“The state is now the main player on the housing market, that means the state can more actively influence price, supply structure, stimulate such segments as economy class housing and individual homes,” he said.

After years of exponential growth, Russian real estate prices began to decrease last fall. According to data from the IRN analytical agency, secondary home prices in Russia’s regions fell on average by 5 percent, while newly constructed house prices fell by 4 percent.

Per meter prices, however, remained well above the threshold described by Putin. By the end of March, the weighted average for economy-class home prices around Russia was 40 thousand rubles on the primary market and 45 thousand rubles on the secondary market. The net cost of constructing new housing was 35 thousand rubles, according to IRN.

Moscow remains the most expensive city for housing in Russia. Despite sharply falling prices, average apartment prices in bearing-wall and pre-engineered buildings the capital were $3692 per square meter, or around 117 thousand rubles. Monolithic and brick buildings, meanwhile, fetched an average $4295 or 136 thousand rubles per square meter.

The Russian government has taken steps to put controls on the domestic economy, from creating massive state corporations to lashing out at companies it thinks are improperly setting prices, to limiting imports on foreign autos. Putin’s new appeal may be the latest step by the state to take charge of how the economy is run.

Yet how much did Putin actually achieve, and at what cost?  Writing for the Moscow Times newspaper, political analyst Yevgeny Kiselyov argues that Putin’s legacy is far from positive.

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But behind that glamorous television image, high popularity ratings and personality cult stands a deplorable track record. During Putin’s years in power, the country lost a complete decade. Russia missed a golden opportunity to use an extended period of high oil prices to modernize the country both politically and economically. Now as we near the end of the first decade of the 21st century, Russia remains mired in the past century. The country’s economy, including its federal budget, continues to be over-dependent on revenue from oil and other raw materials exports. Eighteen years after the collapse of the Soviet Union, it still lacks a modern communications infrastructure. In addition, there is an appalling shortage of high-quality roads ­ including the so-called highway between Moscow and St. Petersburg ­ as well as modern train stations and airports.

In reality, the Russian economy began to grow rapidly before Putin’s rise, when the price of oil was about $15 per barrel. This growth started in earnest in 1999, after the ruble was devaluated following the 1998 default. But in the thick of Putin’s presidency, when oil prices approached $100 per barrel, exceeding even the boldest forecasts, the rate of economic growth year on year actually began to slow. Meanwhile, economic growth in similarly oil-rich Azerbaijan and Kazakhstan during the same period was two to three times higher.

Putin dedicated practically all of his early years as president to the war in Chechnya, the struggle with a few obstreperous and overly ambitious oligarchs, construction of his power vertical, the placement of loyal insiders in key government posts and instituting governmental control over the country’s largest media outlets.

Economic reforms that included the creation of the stabilization fund, the adoption of a new Land Code and new labor laws as well as the reform of natural monopolies were all begun under now-disgraced former Prime Minister Mikhail Kasyanov. After his ouster, the reforms ground to a halt and a new course was set toward building Putin’s state capitalism.

Not Much to Celebrate After 10 Years of Putin

Unfortunately, Russia’s redevelopment is hindered by an inept state and unfathomable levels of corruption.  Even as the government raked in record windfalls from energy sales in recent years, roads were left to rot, and infrastructure projects were not initiated.  Russia is falling behind, Inozemtsev argues, and for the moment, the path to modernization looks bleak unless a drastic change is made.

Read more about Russia’s crumbling roads from the LA Times.
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Modernization.ru: Billions in Asphalt

Vladislav Inozemtsev
07.14.2009
Vedomosti

In order to modernize the economy, a series of conditions are necessary, and one of the most important is the condition of infrastructure.  Accelerated development is unthinkable without a network of roads, accessibility of power and communications, and the ease of mobility for workers.

All countries that have successfully modernized ran into this limiter of economic growth in the early stages, and decisively took to amending the situation.  One can confidently say: only those who managed to jump this barrier succeeded in modernizing.  Those who threw in their hands were left in the past.  Russia, sadly, had nothing to brag about here.  From 1995 to 2008, the length of the auto and rail network hardly expanded (comprising 750,000 and 755,000, and 87,000 and 86,000 kilometers [respectively]; Russia by numbers.  Official publication.  Federal State Statistical Service, 2009, chart 18.9).  From 1989 to 2008, the volume of overseas transport fell by 4.8 percent, and the number of airline passengers- by 2.1 times;  housing stock put into operation fell by 34%, and connecting to the power grid became a nationwide problem.  Leading countries, on the other hand, behaved in a completely different manner.  Its customary now to compare Russia with the other BRIC [Brazil Russia India China] countries – and the comparison here is staggering.  In Brazil, the length of the road network grew by 65% from 1988 to 2005; the volume of overseas transport by 90%; and the number of airline passengers more than doubled.  It’s better not to recall China: in only the last five years, 3.1 billion square meters of housing were built, 480,000 km of automotive and 19,000 km of rail routes; 16 large new airports have been put into operation, the first high-speed trains have been launched, six Chinese ports entered the list of the top 12 sea gateways of the world (moreover, the least busy of them handles more cargo than all of Russia’s ports combined), and connecting to the electrical grid now takes 19 days.

Russia is losing in this competition as result of the incompetence and corruption of the government, which does not set complex development goals as a priority.  The less authorities interfere with infrastructure development –the better the end result.  In 2000, the revenue from providing mobile telephone services was three times lower than services for stationary local and long-distance telephone communications.  In 2008, it was four times greater.  Yet there is no competition in road construction, and there are no results: in 2008, just 2300 km of motor ways were built (in China, this much is built in 10 days!), and the Avtodor state corporation (which was recently granted fiduciary management over 18,000 km of roads) will sooner work to change them into paid toll roads than build new ones.

What is the reason for the failure of Russia’s infrastructure modernization?  In our opinion, it’s clear: unlike the Chinese, Korean of Brazilian, the Russian government is incapable of lodging firm demands on its contractors and optimally organize production.  Today, 1 kilometer of four-lane highway costs $2.9 million in China, $3.6 mln in Brazil, and in Russia – $12.9 mln (for the section of highway from Moscow-St. Petersburg, the figure from the 15th to the 58th kilometer amounts to $134 mln for 1 km; for the Western High-Speed Diameter in St. Petersburg – $142 million for 1km, for Moscow’s Fourth Transport Ring – around $400 mln for 1 km).  The cost of building warehouses and commercial real estate in Russia is higher than in France or Germany, and exceeds the Brazilian figures by 2.4 times, and the Chinese by 3.2 times.  With that said, 1 square meter of area in a residential home expends .9 cubic meters of concrete and 90 kilograms of reinforcing metal, although in developed countries this is 2 times less (in turn, the equivalent of 210 kilograms of fuel oil is spent to produce 1 ton of cement, which is used to make concrete.  In the European Union- 125 kg).  In Germany, 65% of highways are built by laying precast concrete pads, in PRC [China] – 38%, in Russia – 0%.  After all, these coverings do not require repair for 20 years or more, and we spend 5.5 times more funds on repairing existing roads than laying new ones.

The Russian government overpays builders by tens of billions of dollars and throws away capital in even larger sums, simply because those who associate themselves with the government are not “statists,” but “feeders.”  It would not be an exaggeration to say that Russian infrastructure projects in recent years have become the site of the most widespread, non-transparent redistribution of wealth in the world (in 2006-2008 around $230 billion was expended without any visible material result).  Unsurprisingly, this market is completely closed to foreign companies, and the cost of work is growing each year by 25-40%.

Modernization presupposes a rigid system of rule- a true vertical, that can impose terms.  It succeeds where such a system has been built, and falters where bureaucrats act like businessmen.  And since the latter is visible in Russia much more distinctly, then as long as the situation does not change, one can’t expect a more modern infrastructure or modernization as a whole in the country.

The author is the director of the Center for Research of Post-Industrial Studies;   publisher and editor-in-chief of the Svobodnaya Mysl (Free Thought) magazine.

translation by theotherrussia.org

For every perceived Putin victory, analysts point out serious failures and new problems that have emerged, including rising levels of inflation and widespread corruption. Furthermore, critics question the significance of Putin’s economic plan, and suggest that factors beyond the president’s control, like sky-high oil prices and reforms under Boris Yeltsin, contributed more to the economy.

As the Economist magazine explained in a recent article, GDP growth began before Putin even took office, reaching 6% in 1999 and 10% in 2000. Since then, it has leveled around 7% –an impressive result when compared to Western industrialized nations, but just average when compared with other former communist countries in Eastern-Europe. And unfortunately, much of Russia’s expansion is associated with little more than sky-rocketing energy and natural resource prices.

The Institute of Economic Analysis shows that the share of oil and gas in Russia’s GDP rose from 12.7% in 1999 to 31.6% in 2007. Natural resources constitute 80% of the country’s exports. Russia is now heavily dependent on world commodity prices, and has failed to use cash flows to diversify and improve other domestic industries. Foreign Direct Investment in sectors other than energy actually fell (from 1.6 to 0.65%) since Putin took office. Russian infrastructure, such as roads, remains disastrous and outdated, and unnecessarily raises the costs of doing business. State take-overs of privatized companies also dealt a blow to efficiency. Since Mikhail Khodorkovsky’s Yukos was dismantled early in Putin’s reign, growth in oil output fell drastically from a rate of 9% to 1% by 2007.

According to RIA Novosti, a further issue has been a widening gap between Russia’s rich and poor, which has skewed wage and income statistics. In 2007, the incomes of the top 10% were 17 times higher than the incomes of the bottom 10%, up from 14 times in 2000. Aside from a small class of the very wealthy, most Russians have felt their incomes rise quite gradually. Moscow, by some estimates the world’s most expensive city, overtook New York this year to house the most billionaires in any world city. Yet the per capita monthly wage in 2007 was just 30,000 rubles (€820 or $1,250). According to Rosstat, Russia’s statistics agency, incomes in the rest of the country are one tenth of that. More than 21 million Russians, or 15% of the population, remain below the poverty line.

The government has also been unable to conquer steady inflation, which reached double digits in 2007 and has eaten into growth. Prices on all consumer goods and services shot up in recent months, as much as 4 percent in some Siberian regions in January and February of this year alone. Some staple food items have grown by 20 and 25%. The Kremlin’s response has been largely ineffective, and the most notable methods used to deal with inflation have been fixed prices on certain goods.

Unprecedented levels of corruption and subservient courts have also emerged under Putin. Russia now ranks among the world’s worst countries for corruption, according to rankings from the World Bank, Transparency International, Freedom House and the World Economic Forum. The Kremlin’s uncanny destruction of one of Russia’s most open companies, Yukos, has removed any impression that businesses are protected by the rule of law.

The Economist quotes Vitaly Naishul, who tracks Russian institutions:
“The problem is not that the Russian legal system is weak. The problem is that it does not exist. The Russian justice system has as much to do with justice as the Soviet system of trade with trade.”

When Dmitri Medvedev formally takes over in May, with Putin as his prime-minister, he will stand at the helm of a formidable economic power. But a slight change in world energy or commodities markets could quickly reverse Russia’s fortunes, as continuing corruption pushes investors away.

Until serious reforms sweep the country, then, a crisis will always be just around the corner.

The momentum for a new wave of national industries began with the arrest and trial of Mikhail Khodorkovsky, Russia’s richest man, in 2003. Khodorkovsky is now serving an eight year sentence for tax evasion and fraud in Siberia. His oil company, YUKOS, was systematically dismantled and reformed as Rosneft, a national monopoly.

The precursor to current reforms was a series of rapid privatizations started by Boris Yeltsin in the 1990s. Under Yeltsin, many state-owned corporations were quickly sold, often under suspect conditions that created a new class of super-wealthy oligarchs. Putin has publicly chastened this group. Under his administration, business empires have been re-taken, and some high-profile oligarchs have been either imprisoned or exiled abroad.

Yet for all of the president’s fiery rhetoric, Russia’s wealthy elite has actually prospered under his rule. The number of billionaires in the country is now 53, up from 7 in 2002. Once the CEOs and chairs of huge private corporations, a new style of oligarchs now heads Russia’s national companies.

As the country approaches a presidential election on March 2nd, Moscow seems set on filling the boards of its state corporations, from Rosneft, the oil giant, to Aeroflot, the national airline, with officials loyal to Putin.

Viktor Zubkov, Russia’s Prime Minister, has been nominated to become chairman of Gazprom, the natural gas monopoly. The position is currently held by Dmitri Medvedev, Putin’s chosen successor who will almost certainly become the next president. Since Putin has pledged to become Medvedev’s Prime Minister, the three have entered a simple rotation.

Gazprom presents a revealing example of the result of Putin’s nominations. 10 of the 18 members of the current board hail from St. Petersburg, considered a Putin stronghold, and 3 of them worked directly with Putin in the St. Petersburg mayor’s office. Two more previously worked for the presidential administration.

Gazprom has also been accused of using its resources for political reasons, and has cut off gas shipments to neighbors in the dead of winter.

As Vladimir Putin prepares to leave the office of president, he is leaving a structure of individuals loyal to him personally among the top ranks of the nation’s largest corporations. Whether he will manage to keep that loyalty, and whether Dmitri Medvedev will continue a path to re-nationalization remains to be seen.

Of the countries comprising the Commonwealth of Independent States (CIS), only Belarus and Turkmenistan were ranked below Russia. Armenia stood in 28th place, Kyrgyzstan 70th, Kazakhstan 76th, and Moldova 89th.

Hong Kong took first place in this year’s results, receiving a metric of 90.6 out of 100 (Russia received a 49.9). Singapore and Ireland were second and third, respectively, and the United States and Austria filled out the top-five countries.

In the previous Index, Russia was situated between China and Nepal at 120th place. The document, now in its 14th year, rates countries based on 10 criteria, including “investment freedom,” “government expenditures” and “freedom of trade”. Russia’s lowest measure was “freedom from corruption.” On the other end, Russia ranked 5th in the world for “fiscal freedom.”

The paper’s authors assert that freedom of a country’s economy and the pace of its development are directly correlated.