The Bell, 3/1/24

Putin’s state-of-the-nation address offers Soviet vision of Russia’s future

Russian President Vladimir Putin’s state-of-the-nation address Thursday broke records, both for length and the number of “spontaneous” outbreaks of applause (there were 116 of them, according to one count). But the parallels with the Soviet Union don’t end there. Putin spent only a short time talking about the main threat to the economy – Russia’s war in Ukraine – and instead threatened the West, engaged in nuclear saber-rattling, and appeared to promise a far greater role for the state in the Russian economy.

Putin competing with Putin

Unlike last year, Putin radiated confidence in his speech to lawmakers. He is clearly satisfied with the situation at the front, and believes there are enough resources to continue fighting for at least another year. However, opinion polls suggest that the most popular candidate in presidential elections next month would be someone who does not harp on about the war, but who offers solutions to Russia’s domestic problems. So, once he’d got the saber-rattling out of the way, the lion’s share of Putin’s speech was about his plans through 2030.

According to the president, Russia needs more social spending, higher birth rates, longer life expectancy and fewer imports. Of course, that’s basically what the country needed during his previous six-year presidential term. Putin continues to compete with himself.

One of the new initiatives that Putin announced was five “national projects.” Four of these (Family, Youth, Long and Active Life, and Personnel) are related to human capital. Only one, Data Economy, relates directly to the economy. 

Putin’s speech suggested the state intends to act as the major player on the market – not just as a guarantor. He set a target to double capitalization on the Russian stock market by 2030 – not a hugely ambitious goal considering that the S&P 500 Index in the U.S. doubles in value roughly every seven years (and inflation in Russia is much higher than the U.S.).

Putin also pledged billions of dollars of spending. The promised new spending over the next six years comes to around 6 trillion ($66 billion), or about one trillion rubles a year. It may sound like a lot, but in reality it is relatively little – about 0.6% of GDP each year. 

New taxes?

However, even these relatively modest sums must come from somewhere. And Putin hinted that the state could impose new taxes, or raise existing ones, to pay for its additional social spending, as well as to boost productivity and to wean the country off imports.

In particular, Putin suggested raising corporate taxes and hiking income tax for the wealthy. Coincidentally, just three days before the speech, pro-Kremlin media reported the existence of legislation that would raise taxes for high earners. That legislation was not backed by the United Russia party, so it is unlikely to gain traction. It should be seen as a trial balloon. However, the idea of raising income tax to 25% on those who earn above 500 million rubles a year would raise about 1 trillion rubles a year – enough to fund all Putin’s spending promises. 

Russian officials have spent years talking about shifting from Russia’s flat rate 13% income tax to a more progressive system. In 2021, income tax rate was increased to 15% on individuals who earn more 5 million rubles ($55,000) a year. The higher tax applies to all earnings above this threshold. From a bureaucratic point of view, however, implementing a progressive income tax presents several major problems:

• Income tax goes to regional governments, which means that raising taxes will increase Russia’s already significant level of regional inequality;
• Progressive taxation could cause companies to take salaries off the books and pay wages in cash – resulting in an overall fall in revenue;
• Progressive income tax is first and foremost a tax on the middle class. In modern Russia, a large proportion of the middle class are state employees, particularly security officers and soldiers who the Kremlin would not like to irritate by taking money out of their pocket. They would likely need preferential treatment.

A more realistic alternative to hiking income tax would be a review of corporate income tax, which currently stands at 20%. Indeed, businesses have already suggested they would not be unhappy with higher taxes. Alexander Shokhin, chairman of the Russian Union of Industrialists and Entrepreneurs, a lobby group, said in December that businesses had no objection to a tax rise if the government stopped levying one-off payments. 

A new elite

Another important takeaway from Putin’s speech was that those pursuing private business have, in effect, been erased from the national elite. Putin put it bluntly. “The word “elite” has discredited itself, especially when applied to those who lined their pockets in the 1990s,” he said. “The real elite are the workers and warriors who serve Russia.”

Putin confirmed what businessmen already understand: the nationalization of assets will continue. Strikingly, up until now, Putin has acted as guarantor of the outcome of the 1990s privatization. And as recently as last year he said there would be no new nationalization. But a creeping reversal is well underway. The former assets of Mikhail Abyzov and Andrey Melnichenko’s Metafrax company reverted to state ownership in 2023, and, so far this year, the state has taken control of leading auto-dealer Rolf, and a large metals holding formerly owned by Yuri Antipov, a 1990s billionaire who was detained on fraud charges.

Putin believes the true elite are the “heroes” of Russia’s armed forces fighting in Ukraine. And he called for military veterans to play a greater role in managing enterprises, teaching and state service. Starting March 1, veterans will be able to sign up for a special program called “Time of Heroes.” Soldiers in Ukraine already enjoy more social benefits than anyone else in Russia. Among the most recent proposals, the Finance Ministry suggested exempting them from interest payments on outstanding loans.

Come again? 

There were also some odd moments in Putin’s speech. The president praised Russians for drinking less, despite the fact that recent official figures showed the first increase in the number of alcoholics in Russia for a decade. He also said the number of people in poverty should be reduced to 7% of the population – even though six years earlier he had set a far more ambitious target. 

Ominously, Putin promised to prevent an economic collapse like the one that occurred in the late Soviet Union. Putin said that military spending accounted for 13% of GDP in the1980s (a figure that tallies with accepted Western estimates). However, Russian military and related expenditure is currently estimated to be running at 10% of GDP.

Why the world should care

State capitalism in Russia is becoming more and more about the state, and less and less about capitalism. State spending, national projects and inflated government outlays are now a much better pathway to wealth than the free market. Nor did Putin much bother with presenting a new vision for the future in his speech. His new six-year plan can be summed up as: everything will be like before, only better. Some of Putin’s planned projects have obvious beneficiaries, such as the construction sector, and the new military elite. But who exactly will be better off, and how exactly this will work, is not at all clear.