Orbital odyssey Spaceflight Investing in aspirations do not get much bigger than a hotel in orbit but the reality is rather more down­to­earth RUSSIA Page 4 FINANCIAL TIMES SPECIAL REPORT | Tuesday October 4 2011 www.ft.com/investing­russia­2011 | twitter.com/ftreports Putin’s return puts future in doubt Now that uncertainty over the leadership has been removed, attention has turned to the longer term. Charles Clover reports or the Kremlin to do some- thing utterly predictable is quite rare. For this reason, the return of Vladimir Putin as FRussia’s president next May managed to take Russia’s political class by sur- prise. Mr Putin’s return, announced on September 24, lays to rest the prin- cipal source of intrigue over the past four years. Ever since he avoided constitutional prohibition on a third term in 2008 by appointing his friend Dmitry Medvedev to the presidency while he became prime minister, Moscow polit- ical circles have speculated about his return. Now that this uncertainty has been cleared up, the chattering classes are wondering what the third (and likely fourth) Putin term will bring. Things have not gone well thus far – the very announcement was botched, taking not only the public by surprise, but also the most senior gov- ernment officials. The decision that Mr Medvedev would take over as prime minister Changing places: Vladimir Putin (left) with current president Dmitry Medvedev at the United Russia party’s congress, where Medvedev announced the return of his predecessor Getty next year, meanwhile, provoked a row with Alexei Kudrin, the finance minis- Raising investment is a priority for growth will be about increases in effi- speech to investors at a conference in ian political system. In his first two they were relieved to have a firm ter and fiscal conservative long the Kremlin, though this is proving ciency and productivity,” he says. the southern town of Sochi, Mr Putin terms, he brought parliament to heel, hand restoring order. viewed as the guarantor of a stable more and more elusive, except in the “Russia has a peculiar advantage in said: “We are not going to build state had several prominent businessmen The urban middle class gets much economy, who was sacked after his oil and gas sector, still hugely attrac- that it is very inefficient, so there is capitalism. If we are concentrating on exiled or jailed, and established direct of its information from the internet, angry announcement that he would tive, as made clear by an agreement plenty of room to become more effi- certain resources, we do so exclu- Kremlin control over much of Rus- works in the private sector and not serve under Mr Medvedev. In between ExxonMobil and Rosneft to cient.” sively to ensure the recovery of this sia’s mass media. speaks foreign languages. Keeping effect, it was a decision to trade a explore for oil in the Arctic Sea. Increasing productivity is a good or that industry. But we are not going “Political reforms are now off the these talented people from emigrating political crisis for an economic one Foreign direct investment was argument for privatisation, which to stay there for good.” table,” says Igor Yurgens, head of may force the Kremlin to change the and Mr Kudrin’s departure has rattled $42bn in 2010, according to ministry of economists agree is essential to Much will depend on the price of Insor, a liberal think-tank and an eco- way it governs. markets at a time when confidence in economy figures, smaller than both breathe life back into a stagnating oil, which seems inversely correlated nomic adviser to Mr Medvedev. Some believe that “Putin 2.0” as he Russia is low. China and Brazil, and Putin’s declared economy. with Russian democracy and reform. However, not everything in is known, might surprise everyone. The stock market has lost about 21 goal is raising this to $70bn. “The thing that the Russian econ- A fall in the oil price could put pres- Russia is under the Kremlin’s control. “He will have to show everyone per cent of its value so far this year, Stanislav Voskresensky, deputy omy lacks most is competition,” says sure on the Kremlin to liberalise both Russians are richer, more middle that he is not power-hungry, that entering the realms of a bear market, minister of the economy, says growth Mikhail Shamolin, CEO and president economically and politically, much as class, and less patient than they were he has not come back just to strangle while the rouble was down 8 per cent in the past decade was primarily of Sistema, a large Moscow-based it did in the 1980s and 1990s. when Mr Putin first took power in our freedom some more. He will be in September against a eurodollar bas- about high oil prices and spare capac- investment company. “Once there is Unless Mr Putin comes under 2000. At that time, exhausted by a under pressure to show that he is ket of currencies, due partly to global ity left over from Soviet days. competition, there is the answer to unprecedented pressure, there is little decade of democratic reforms under good,” says one former senior Krem- turmoil and partly to increased per- “In the next 10 years, however, inflation and to the high cost of capi- hope for reform of Russia’s authoritar- the erratic President Boris Yeltsin, lin official. ceptions of risk in Russia. Only bil- tal. It all starts with increasing com- lions of dollars in hard currency sales petition, and the only way you can do by the central bank have kept it from that is to decrease the role of the falling further. Inside this issue state,” he says. However, Russia remains a funda- Privatisation Few people doubt that the tempo of mentally healthy economy with low The declaration of a reforms will be slower under a Putin sovereign debt of 9 per cent of gross state sell­off drew a presidency than they would have been domestic product and a budget that gasp of approval under a Medvedev one, but Mr Putin’s could balance this year – provided oil Page 2 priorities are still a matter of guess- and commodity prices remain high. work. Over the long term, however, Mr Economy Growth Some believe he favours a form of Putin’s return puts a question mark of 4 per cent is authoritarian capitalism such as the over Russia’s future, especially priva- good but there is a system that flourishes in China, and tisation plans that could transform risk of stagnation Page 2 that privatisation would threaten the the economy from one mainly state perks and vested interests of a corrupt Private equity The head of a new owned to one with a more vibrant bureaucracy. investment fund is seeking big name private sector in which competition backers Page 2 Economists Sergei Guriev and Oleg could flourish. Tsvininski wrote in a September 27 Most economists see further reform Stock market editorial in the newspaper Vedomosti as vital to avoid a repeat of 2009, The merger of that the main danger of a return by when a global financial downturn hit two exchanges Mr Putin is that the state may view Russia extremely hard and GDP fell 8 marks a milestone losing control over the economy as an per cent, further than any other G20 in a bid to unacceptable risk, and hesitate to lib- country. Since then, the economy has compete with eralise. “The ruling elite prefers to limped along anaemically, and the London Page 2 remain in control of a stagnating growth forecast has been revised economy – having the largest slice of downwards by the World Bank to 4 a smaller pie – than risk losing per cent from 4.4 per cent. Politics Putin’s return to the power,” they wrote. “The 4 per cent growth we have presidency was ‘so obvious that none Others believe Mr Putin is, in his now is mostly the result of good anti- of us was expecting it’ Page 3 heart of hearts, a liberal, pointing out crisis measures and high growth rates that, despite the Kremlin’s nationali- in Asian countries. The anti-crisis Transport sation of a number of private compa- measures can’t last forever and Russian Railways’ nies, Mr Putin is also a moderniser attempts to join growth [in Asia] is not expected to be and liberaliser of sorts. He legalised the 21st century as high as it was in the last two Page 3 the sale of land, got rid of capital years,” says Arkady Dvorkovich, a controls, and reformed the tax system senior aide to President Medvedev. Consumers during his first two terms as presi- Reforms such as privatisation have The middle class dent. been undertaken cautiously, partly looks like it is They point out that Mr Medvedev’s because of the need to build consen- expanding – and shopping Page 4 liberal policies, such as kicking minis- sus in government, and partly due to ters off the boards of state companies, concerns for social stability. Tomsk A Kremlin experiment in were undoubtedly discussed with, and “It’s always desirable to do things diversification Page 4 approved by, Mr Putin. faster, but first we should make sure Mr Putin’s recent statements sug- that we do no undermine stability,” Company profile gest that he has been sending the says Mr Dvorkovich. “Reforming too A ‘discovery engine’ that helps message that he, like Mr Medvedev, quickly would put millions of families organise pirated music Page 4 sees the state’s role in the economy at substantial risk.” shrinking.