Even before the abrupt job swap announced last week between Russia’s prime minister Vladimir Putin and President Dmitry Medvedev, investor confidence in Russia was already running low. The subsequent departure of trusted finance minister and fiscal conservative Alexei Kudrin now risks shaking the faith of the most optimistic.

The signs of investor concerns are obvious. Russian shares have been hit sharply this week and the rouble has fallen significantly against the dollar. Over the past year capital outflows have grown to more than $70bn, and this week’s events give investors little reason to reverse that trend.

The optimists will argue that Mr Putin’s return to the top job in Russian politics finally brings much needed clarity. And it is true that the oligarchs who control so much of the Russian economy have held off investing, in part due to the global crisis, but also to wait for the Kremlin fog to clear.

But in the longer term Mr Putin’s return, and Mr Kudrin’s departure send all the wrong signals on the future investment climate in Russia.

Though Mr Kudrin did much to instill a welcome sense of discipline in Russian public finances, his spectacular sacking has laid bare the pressures to return to less prudent policies.

And there are already signs that Mr Medvedev’s promised privatisation programme is stalling as the timetable is pushed into the long grass. Senior Kremlin advisers now admit that, as president, Mr Putin is likely to slow the process even further.

Mr Putin may attempt to present a more liberal image, but the truth is that his track record suggests otherwise. In eight years as president and almost four as prime minister, Mr Putin has done little to help the Russian economy become more competitive. It remains overly reliant on complacent and under-invested extractive industries, and corruption is rife. The biggest obstacle to foreign investment today is the country’s corrupt court system.

Such handicaps require reforms that a corporatist such as Mr Putin may find difficult to accept, let alone implement. Moreover, he will not have the favourable wind of rapidly rising oil prices as he did in his first two terms as president, when the opportunities were missed. This all threatens to mire Russia in Brezhnevite era of stagnation.

If investors needed any proof that nothing has changed, then the backroom manner in which the Russian leadership has been decided should be ample evidence.

Political and economic overhaul are vital. Otherwise, Mr Putin may be remembered as the heir of Leonid Brezhnev, whose reluctance to reform sowed the seeds of the Soviet Union’s demise.

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