#7 - JRL 7063
The Russia Journal
February 14-20, 2003
Three years of Putin's progress
By Bruce W. Bean

Bad news for congenital Russia-haters: After eight years of living and working in Russia, I am forced to report that the Russian legal and business climate has markedly improved in the 37 months since former President Boris Yeltsin’s end-of-the-century surprise made Vladimir Putin acting president.

Only the most desperate would-be muckraker would deny Russia’s recent impressive economic performance relative to Europe and the United States. Of course, we do have some heretofore-ignored academics cavalierly explaining that Russia’s progress in this millennium is entirely the work of high oil prices and self-importantly pontificating that Russia will never "catch up with Portugal."

The Yeltsin-Duma deadlock, which had blocked much legislation during the 1990s, vanished with the Putin presidency and the new Duma that was elected in December 1999. The Russian Federation has the most favorable, business-oriented tax legislation of any industrialized country. Dick Armey, the Texas congressman, has been moaning for years about establishing a "flat tax" in the United States. Doubtless because of the millions of votes that would be lost by lawyers and accountants who grow fat on the current quagmire of U.S. tax laws and regulations, the flat tax has gotten precisely nowhere. Nowhere, that is, in the United States. But the first and most important legislative achievement of the Putin administration was passage of Russia’s 13 percent flat personal-income tax. While no one wants to be accused of believing numbers from any government, we have been consistently told that, since Jan. 1, 2001, when this innovation became effective, tax collection and the number of reported taxpayers in Russia have jumped impressively.

Two additional tax measures have also contributed to improving the Russian business climate over the past three years: The chopping of the corporate-profits tax from 35 percent to 24 percent and the easing of the so-called "social taxes." These initiatives, surprising to many, are just the most important of a fairly impressive series of legislative achievements that have convinced the Moscow business community that a Putin priority is improving Russia’s economic climate.

One: In August 2001, the Duma completed amendments to the Joint Stock Company Law, one of Russia’s fundamental commercial laws. These changes, the first major overhaul of this law, address many of the concerns raised about the original law since it was first enacted at the end of 1995.

Two: Dealings in foreign currency have been liberalized, both for Russian residents and exporters. The requirement for mandatory conversion into rubles of hard-currency export proceeds has been reduced from 70 percent to 50 percent, and there are proposals pending to reduce it further to 30 percent. It is expected that these restrictions on currency transactions will be eliminated in 2007.

Three: Sales of commercial and agricultural land have now been authorized, thus "solving" a problem of perception, not reality. The existing 49-year leases have proven more than adequate for any business plan yet prepared for Russia.

Four: Judicial reform is underway with both much-needed procedural changes and important salary increases for the judiciary. While we may never reach judicial Nirvana, the Russian legal system may quickly overtake some of the more notorious jurisdictions in the United States.

Five: Other laws have also improved, or are expected to improve, Russia’s business climate. These include mandatory automobile liability insurance, pension law reform, anti-money-laundering laws and many others.

Having previously been labeled a member of Russia’s "hooray chorus," I have been careful in presenting this list. This is a list of enacted measures, which does not mean each item has been fully and successfully implemented. Like other functioning democracies, Russia cannot change the way it operates overnight. This is a real-world country of 150 million people, not George Lucas’ Industrial Light and Magic. The old ways cannot be instantly replaced with a computer-generated Hollywood set. As a practical matter, Russia has millions of bureaucrats, some significant portion of whom came of age in a time when any commercial activity could have been deemed a crime. And, doubtless, an unknown portion of these greatly resents the commercial success of those who have not dedicated their careers to working for the state. Implementation of any change can be painfully slow.

Just as the Russian market economy was not instantly created when Yegor Gaidar freed prices on Jan. 1, 1992, so Putin’s recent legislative reforms have not yet fully taken hold.

Whatever your view of Putin’s role in Russia’s progress over the past three years, it is undeniable that enough has happened to make it obvious that a middle class has arrived in Moscow.

While we can concede that an unknowable percentage of Russia’s current economic success may be ascribed to the high price of crude oil, it would be foolish to say this is the whole story. On the day Yeltsin resigned and appointed his prime minister the acting president, there was an immediate, palpable improvement in the perception of political stability in Russia. Compared to Yeltsin, Putin was a veritable health nut. No one worries that Russia’s president might return to the hospital. No jaundiced journalist counts the days Putin actually makes it to the Kremlin. The fact that Putin and his youthful team were, on average, born and raised well after WWII contributes in an unquantifiable way to the sense that, with Putin, we have a new regime and a new approach.

There are always many items on any list of needed Russian legislative improvements. In addition to full implementation and enforcement of existing laws, the Putin agenda for enhancing business in Russia must include significant banking reform, further revisions to the bankruptcy law, a meaningful crackdown on corrupt bureaucrats, progress in dealing with the electricity sector, railroads, pipelines and much more.

But no honest commentator can deny the real progress that the Russian economy has made to date. Putin, KGB or not, gets this credit not because all of his legislative initiatives have been brilliantly and successfully implemented, but because the on-the-ground business community, Russian and foreign, believes that the Putin government is attempting to do the right thing and, thus far, has been largely successful in doing so.