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Putin unveils investment plan but mood gloomy in Russia

20 June, 2013

President Vladimir Putin unveiled a $13 bln investment plan on Friday to build roads and railways across Russia and show he is not steering the country into political and economic stagnation.

But in a speech setting out moves to curb inflation, boost economic growth and sack the heads of under-performing state firms, he failed to allay investors' concerns over an economy sliding towards recession.

With growth slowing and inflation high, even the promise of a lucrative energy deal with China valued by Russia at $270 bln could not lift the gloom at Russia's answer to Davos in the former KGB spy's hometown of St Petersburg.

Putin was less upbeat than in previous years at the forum, which is meant to show why Russia is a good place to invest. He acknowledged the economy faced problems a year into his third spell as president and 13 years after he first took the helm.

"There is no magic wand which could change the situation with one wave," he said, declaring the era of high revenues from oil exports over.

Setting out distant projects reminiscent of the five-year plans of the Soviet era, he promised to plough 450 bln roubles ($13.6 bln) into building a new ring road outside Moscow, updating the Trans-Siberian railway and building a rail link from the capital to Kazan in central Russia.

Moves to improve infrastructure, some of which has improved little since Soviet times, are considered vital by investors to modernise Russia and make its economy more competitive.

But with inflation running at an annual rate of 7.4% and economic growth now forecast to be 2.4% this year, below Putin's 5% target, investors are concerned Putin is not the man to lead the economic recovery.

"There is a concern that Russia is potentially in some Brezhnev-style stagnation," said Charles Robertson, chief economist at investment banking firm Renaissance Capital, referring to the Soviet leader Leonid Brezhnev.

"Now the energy prices are stagnating as they did in the late 1970s and the early 1980s, and now maybe reforms are petering out. Maybe politics is a part of the problem," he added.

Last year Putin, 60, faced the biggest protests since he was first elected president in 2000. The rallies have dwindled but critics accuse Putin of cracking down hard on opponents to silence dissent and stifle democracy.

DIPLOMATIC SPAT WITH GERMANY

Talk on the sidelines of the first day of the forum was dominated by a hoax email that briefly had Russians believing the head of state-run Russian Railways - a Putin ally - had been dismissed, fuelling speculation that a battle for influence and money behind the scenes was intensifying.

Friday's events were marred by talk of a diplomatic row after Putin and German Chancellor Angela Merkel, the main foreign guest, initially dropped plans to attend an art exhibition, but they later reversed that decision.

In his speech, Putin said Russia would contain inflation by tying the tariffs charged by state monopolies such as energy firms to retail price growth.

A year ago, Putin said "state capitalism" was not his goal. But on Friday he warned managers of state firms they would be punished for poor performance "right up to being sacked."

He also said he would open up state-run Gazprom's monopoly on gas exports to allow competitors to sell liquefied natural gas abroad.

Privatisation, he said, would be conducted gradually. But investors, worried by the slow pace of privatisation and the flight from Russia of a liberal economist Sergei Guriev after pressure from state prosecutors, were not convinced.

"Putin's speech stuck to what is now a familiar script - Russia needs to raise investment, improve the environment for business and diversify away from oil and gas," Neil Shearing, Chief Emerging Markets Economist at Capital Economics Ltd, said.

He questioned whether the sums promised for infrastructure were large enough, adding that "for now I'm not ready to change my view that the Russian economy will underperform over the next couple of years."