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Medvedev presents economic program - UPDATE

February 18, 2008 | RBC

The Fifth Krasnoyarsk Economic Forum “Russia 2008-2010. Growth Management” opened in the Siberian city of Krasnoyarsk on Friday. Dmitry Medvedev, First Deputy Prime Minister and Russia’s leading candidate for the March 2 presidential election, presented his four-year economic program for Russia.

The program, Medvedev said, was based on the four “I’s” – institutes, infrastructure, innovation and investment. The following problems have to be sold in these areas, according to Medvedev. First, it is necessary to eradicate “legal nihilism”, paying particular attention to the quality of laws and efficiency of law enforcement. Second, administrative barriers should be reduced radically, and the tax burden must be slashed in order to boost innovation and private investment in human capital. Then, it is necessary to build a strong and independent financial system, which would in future become one of the most stable systems in the world, making the ruble a regional reserve currency. “We need a financial system that will protect people’s savings from depreciation and that would have enough resources to satisfy demand from companies implementing various projects, from opening a restaurant to the construction of a power plant,” Medvedev said.

He also called for the modernization of the transport and energy infrastructure and the creation of an advanced telecommunications infrastructure. Among other goals Medvedev mentioned the creation of the national innovation system and the implementation of a new social development program.

Turning to tax matters, he also outlined a plan of action. First, it is necessary to pass a bill on cutting the VAT, later to be replaced with the sales tax. The principles of taxation should be changed to stimulate high-level processing of natural resources. Further, tax incentives are needed to support research and development. And simpler taxation rules are needed for small businesses, with tax declaration no longer than one page, according to Medvedev. At the same time, it is necessary to take measures against tax optimization schemes and attempts to reduce the tax base.

Economic health cannot coexist with corruption, Medvedev stressed, calling for the development and implementation of a national plan against corruption. “We should exclude law breach from the habits followed by our citizens in their daily activities,” he stated.

Contempt of law, Medvedev said, always leads to disrespect of other people’s rights and failure to perform one’s own obligations. “What’s the use of talking about equal opportunities if everyone knows that those with sharper teeth are always right, not those abiding by the law,” he noted.

Another priority was to fight against corporate raids, said Medvedev, adding that “it is necessary to pass a package of laws against corporate raids as soon as possible.”

Finally, Russia needs an efficient judicial system to fight crime, Medvedev said, stressing the need to reform the country’s judicial system, making it independent from the executive and legislative authorities. “For the next four years, our top priority will be to ensure real independence of our judicial system,” Medvedev said.

Experts welcomed Medvedev’s program. Maxim Shein, an analyst at BrokerCreditService, said Medvedev had offered an effective development program, in line with ‘Putin’s style.’

“Everything is in line with Putin’s words, this is obvious and for this time this is correct. They should not drift apart,” Shein told RBC, adding that Medvedev’s speech was dominated by general phrases and contained few concrete proposals.

“General words are all correct and nice-sounding. For example, that we should export less raw materials. From an economic point of view, this is a correct idea, but it exists since Soviet times. There was little concrete information, but perhaps, this is a topic for another speech. Medvedev has outlined his general strategy,” Shein said.

Commenting on Medvedev’s proposal to cut the VAT, Shein said this would be good for the economy as the VAT cut would boost business activity and manufacturing. However, it is consumers who will have to pay, according to Shein. “The budget will have to compensate for a decline in VAT revenues, and it remains unclear how this will be done. Perhaps, through diversifying the income tax,” he said.

Anton Startsev, leading analyst at the Olma investment firm, agrees that replacing the VAT with the sales tax would be good for the Russian economy. “This would make our taxation system more transparent, removing the complicated VAT refund schemes,” he said, adding that this measure would also improve tax collection. On the other hand, in terms of tax administration, Startsev said, it would be difficult to replace with VAT. “It will take several years,” he estimated.

Vladimir Osakovsky, an economist with UniCredit Aton, called Medvedev’s proposal to cut the VAT “innovative and interesting,” noting that the issue had also been raised by President Putin recently. “The fact that Medvedev continues in the same spirit, means that the VAT reform is likely,” he said.

On the whole, Osakovsky said, Medvedev’s program was quite positive. “Medvedev has confirmed his relatively liberal image, and this is a sign that the current economic policy, which is quite liberal, will be continued,” he told RBC, adding that many of the priorities defined by Medvedev were already seen as priorities.

Anton Struchenevsky, chief economist at Troika Dialog, focused on two ideas offered by Medvedev: development of an independent judicial system and reduction of administrative barriers in the economy. “It is these two aspects that form the ‘Achilles’ heel’ of the Russian economy and, in fact, impede economic growth,” Struchenevsky said, adding that this was confirmed by all opinion polls among the business community. “I think this is the most important and effective measure to enhance the competitiveness of the Russian economy,” he said.

Other measures offered by Medvedev look just as reasonable, according to Struchenevsky. Yet, he expressed some doubts regarding taxation. “According to opinion polls, the main problem is not the level of taxation but the tax administration system, or communication with tax services,” the analyst said.

“As for tax cuts, we should not forget about financial stability and budget stability. VAT is a very important tax, generating about two-thirds of the federal budget revenues. Ideas to cut the VAT have long been discussed, but the Finance Ministry did not support them, which I think is justified. The tax reform is a pledge, and whether and how it will be implemented is another question. For the country as a whole, institutional reforms are far more important,” Struchenevsky said.

Alexander Razuvayev, chief market analyst at Sobinbank, says Medvedev had said many right things at the Krasnoyarsk forum. “Particularly regarding the Russian national currency. The formation of the ruble zone is not just an economic but also a geopolitical task. Today, the ruble is one of the most stable currencies in the world, and there are all preconditions for the formation of the ruble zone,” he noted.

According to Razuvayev, the main achievement of Putin’s presidency is the improvement of Russia’s investment climate and businesses environment. “However, now I think progress will be slower. The lack of plans to reduce the tax burden on the oil sector is also regrettable. The government can get part of the revenue through dividends on its stakes. At the same time, the existing tax burden on the oil industry is excessive, especially given plans to develop East Siberia,” Razuvayaev said.

The decisive factors for the Russian economy are oil prices and political stability, he reckons. “There are no problems here, economic growth will remain high over the next few years whatever the state policy. As Finance Minister Alexei Kudrin remarked, Russia is a save haven for investors today,” Razuvayev said.

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