Russia’s economy. Told you so

Is Russia heading for “stagflation”?

STROLLING past sports-car dealerships, visitors to Moscow might think talk of the “oil curse” is overblown. Ditto economists impressed by Russia's macroeconomic stability since 1998. But in fact the outlook is increasingly glum. Growth in the first quarter was over two points down on last year. The official forecast for 2005 has been cut to 5.8%. And inflation hit 11.7% in 2004, and may touch 13% this year, well above the (revised) target of 10%.

The underlying trouble is that high oil prices, even at $60 a barrel, no longer compensate for the poverty of policy in Russia. After climbing for nearly five years, oil production began to stagnate last autumn. One reason is that oil companies now have to look beyond the easy-to-tap oil reserves of western Siberia for new fields. But another is a loss of confidence after the government's assault on Yukos, an oil firm, and its boss, Mikhail Khodorkovsky. Choked export routes and high windfall taxes are also blamed for flat oil output.

Even as petrodollars have strengthened the rouble, damaging competitiveness, the reforms that might have offset this have been glacial. An OECD report out this week says business still faces too many rules, changed too often and capriciously applied - as any small businessman would readily affirm. The justice system is shameful. The gas, electricity and railway industries are dominated by inefficient and opaque monopolies. (This week the government was due to buy a further 10.7% of Gazprom, the biggest and most opaque, for $7.1 billion, taking its stake above 50%.) The trend, says the OECD politely, is towards “more interventionist, less rule-governed state behaviour.”

Opinions differ as to why Vladimir Putin, who seemed keen on reform in his first term, has more or less given up in his second. Has oil money induced complacency? Is it his authoritarian streak that led him to appoint an inert prime minister? Whatever the explanation, the government is missing a chance for relatively painless change. Given the storm over one reform that was tried - the monetisation of some in-kind social benefits - and the anxiety in the Kremlin over the presidential succession in 2008, that chance may now disappear altogether.

Along with post-Yukos jitters, stalled reform helps to account for Russia's stampeding capital flight, which, reckons Fitch, a rating agency, was a net $33 billion last year. Fear of bureaucratic attacks also explains a spate of Russian flotations, often of smallish stakes, in London. The thinking is that foreign investors offer some protection against government predation (though they availed Yukos little, and the theory relies on moderately good relations between Russia and the West).

Nervous Russian cash heading out; naive foreign loans still coming in: so it was before the default and devaluation of 1998. That may be a comparison too far. Russia has run trade and budget surpluses for five years. So far, the oil-windfall revenues in its stabilisation fund have not been used except to pay off debt, which the president seems to regard as an affront to Russia's pride. Mr Putin realises that his hope of transforming living standards is fading: he periodically berates his ministers, ordering them to get growth numbers up and inflation down. But such harangues only exemplify the instinctive dirigisme that is a big part of Russia's problem.