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Originally published Sunday, March 18, 2012 at 8:34 AM

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Putin's campaign promises pose economic challenges

Vladimir Putin's lavish promises of higher wages and benefits for soldiers, doctors and teachers were a key element in winning a new term in the Kremlin. But the price tag, estimated at $160 billion or more over his six-year term, worries economists.

Associated Press

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MOSCOW —

Vladimir Putin's lavish promises of higher wages and benefits for soldiers, doctors and teachers were a key element in winning a new term in the Kremlin. But the price tag, estimated at $160 billion or more over his six-year term, worries economists.

They say Putin will have to make serious efforts at reform and tackle endemic corruption, or else fulfilling the promises could undermine the economy.

On the other hand, if Putin fails to deliver on his promises, the political risks could be high.

"People are not going to be ready to wait," said Sergei Guriev, rector of the New Economic School in Moscow. "If the discontent of Putin's traditional voters combines with the willingness of the urban middle class to protest, then Putin's presidency may be over well before 2018."

Moscow and St. Petersburg saw the largest street protests in Russia's post-Soviet history this winter, when tens of thousands came out to demand fair elections as well as a bigger say in how their country is governed. This emergence of a vocal middle class puts new pressure on Putin to follow through on promised political reform.

But Putin faces even greater pressure from his traditional supporters, including all those dependent on the state, to fulfill his promises of higher salaries and benefits.

"He's fairly well locked into having to deliver on this," said Chris Weafer, chief strategist at the Troika Dialog investment bank. "Putin is now coming back with a lot more at stake and a more difficult situation than he had in 2000. There's no question about that. There's now a much larger group of people that are waiting for this government to fail."

Putin's most tangible and costly promises were made in a lengthy article published about three weeks ahead of the March 4 election.

He vowed to increase teachers' pay to the equivalent of the average salary for their respective regions by the end of this year. College professors and doctors were told that their salaries would reach double the regional average by 2018, which alone would cost the budget an extra 3.5 trillion rubles ($119 billion) over the next six years. He also promised considerable hikes in monthly benefits to families with more than two children and in stipends for students at state universities.

These extra payments come on top of significant raises given to military and police officers in January, and steadily rising pensions.

The Fitch ratings agency estimated Putin's pledges will cost about $160 billion over six years, while state-owned Sberbank put the figure even higher at 5.1 trillion rubles, or $173 billion.

Shortly after his election Putin insisted that he "had not promised anything that would be impossible to implement." He estimated that the additional social spending would be about 1.5 percent of Russia's gross domestic product and gave assurances that the money could be found by cutting costs and inefficient spending.

Economists disagree.

"Russia needs a different economic model if it's going to achieve the level of growth that's required to sustain stability, both economic and political," Weafer said.

Guriev, a prominent economist, believes the government could run out of cash to cover these expenses unless Russia's economy delivers at least 6 percent growth, which he said is possible only if Putin pursues economic reforms and gets serious about eradicating corruption.

The economy, highly dependent on exports of oil and gas, is expected to grow less than 4 percent in 2012, down from 4.3 percent in 2011.

"With the current structure of the economy, 6 percent is feasible only if oil prices grow 20 percent every year," Guriev said.

Russia's economy grew by leaps and bounds in the years after Putin first came to power in 2000, mainly on the back of soaring oil prices. But back then, the government was able to balance its books with an oil price of only $60 per barrel. With the growing spending, Russia these days can avoid a deficit only if oil stays above $117. Urals crude is now trading at about $120.

Economists say the government may be able to afford the extra spending at this point, but it could hamper growth and leave Russia vulnerable in case of greater global economic turmoil or a drop in oil prices.

Russia has 1.8 trillion rubles ($61 billion) in a reserve fund, created from oil revenues that the government tucked away when prices were high. But even more money was sent out of the country last year, a whopping $84 billion in capital outflow, indicating a lack of confidence in the Russian economy and illustrating the difficulty the government faces in attracting needed investment.

Potential sources to cover the new expenses could include higher taxes on metals and mining industries and the privatization of some state-owned assets, as well as cutting costs and inefficiencies, according to Weafer.

Along with the campaign promises of higher wages for teachers and doctors, Putin's government has committed to spending 1.8 trillion rubles ($61 billion) this year alone to revamp Russia's armed forces. And military spending is set to grow by some 20 percent annually in at least the next two years.

Another touchy subject for Putin is Russia's relatively low retirement age of 55 for women and 60 for men.

Economists and even some Russian officials have insisted that the current pension system is unsustainable and will drain twice as much money from the budget in the coming decades unless the retirement age is raised. Putin, however, vowed throughout his campaign that the retirement age would remain unchanged.

Yulia Tsyplyaeva, chief economist at BNP Paribas in Moscow, said that while Putin's promises of higher salaries are feasible, the pension system poses a much more serious challenge.

"There is the question of how confident can a country feel when it transfers 5 percent of GDP from the budget to the pension fund, which runs a constant deficit?" she said.

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