from Russia’s mainland to Crimea. Mr Putin’s much-needed higher gear is looking hard to find.

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