Can small business help Russia bear West's sanctions? Putin hopes so.

The Russian president rolled out a series of liberal economic reforms in his state-of-the-nation speech today, saying that clearing away bureaucratic red tape and offering tax breaks to small business would soften sanctions' bite.

Ivan Sekretarev/AP
Russian President Vladimir Putin is on a TV screen at a shop in Moscow on Thursday, giving his annual state of the nation address in the Kremlin. Mr. Putin said that amid Western sanctions over Ukraine, Russia needs to promote small businesses to maintain its economy.

Admitting that Russia has suffered a "difficult" year and faces what now looks to be permanent ostracism from the West, Vladimir Putin on Thursday argued that the current economic malaise is a matter of national security that will determine the country's ability to survive.

That appears to make it official: the Kremlin now believes that it's locked into a replay of the cold war, which it does not intend to lose this time. "We are ready to meet any challenge of the times and win," Putin said.

But in a startlingly new appeal, Putin said in his annual state-of-the-nation address that the way forward is to liberalize the economy and let small business flourish in Russia.

Speaking to assembled officials and the joint houses of parliament, amid the splendor of the Grand Kremlin Palace, Mr. Putin set forth what appears to be a package of genuine liberal economic changes. He also pledged to crack down on corruption and threatened to punish speculators, plus the usual strong dose of rally-round-the-flag patriotism.

What Russia is enduring, he said, is no minor disagreement with the West over policies toward Ukraine, but an open-ended campaign to humble Russia through sanctions, diplomatic isolation, and political interference. Russia now has no option but to dig in, release its domestic energies to grow more self-reliant, and court new economic partners in the East.

Much of Putin's speech rehashed the well-worn blame game with the West over the Ukrainian crisis. And though his popularity ratings remain sky-high at over 80 percent, even Putin seemed aware that can't last forever. Russia's economy is headed for recession next year, after the ruble has lost almost half it's value this year and prices for oil – Russia's main export – have plunged from over $100 per barrel to under $70. Inflation is close to 10 percent, hitting prices of basic necessities particularly hard.

However, some Russians say that Putin may have hit on something by urging Russian entrepreneurs to help pull the country out of it's deepening economic rut. The Kremlin leader proposed a series of incentives for business startups, including tax holidays and curbs on red tape. The government would be working out a full program for next year, Putin said, including financial aid for small business and assistance for technological innovators. He also announced a full amnesty for wealthy Russians who bring their capital home from offshore tax havens.

One novelty would be a government-run clearing house for "import substitution" ideas, which would provide state funding and market support for business plans that could help reduce Russia's dependence on foreign technology and imported goods.

'Sounds good, but let's see'

"I've never thought of Putin as my president, and it never seemed he was speaking to my concerns when he gave speeches like this," says Mikhail Sagiryan, who owns a string of Moscow-area health clubs. "So I couldn't believe my ears today. Suddenly he was talking about 'unblocking the road' for small businessmen, giving us tax breaks, limiting all these endless inspections of our premises, and finally letting us work."

A decade ago, Mr. Sagiryan outlined to the Monitor his bureaucratic ordeal in trying to obtain all the necessary permissions to open first health club in Moscow. He says little has changed in the interim, but Putin's change of economic tack has given him new hope.

"I always hoped to hear words like that from a younger leader, perhaps one not burdened with a KGB past and a lot of big oligarchic friends. But you have to take what you can get," he says. "According to what Putin said today, I am suddenly an important person in this country, after being nobody for so long. And I think he's right, unleashing Russia's inner energies is the way out of this crisis."

Other small business people echo Sagiryan's enthusiasm for that part of Putin's speech, but perhaps with a bit more caution.

"What Putin said was good. I like the idea of tax holidays, no raising of existing taxes for four years, and an amnesty for capital flight," says Vladlen Maximov, vice president of Opora Rossi, a small business association in Moscow.

"It's an old story here. We never have had clear, predictable rules-of-the-game for businesses to work. Politicians have often talked about fixing this, but it hasn't happened yet. What Putin said sounds good, but let's see," he says.

Political experts seem less enthusiastic.

"There were no breakthrough ideas in Putin's speech, not in economics nor in foreign policy," says Nikolai Petrov, a political science professor at the Higher School of Economics in Moscow. He says the basic message to Russians is to dig in, emphasize their patriotic thoughts, and muddle through.

"Maybe some of those ideas he presented would have worked if they'd been introduced in a timely fashion a few years ago. But now it's mainly slogans, and too little, too late," he says.

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