Putin stuns advisers by defeating corruption in order to resist sanctions

Vladimir Putin sat motionless as the minister, seizing on the first major meeting of the Russian leader with his economic team in several months, listed the problems.

Recession is inevitable, inflation is out of control, and the ruble and oil are in free fall, Economy Minister Aleksey Ulyukaev told Putin, according to people who attended a meeting at the presidential mansion near Moscow in mid-October. Obviously, Ulyukaev concluded, the sanctions must be lifted.

At the same time, Putin retreated. "You, Aleksey Valentinovych," he asked, using his patronymic, "do you know how to do this?" No, Vladimir Vladimirovich, Ulyukaev, as reported, answered, we hoped that you know. Putin said that he did not know how he needed options for surviving a decade of even greater and burdensome sanctions, leaving the group "discouraged", informed the sources.

The policy, which Putin plans to announce during his annual address to parliament next month, calls for tougher measures against audits and other forms of bureaucratic intimidation that cost businesses tens of billions of dollars in bribes and kickbacks, people say. This entails that the president's order will end predatory behavior, prosecution, which is an incentive for compliance, they said.

Thieves beware

"Expenditure, inability to manage state funds and even direct bribery, theft, will not go unnoticed," Putin said yesterday at a meeting with supporters in Moscow.

The isolation of Russia's growth due to its support for the separatist "uprising" in Ukraine has created divisions among competing factions within Putin's ruling circles. One group, the "security forces", are dominant people who share Putin's inconspicuous position in the security services and reject American hegemony. They dominate the second bloc, centered around Prime Minister Dmitry Medvedev, who favors less government control over the economy, according to five officials close to the president.

Putin's representative, Dmitry Peskov, said that he was not aware of any specific "liberalization plan" and refused to comment on what the president plans to say in his address to parliament.

"We are constantly and purposefully reducing bureaucratic pressure on business," Peskov said by phone. Ulyukaev refused to comment through his press service.

Putin's choice

Support for Putin's programs marks a revival of sorts for Medvedev's faction, which advocates closer integration with the US and Europe - a process now undermined by sanctions - as the most profitable path for the country. This group, which includes Ulyukaev, has been limited since February, when the ouster of Ukrainian President Viktor Yanukovych, an ally of Russia, prompted the security forces to organize the annexation of Crimea.

Putin preferred the policy of applying harsh measures to corruption to the second option presented by his economic team: the "megaprojects" program. This choice would have enriched two of his closest allies, billionaires Gennady Timchenko and Arkady Rotenberg, and transferred huge sums of money to contractors.

With sanctions causing more pain than expected, declaring a war on corruption is an "obvious" plan of action, but it is doomed to failure, said Borys Makarenko, deputy director of the Center for Political Technologies in Moscow.

"New Reality"

"Such measures are foreign to the mentality of the government bureaucracy, whose natural instinct should be to get more of the same amount, more regulation, more compression of business income," said Makarenko.

Only in September and October did officials and executives fully realize that the sanctions would be in place for a long time and that urgent measures were needed to limit the damage, according to Sergei Dubinin, the former governor of the Central Bank who is now the chairman of the state-run VTB Group, the second largest Bank of Russia.

"They hoped that the sanctions would be temporary," Dubinin said in an interview in the Russian capital. "Now they have realized a new reality."

The call to action was prompted by the "shocking devaluation" of the ruble, which unfolded as a result of the closure of foreign financial markets that coincided with falling oil prices, the country's biggest export, Dubinin said. This has unleashed a cash crunch for companies that have $44 billion in outstanding debt. by the end of the year, according to the estimates of the central bank.

Oil burden

Last week, Putin said that Russia is ready to face a "catastrophic" sharp drop in oil prices. Brent, the benchmark for more than half of the world's oil, has already fallen by 30 percent since the end of June. The ruble has fallen by the same amount against the dollar this year, the most among 24 emerging market currencies tracked by Bloomberg.

Before the first round of sanctions imposed in March, the government had done a good job of creating a "favorable external environment" for Russian companies, even as corruption and other domestic pressures remained burdensome, said Sergey Vasiliev, deputy head of the state development bank VEB.

"Now the external environment has become very complex, so we must free the internal environment in order to create the best conditions for economic agents," Vasiliev said. "Liberalization can help compensate for adverse external conditions without increasing the tax burden."

Official crooks

Former finance minister Alexey Kudrin, who sits on the presidential Economic Council, said that a successful campaign against extortion would be akin to tax cuts without further weakening state finances. Corruption is one of the biggest obstacles to growth, and if Putin pursues policies with the same vigor as he pursues security issues, the impact on the economy could be very deep, Kudrin said in an interview.

"The key factor for the country's development is citizens' confidence in the economy," Kudrin said. "The first thing to do is to limit the amount of control and controlling functions of the state. The authorities should simply stop going to enterprises and scheming for money. We must limit fire, sanitary and technical inspections."

In 2008, when Putin switched jobs with Medvedev for the current four years, the company paid more than $200 billion an hour in bribes, the Moscow research group INDEM said in a report that year, using data from the prosecutor's office. Most Russians say corruption has only gotten worse since then, according to a survey published by Transparency International.

"Economic Freedom"

"Business Solidarity", a Moscow-based anti-corruption organization, believes that bribes, kickbacks and related illegal activities end up increasing the retail price of most goods by 30 percent.

The use of strict measures regarding inspections, if properly organized, could have a "direct impact" on the economy, said the chairman of MDM Bank Oleg Vyugin, who served as the first deputy head of the central bank from 2002 to 2004. Because now, law enforcement agencies have a simple business model: the more they inspect, the more they earn, Vyugin said in an interview.

"The economic power of the Investigative Committee, the General Prosecutor's Office and the police must be curbed," Vyugin said. "This is the only way to convince people that it is possible to develop business here."

There is an irony about the American and European sanctions, which was not lost on the members of Putin's economic team. While the fines pushed away foreign investors, they also became a catalyst for meeting one of their key demands – rooting out corruption.

One of the main discussions about the new program at the moment is what to call the plan, because Putin thinks that "Economic Liberalization" seems too Western, according to one of the sources, who attended the strategic meeting last month. "Economic Freedom" is in the lead, and everyone is praying that he doesn't change his mind, said our character.

Based on: finance.yahoo.com