Administrative reform will be a central theme in Putin’s second term. The change of cabinet is just the beginning of the establishment of new, compact, and efficient managerial machinery. None of Russia’s leaders so far have managed to reach this goal.

Maxim Rubchenko and Iskander Khisamov 

Last Tuesday, Mikhail Kasyanov’s cabinet was dismissed. Politicians, analysts, and the general public, deprived of discussion-worthy topics in this presidential election year, immediately made a number of conjectures and accusations. The main political version of the story was that the president dismissed the cabinet to keep everyone out of the dumps before Election Day on March 14. 
The main accusation was that although Vladimir Putin acted in compliance with the Constitution, he didn’t play by the rules. “Why couldn’t he just wait until he was reelected and then change the cabinet? He tricked us!” many are declaring. We don’t know yet why he did what he did, but it’s already clear that something fishy is going on. Apparently, he wants to strengthen the regime of his personal authority and crush the already weak shoots of democracy. 
We looked into all the versions of the story and all the accusations scrupulously, making some rash conjectures of our own and discarding them just as quickly. It turned out much simpler and more fruitful to believe what Putin himself has said regarding the dismissal of the cabinet, that it was planned. As for the timing, the political situation offered him the opportunity to act and therefore he had to move immediately. As the president put it, there were “political and administrative reasons” for his decision.
At the end of his first term, plus another six months as Yeltsin’s successor and acting president, Vladimir Putin is in a position to claim that the preservation and strengthening of Russia as a state was his major achievement. At a meeting with his official campaign advisors two weeks ago, he painted a detailed portrait of the signs of Russia’s decay in 1999. Along with political problems like Chechnya, regional separatism, and intergovernmental conflicts, he recalled the collapse of the economy and the financial system, as well as widespread poverty and unemployment. Kasyanov’s government played the correct historical role in strengthening the country’s economic status.
Back in 1999, Putin’s first year, there was more than just tragedy, however. There were also some triumphs. Ruble devaluation after the default in August 1998 revived domestic production. Revenues from natural resource commodities abroad began to grow. Imagine a family that has only just started to get out of impenetrable poverty. The ambitious, creative husband came to his senses immediately and considered buying a car or even investing his first salary in some business. His more pragmatic wife demands that they should save up some money for a rainy day first. Kasyanov’s government under President Putin was exactly like this wife. With actual wives, this period passes very quickly, but it lasts forever with bureaucrats. What was good in the beginning becomes a hindrance later on. 
As a result, a surplus budget, a stabilization fund, and tax reforms became the principal and the biggest achievements of Kasyanov’s cabinet. Over the last couple years, banking and administrative reforms have begun and a clamorous campaign to support domestic small business has been launched. But all this has been done, one might say, at the husband’s urgent request and has therefore failed. 

Why they gotta

Last year, Finance Ministry officials managed at last to make their dreams come true. The draft budget for 2004 now has a line item establishing a stabilization fund. It is supposed to act as a cashbox to maintain necessary state expenditures in case of a drastic reduction in tax payments. The main reason for such a possible change for the worse is generally known in Russia: a fall in the world prices for raw commodities.
The Ministry of Finance itself will manage the accumulated cash in the fund, investing them “in bonds issued by countries with an investment-grade rating.” However, the return on investments in US government bonds amounts to no more than 4% per annum, and according to Central Bank forecasts, the ruble will get stronger versus the dollar by around 5%. Investments in Western government bonds will inevitably lead to the depreciation of the stabilization fund. Keeping them in rubles in accounts with the Central Bank would expose them to inflation “shrinkage.” The argument that we need a reserve to pay foreign debts doesn’t make sense, either: even the $17 billion that Russia must pay in the “peak” year of 2005 by no means looks threatening at the present level of the Central Bank’s gold and currency reserves. Moreover, a country’s foreign solvency is considered adequate if gold and foreign currency reserves cover three months of imports plus annual payments on debt, including the sovereign and private sector debts. Following this formula, the required amount of gold and foreign currency reserves for Russia should be $46-47 billion, while they are approaching $90 billion as we speak. Thus, there is no practical need for the additional stabilization fund.
There is better insurance against worsening foreign trade conditions: the development of processing industries. Of course, this takes time, but no one stopped Kasyanov and his colleagues from starting five years ago when the oil prices had already risen. This loss of time is the direct fault of the departing government. 

An agenda for a new cabinet

As a result of the tax and budget policy pursued by Kasyanov’s cabinet, we have a pathologically high rate of gross national savings in Russia today. We have to pay for these accumulated funds with low consumption. Meanwhile, gross savings are a critical investment resource. But while the gross savings to GDP ratio, for example, of Japan or Southeast Asian countries is approximately equal to that of Russia, their public investment is three times as high.
Therefore, one of the main tasks facing the new government is to abandon the thoughtless savings and turn the resources dormant in the stabilization fund into investment in the national economy. This could happen, for example, by initiating government guarantees of loans for businesses to implement domestic demand-oriented projects. This solution alone could prompt a number of reforms that have yet to produce real results, for example, banking reform. For several years Kasyanov’s government discussed ways to reform the Russian banking sector, and in essence reduced the debate to how to “clean out” the sector, whether by a bank’s size or its performance and development prospects. In the end, the issue has resolved itself – noncompetitive banks, for the most part, are dying off naturally. The only problem is that the banking system remains small and feeble.
Alleviation of the tax burden, which is still very heavy, should become another area for using public funds. It is much more important and promising than accumulating money in the notorious stabilization fund.
Today, Russia is badly in need of a government that would give up the accountant approach to taxation, one that would view lower taxes as potential investments in Russia’s economic development and not “reduced budget revenues.”

Administrative revolution

Vladimir Putin mentioned the need for administrative reform as one of the reasons for dismissing the cabinet. To all appearances, this will be the main issue of his second term. Here, we can also observe an almost dialectic contradiction: while “assembling” the state, it was necessary to foster and strengthen in every way possible the demoralized and disorganized managerial class. Now it has gotten stronger and has powers beyond all proper measure. Take, for example, officers from sixty (!) federal agencies have the authority to suspend operations at a company without a court ruling. 
On the same day Putin was speaking with members of the former cabinet, a forum entitled “Administrative Reform and Small Business” took place in Moscow, organized by an entrepreneurial association called Opora Rossii. Acting Vice-Premier Boris Aleshin reported to the public that the state machinery will be reduced by 30%, that the ministries will keep no more than 15% of their present functions, that oversight agencies will be separated from executive agencies, and that commercial organizations will be responsible for conducting official inspections. All this will spells an administrative revolution, as Mikhail Dmitriev, acting First Deputy Minister of Economic Development and one of the draftsmen of the reform, said.
If Putin succeeds in making Russian officialdom compact, efficient and friendly to business and the public and in confining corruption, all other reforms will move along brilliantly and the long-awaited Russian economic miracle will finally occur. There are only two worrisome things: first, no one in the history of Russia has ever succeeded in doing this, and second, a change of government alone is not enough. The government, no matter how progressive the future prime minister may be, will be unable and unwilling to make a revolution on its own. In other words, the second term of Vladimir Putin must partly be a negation of the first term. Such is the nature of dialectics.

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