Sept. 29 (Bloomberg) -- Bloomberg’s Olivia Sterns reports on Sergei
Lavrov’s tenure as Russian Foreign Minister and Russia sanctions.
BlackRock Global Opportunities Portfolio Manager Nigel Hart also speaks
on “Bloomberg Surveillance.” (Source: Bloomberg)
When U.K. Prime Minister Tony Blair became the first leader of a major economy to meet Russia’s new president in March 2000, Vladimir Putin couldn’t have been more gracious.
Accompanied
by their wives, Putin showed Blair around the Hermitage museum in his
hometown of St. Petersburg. At the Mariinsky Theater, they watched an
operatic version of “War and Peace.” Blair praised Putin for seeking to
modernize his economy and make it more open to foreign investment. Putin
the week before had mentioned the idea of Russia joining the North
Atlantic Treaty Organization.
The Russian leader initially lived
up to expectations as he reduced taxes and pushed entry into the World
Trade Organization. Markets rallied and foreign investors poured in,
driving the Micex Index
of stocks up 12-fold in Putin’s first two terms, before the financial
crisis hit in 2008. The ruble rose 12 percent in the same period.
Those
days are now consigned to what might have been. Putin began turning
away from his new friends as early as 2003, and accelerated the retreat
as his third term in the Kremlin got under way in 2012. He cracked down
on dissidents, curbed economic freedoms and, this year, fomented the
rebellion in eastern Ukraine.
Photographer: Jeff Overs/BBC News & Current Affairs via Getty Images
Tony Blair and Vladimir Putin in this 2000 file photo.
The result: Russia, now bordering on recession, suffers
mounting international sanctions and, increasingly, is a pariah in
capital markets. While the MSCI World Index of equities is up 9.7
percent from a year ago, the Micex is down 2.9 percent. The ruble, which
today reached a record low, has fallen 30 percent since Putin first
became president.
‘Wasted Moment’
“There will be long-term damage to Russia,” Michael McFaul,
until February U.S. ambassador to the country and now a professor at
Stanford University in California, said in a telephone interview.
“That’s a great wasted moment because Russia was on such a different
trajectory. It’s just a tragedy for all that Putin went off in a
different direction.”
For what could have been, look no further
than the $2 trillion economy, which expanded an oil-powered average of
about 7 percent from 2000 to 2008.
As Putin resumed the
presidency in 2012, the International Monetary Fund was predicting
growth of 3.9 percent in 2013. Instead it was 1.3 percent, an undershoot
equivalent to about $50 billion. A similar shortfall is forecast for
this year, according to Anders Aslund,
a senior fellow at the Peterson Institute for International Economics
in Washington, who advised Russia on privatization in the 1990s.
Even worse, Alexei Kudrin,
who as finance minister from 2000 to 2011 helped return Russia’s budget
to surplus, said Sept. 16 that his country will post zero or negative
growth for the next two to three years.
Weaker Path
“The engagement with Ukraine has put the economy on a far weaker growth path,” said Charles Collyns, chief economist at the Institute of International Finance in Washington and a former U.S. Treasury official.
Global
investors withdrew about $850 million from Russian bond and stock funds
in the year through Sept. 24, according to data compiled by EPFR Global
in Cambridge, Massachusetts. Economy Minister Alexei Ulyukayev said on Sept. 18 that this month’s arrest of billionaire Vladimir Evtushenkov could lead to increased capital flight.
Business
people are signaling flight as well. Where once they rubbed elbows with
Putin at the St. Petersburg Economic Forum, the chief executive
officers of Goldman Sachs Group Inc. and Citigroup Inc. were among those
to skip the gathering in May of this year.
New York-based
Blackstone Group LP stopped seeking investments in the country after the
private-equity firm failed to strike a deal in three years of trying,
said a person with knowledge of the plan.
Business Ease
Putin’s dream of making Russia one of the world’s five biggest economies by 2020 is now in ruins, according to Sergei Guriev, a former economic adviser to Prime Minister Dmitry Medvedev
who fled to Paris last year. He says it could have been achieved had
Putin focused on delivering economic growth of 5 percent to 6 percent as
promised.
“Russia had such a massive potential because of its
inefficiencies that it was perfectly feasible to achieve this rate of
economic growth,” said Guriev. “What changed is that the government
decided not to fulfill its promises.”
The sentiment was different in 2000, when Putin replaced Boris Yeltsin.
One of his early acts was to close Russia’s radar base in Cuba, the
only intelligence-gathering center it had in the Western Hemisphere. He
also shut a naval base in Vietnam, its biggest outside Warsaw Pact
countries. After the Sept. 11 attacks, Putin pledged unconditional
support for the U.S.
Tax Cuts
Domestically, he cut
income taxes to a flat rate of 13 percent from a maximum of 30 percent
and reduced corporate taxes to 24 percent from 35 percent. Budget
revenue surged.
“That was a completely different life and Putin behaved completely differently,” said Mikhail Kasyanov, who was prime minister during Putin’s first term and is now an opposition leader.
Putin’s
embrace of capitalism was never a full one. In 2000 he wrested control
of NTV, a leading independent TV station owned by an oligarch, Vladimir Gusinsky, and in 2003 Mikhail Khodorkovsky,
head of Yukos Oil Co., was arrested on charges of money-laundering and
tax evasion. After 10 years in prison, he was freed last year by
presidential pardon.
Ties with the U.S. began deteriorating further during President George W. Bush’s 2003 invasion of Iraq and Russia’s opposition to U.S. missile defense plans in eastern Europe.
Reset Button
When President Barack Obama arrived at the White House, he sought a “reset” in relations. Secretary of State Hillary Clinton offered Foreign Minister Sergei Lavrov a toy box with a large red button when she visited Moscow in 2009. The U.S. even supported Russia’s entry to the WTO.
The make-up didn’t last. Putin offered asylum to fugitive American government intelligence contractor Edward Snowden in August 2013 and Russia defied the U.S. in shoring up the regime of Syrian President Bashar al-Assad.
Then came Ukraine and the Cold War-style standoff. The overthrow of Russian-backed President Viktor Yanukovych in February marked the culmination of years of Kremlin frustration at NATO’s steady encroachment on former Soviet territory. Vladimir Lukin,
Russia’s ambassador to the U.S. in the early 1990s, says Putin isn’t
solely to blame for the state of affairs. The U.S. and the European
Union must bear some responsibility for the “persistent and unilateral
expansion” of NATO, and then the EU, towards Russia’s borders, he said.
“Putin was picked partly to stand up to the West, so the guy we got is partly a product of those decisions,” said Tony Brenton, U.K. Ambassador to Russia from 2004 to 2008.
Sanctions Impact
U.S. and EU sanctions might be biting more deeply after the U.S. expanded them to encompass OAO Sberbank, the country’s largest bank, and energy companies as well as five state-owned defense and technology companies.
“These
sanctions are limiting his ability to implement those projects he needs
to imitate normal economic growth in Russia,” said Kasyanov, the
onetime prime minister. “Sanctions should speed up the collapse of the
whole economic system, which would lead to a deep, systemic crisis.”
While the ruble and Russian stocks gained in recent days on the hope sanctions may be eased and the ceasefire maintained, Benoit Anne of Societe Generale SA expects further selloffs.
“I
don’t know many international investors that are currently bullish on
ruble assets,” he wrote in a Sept. 24 report. “These are either bearish,
for the large part, or have decided to stay away altogether.”
Guriev,
the former prime ministerial adviser, says plans for a balanced budget
also are predicated on economic growth of 2 percent to 3 percent. With
that now in jeopardy he predicts Putin will soon have to shrink spending
on military and pensions as a falling oil price provides another fiscal
challenge.
“This is an entirely new thing and we don’t know what will happen,” said Guriev. “It’s unprecedented for Putin.”
To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Anne Swardson, Brad Cook
end quote from: What Putin Wrought Has World Asking What Russia Might Have Been
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