Quo vadis, Russia?

(Photo: EPA)

BY LUKAS PILZ, Eastern Europe Editor

The year 2018 was a turbulent one for Vladimir Putin’s regime in Russia. After decisively winning the presidential election in March by gaining 67% of the vote, Putin announced his so-called May decrees, a series of borderline utopian economic and geopolitical targets for 2024. Then, while the Russian people rode on the high of the World Cup wave, welcoming the world into their country and seeing their team perform well, he unveiled plans for sweeping pension reforms to fund these decrees, increasing the retirement age from 55 to 63 for women and from 60 to 65 for men. Although the reforms were softened and quickly pushed through the lower house, they sparked major protests across the country culminating in the ruling party United Russia losing three gubernatorial elections to opposition candidates, who did not even bother running a campaign. This overwhelming protest vote coupled with negative opinion poll results showing waning public confidence led to even pro-Kremlin newspapers questioning whether Russia was going in the right direction. How could the iron grip Putin seemed to have over the Russian people weaken so dramatically? And what does this mean for the country’s future?

Vladimir Putin’s career began in East Germany as a KGB officer. In this capacity, he not only learned the ropes of politics during a number of Soviet-East German social gatherings but also experienced the frailty of the political and security elite’s loyalty when Moscow refused to send tanks to protect the KGB’s Dresden headquarters from protestors. Upon returning to Russia after the collapse of the GDR, he quickly noticed the value of his political connections and began rising through the ranks of the post-Soviet Russian Federation. His ascent from head of the Committee for External Relations (1991-1994) to his appointment as director of the FSB (1998) and First Deputy Prime Minister (1999) was complete when Boris Yeltsin unexpectedly resigned at the end of 1999. Putin, consequently, became Acting President of the Russian Federation and won the resulting March 2000 election owing to Yeltsin’s endorsement and his image as a law-and-order candidate in the face of the Chechen insurgency. Determined not to repeat the mistakes of the Soviet leadership, his close associates from East German times would go on to occupy leading positions in his regime for example as head of important state-run businesses like Transneft, the state pipeline company.

The transition of the Soviet communist system based on state-ownership of business to a modern, market-based capitalist economy in the 90s became known as “Shock Therapy” and consisted of major economic reforms and large-scale privatisations. Said privatisations were handled hastily and politically well-connected individuals used their clout to obtain state assets for pennies on the dollar. This marked the emergence of an influential Russian oligarchy, controlling large swathes of the economy and wielding enough power to potentially threaten Putin’s regime. He reacted by arresting the largest oligarch at the time, Mikhail Khodorkovsky, on fraud charges in 2003 and sentencing him to nine years in prison. While Khodorkovsky kept professing his innocence, Putin reached a bargain with the other oligarchs, allowing them to retain their wealth in exchange for public support of the government. Some commentators assert that in exchange for de facto immunity from prosecution, the oligarchs agreed to give Putin 50% of their wealth, which would make him the richest man in the world at an estimated $200B US.

While the political and financial elites of Russia made a fortune out of its post-Soviet transition in the early 90s and sheltered their assets in the West, the public was suffering under the collapsing economy which entailed a 40% drop in GDP and hyperinflation wiping out pensions and personal savings. Crime and destitution spread over the country as living standards and life expectancy fell dramatically and Russia plunged into the 1998 financial crisis. The crisis was over in 1999, when currency devaluation made the Russian export industry competitive again and allowed the state to reach Ruble-denominated spending targets more quickly resulting in a continued boom through the 2000s. Not only did Russian GDP grow an average 7% p.a. during this period, disposable income doubled and the number of people below the poverty line halved. This is the main source of Putin’s popularity, as his name became essentially synonymous with the boom years.

The boom, however, did not last forever and even though Russia weathered the financial crisis of 2007/08 unexpectedly well due to quick and decisive action by government and the Central Bank, the economy began stagnating in 2013 at a mere 1.3% growth. This is widely attributed to a number of factors including stagnating oil prices, demographic problems, a recession in the EU (Russia’s largest trading partner) and a lack of industry diversification caused by the continued dependency on hydrocarbon exports. The sanctions following the 2014 aggression against Ukraine and the illegal annexation of Crimea worsened an already difficult situation and sent the Russian economy into a recession, reducing it by an estimated 6% according to a 2018 Bloomberg analysis. The population is becoming increasingly aware of the government’s reluctance to implement large-scale economic reforms, with military and law-enforcement spending always taking precedence in the budget. However, ideas about what they could look like have already begun to emerge.

In Moscow, two factions have formed. One is being headed by long-time Putin associate and former Minister of Finance Alexei Kudrin and the other by the Business Ombudsman Boris Titov. While both suggest a judicial reform to increase investment security for businesses, their ideas about economic reform differ quite substantially. Titov worries about social unrest due to liberal reforms and thus proposes to stimulate growth by increasing the government’s role in investments. This would entail monetary policies like quantitative easing for banks coupled with cheap loans, subsidised consumption and tax incentives for poorer citizens. Kudrin on the other hand fears that this course of action could lead to unsustainable levels of inflation and proposes curbing government interference in business in an effort to remove obstacles to domestic and foreign investment. He also proposes reallocating parts of the inflated military and security funds to healthcare and education, thus investing in Russia’s human capital and setting it on a sustainable long-term trajectory towards economic prosperity. It is unlikely, however, that Putin will pick up any of these policy suggestions in the near future, as none of his recent speeches and strategic documents suggest a renewed interest in economic development.

Should he choose not to implement any economic reform, his task will consist of convincing an increasingly sceptical public why they should continue supporting his sustained focus on geopolitical versus domestic issues. Newspapers writing at the turn of the year about the prospects for 2019 diagnose the Russian population with having fallen into a deep depression caused by the bleak economic situation and the missing developmental strategy by political and economic elites. While a recent study published in mid-December 2018 concludes that Russians spend 31.7% of their incomes on food compared to Luxembourg’s 8.7%, independent experts are quoted saying the real figure is probably over 50% and voice their concerns that most families could not have enough money for food in 2019. Coupled with a VAT increase of 2% and a two-stage rise in communal bills on the horizon, this situation poses a unique challenge for Russia’s propaganda machine.

The government, nonetheless, seems to be determined to stay on this trajectory, as state media is using the narrative of Russia being under attack by a hostile West to justify the continued investment in security over the economy. The increasing involvement in multiple mid-scale regional conflicts including the ongoing occupation of South Ossetia and Abkhazia, the Ukraine conflict and the intervention in the Syrian war points to Russia trying to reassert itself as a global player despite being light years behind the US or China from an economic standpoint. State media is portraying this as restoring Russia’s status as a superpower in the world, trying to shift the metric for successful governance from economic to geopolitical performance. However, an increase in demonstrations from 1000 in 2017 to over 2500 in 2018 seems to suggest that this course of action is only having limited success. To counter the increasing discontent, Putin is relying now more than ever on his intelligence apparatus and security services to prevent mass uprisings. As seen in a number of ex-Soviet republics, these can quickly lead to colour revolutions if the elites ally themselves with the protestors. Their loyalty and cohesion, thus, is an important factor to keep in mind when assessing the stability of any regime.

In Russia, however, this cohesion seems to be faltering, as conflicts among political and economic elites are increasingly resolved in the open. Leonid Volkov, prominent opposition figure and chief of staff to opposition leader Alexei Navalny, explains this development by pointing to Russia’s mafia state-like organisation. A mafia state is headed by one person, the Godfather, with multiple subordinate lieutenants who are embroiled in a constant struggle over resources and power. Since it is a highly personalised authoritarian system, the only mechanism for arbitrage of these conflicts is for the parties involved to appear before the Godfather, plead their case and then accept his ruling as final. Those rulings are then enforced by a subservient executive and judicial branch or by harassment and extrajudicial killings carried out by loyal security services. The balance of power among the political and economic elites is, thus, heavily dependent on the Godfather’s person, as all arbitrage and resource allocation is negotiated by him and there is no independent way of codification and enforcement. As the Russian institutions nowadays, like in the tsarist era, obtain their legitimacy in a top-down manner from Putin himself, a crucial function of the state apparatus is to keep his approval rating high, even at the expense of the popularity of individual officials or the government as a whole.

With the 2018 presidential election over and the average age of governors being only 46, the so-called “2024 problem”, referring to the constitutional term limit being reached by Putin in 2024, seems suddenly closer than ever. For now it is unclear what he is planning to do about this issue and possible solutions range from him becoming the head of state of a union between Belarus and Russia based on a 20 year old treaty to his resignation and succession. The uncertainty generated by this development, however, is felt acutely in the corridors of power in Moscow and serves as a possible explanation for the increasing reliance of elites on the court system to arbitrate conflicts. Two prominent examples are the cases of Alexey Ulyukaev, who got sentenced to eight years in a strict-regime labour colony and Rauf Arashukov, who got arrested and charged with two counts of murder and one count of organising a crime group. Another indicator for change is Putin’s reaction to the Skripal case and the pension reform protests compared to earlier crises. Suffering only international embarrassment from his comments in the Skripal case, him taking responsibility for the pension reforms led to a huge drop in approval ratings. A few years prior similar situations occurred. When flight MH17 was downed, Putin initially had state media manufacture a number of alternative explanations, so he could avoid engaging the issue by claiming that nobody knew what was going on. The pension reform is also not the first unpopular reform in Russia. In 2005, the social welfare benefits were transformed from preferences and discounts to monetary compensation, which was also very unpopular at the time. Here, Putin let the government take the fall by blaming it on their incompetence. For now, however, it seems like the state apparatus has given up on maintaining Putin’s approval at its own expense and is keeping one eye on a possible post-Putin future.

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