|October 10, 2016
Recent political reshufflings in Russia highlight Russian President Vladimir Putin’s strategy, but also his constraints in governing the country. These moves have been his response to increasing protests in the regions outside the main cities, caused by poor economic conditions. Historically, regime change in Russia has been triggered by deteriorating economic and security conditions. Putin currently enjoys high approval ratings, but only because the population trusts him to come up with solutions to their problems.
- Russia’s economic dependence on hydrocarbon exports has created structural vulnerabilities. These became visible at the end of 2012 and have worsened as oil prices dropped. The government must address the urgent economic problems and consider structural reforms that can move the economy away from its dependence on energy exports.
- Two programs for relaunching the economy have been proposed, each with its own symbolism and political implications. Putin hasn’t chosen either one, so as not to create divisions, but said a combination of the two would work better.
- The Russian people have seen small to no real wage increase, pensions indexed below the inflation rate, unpaid wages and unemployment. Discontent and labor protests are growing in the regions, where people see oligarchs and regional officials as having mismanaged the economy.
- With the parliamentary elections coming up in September and the presidential election in 2018, Putin senses the danger of increased unrest. He has established a National Guard who report directly to his office. This, in tandem with the recent security and administration purges, is meant to ensure his control over the situation and keep his approval ratings high.
- Putin’s maneuverings also give us an opportunity to evaluate Putin’s strength. Putin needs to deliver what the people expect him to deliver. Though not quite a dictator, he is the most important political figure in Russia, which has historically needed a strong central figure. Putin is trying to be that figure, but Russia’s problems are serious and there are no easy solutions. As Russian economy weakens, so does Putin.
In 2017, Russia will mark the centennial of the October Revolution. In 2018, it will have a presidential election, in which President Vladimir Putin could run again. Putin is seen by most of the Western media as at least a dictator, if not as a czar, but dictatorships require absolute power. Russia’s current geopolitical and socio-economic reality has kept a true dictator from emerging, but Putin is the most important political figure and clearly a ruler. He needs to respond to the Russian people’s problems and keep the country running. Putin is using arrests, raids, resignations and political reshufflings to boost his position and appease the Russian public ahead of next month’s parliamentary elections. While Russia is facing many challenges, Putin’s regime is under consolidation.
The raids, arrests, forced resignations and reshufflings during the last few months are related to Putin’s strategy. He is not in immediate danger of losing control, but he is trying to consolidate and bolster his power, while addressing the major concerns of Russian society. The moves also highlight Putin’s constraints. None of the measures taken indicate the Kremlin has a radical approach to solve the socio-economic problems.
Putin’s latest approval ratings are high – more than 80 percent of the population supports his actions. But the approval rate for regional governors has been below 50 percent since the end of 2014, according to Levada Center, an independent Russia-based polling organization. With the presidential election in 2018, Putin needs support in the Duma for the next two years. To get support in the Duma, he needs to make sure that his United Russia Party wins the September parliamentary elections.
In September 2015, a different Levada poll listed the management of the economy and the fight against corruption as major failures for Putin. So to hold on to power after 2018, he needs to tackle corruption and address the economic challenges.
Tackling Russia’s Economic Problems
Russia’s economic problems start with the economy’s structure. The country’s budget is heavily dependent on revenue from hydrocarbon exports. Low oil prices have had dramatic effects, especially since the country hasn’t managed to fully recover from the 2008 recession. In 2013, the economy only grew by 1.3 percent, even though the price of oil was around $110. During the 2000s, energy industry profits generally came from state-led investment projects and increases in pensions and wages, which caused consumption to grow.
There was little to no investment in industrial diversification and almost no investment in increasing efficiency or new technology. Therefore, signs of stagnation started appearing in late 2012. But the people’s expectations were different: considering the political discourse and the fading of the 2008 crisis, most expected growth. With no real growth in wages or pensions over the last two years and the poverty level increasing, Russians’ pessimism and appetite for protests grew instead.
Russia’s 2016 budget was built around oil prices averaging $50 per barrel and the deficit target was set at 3 percent. The drop in oil prices means a rising deficit. Since it can’t control the price of oil, Russia needs to find other ways to manage its finances. So far this has included cuts in government spending (except in defense and social services) and privatization plans for some state-owned companies.
But the steps taken haven’t addressed the weakening socio-economic conditions. Russia’s GDP per capita is down from an all-time high of $11,615 in 2013 to $11,038 in 2015. More than 2 million people fell into poverty in 2015. About 19 million Russians, or 13.4 percent of the population, lived below the poverty line ($139 or 9,452 roubles a month), according to the Russian government.
Inflation has been the most worrying indicator. Real wages fell by 9 percent in 2015 and 4 percent in 2014. Inflation fell from 12.9 percent in December 2015 to 7.4 percent in March 2016. As inflation dropped, the central bank resisted calls to cut the interest rate as nominal wages rose more than 5 percent in the first quarter, exceeding the rate of inflation for the first time since 2014. The government announced that pensions would increase by 4 percent in February 2017 and that they will be indexed to inflation starting in 2017.
Concerns over rising inflation are still looming. On Aug. 4, Putin advised people to get a mortgage loan now rather than wait for lower interest rates, citing “inflationary pressures” on the economy. Then on Aug. 6, Prime Minister Dmitry Medvedev said, “When faced with questions of what we should do with wages and pensions, the economic model takes a back seat, and we are forced to take decisions simply so as not to let the economy go into free fall.”
On June 10, on a visit to Crimea, Medvedev told a pensioner complaining about a small pension, “There simply isn’t any money.” This is the main reason Putin said people should get mortgages now, to create more liquidity in the economy. Pumping money and optimism into the economy is urgent for Putin, but further measures are needed to address the country’s complex economic problems.
Since the beginning of the year, there have been discussions about the best way to fix these problems. Three potential programs were presented during the May 25 meeting of the Economic Council. The Economy Ministry’s plan looks at ways to cut down consumption through labor legislation reforms – allowing companies to lay off workers for economic reasons, limiting salary growth and transforming revenues into investments, especially in the state-owned sector. Such a program would only work in a planned economy. This was a solution the Soviet Union used during the first half of the 20th century, when resources were allocated to develop the country’s industry at the expense of private consumption.
The other two programs were presented by two groups, one led by former Finance Minister Alexei Kudrin and one called Stolypin Club, chaired by Boris Titov, who has been the commissioner for entrepreneurs’ rights since the creation of the post in 2012. Kudrin served as finance minister from 2000 to 2011 and is known for his liberal yet cautious macroeconomic reforms, guiding Russia out of the 2008 financial crisis. He is seen as an outspoken pro-market reformer who could effectively counter the security services personnel in Putin’s inner circle – the siloviki.
Kudrin’s return to government in April 2016 is not accidental. He was named the deputy chief of the Economic Council, which gave the Kremlin the support of Russian liberals. Titov is less known to the public. The club he chairs is named after young reformist Prime Minister Pyotr Stolypin, who served under Czar Nicholas II. Stolypin’s skill at controlling insurrection led Nicholas II to appoint him prime minister in 1906. He was assassinated in 1911, but remained the last hope for czarist Russia to avert the 1917 revolution. Stolypin Club includes personalities like presidential adviser Sergei Glazyev and Andrei Nikolaevich Klepach, former deputy minister of economics and now deputy chairman of VEB Bank’s board of directors.
The program proposed by Stolypin Club advocates for increased investment based on monetarist principles: budgetary help and printing money. The Stolypins support a “quantitative easing” policy and suggest issuing special bonds for 1.5 trillion rubles ($22.5 billion) to refinance the banking system. It also proposes the country abandon the floating exchange rate regime currently underway in Russia and impose selective exchange controls aimed at reducing the impact of speculative capital on the exchange rate.
Kudrin’s program promotes measures supporting investment growth through favoring small private business and reforming the justice and law enforcement sectors.
Putin basically had to choose between Kudrin’s “Plan K” and the Stolypin Club proposal. On July 8, Medvedev hinted that the Kremlin preferred Plan K, announcing that Russia will introduce a preferential tax regime. This topic has been taboo since Putin took power, when he implemented the “Gref Plan” – which introduced a flat tax regime (13 percent income tax and 24 percent on corporate profits), in line with the energy-fueled economy.
No specific details were given on the new tax regime, but Medvedev said that real wages will be maintained at their current levels and allowed to increase slowly in line with economic growth. This is directly from Kudrin’s Plan K, which attempts to switch the growth driver from consumption to investment. Reports in the Russian media have also hinted at a radical reduction in insurance premiums with a complementary increase in the VAT as well as the introduction of special tax exemptions for strategically innovative industries. Putin highlighted Russia’s need for these exemptions in his recent speech at the St. Petersburg International Economic Forum.
But on July 29, it was reported that Putin wants both Plan K and the Stolypin program to be considered as solutions for the economic crisis. Opting for a combination of the two highlights his careful maneuvering, which confirms the weak state of the Russian economy and Putin’s political constraints.
Both programs have political implications. Kudrin is supported by the Russian liberals and reformists, while Titov is one of the Party of Growth leaders. The Party of Growth is seen as pro-Kremlin, but the symbolism attached to the Stolypin name should not be ignored. Moreover, as economic problems affect social stability, Putin needs to politically maneuver to buy time to test which of the proposed measures will work.
No one but Putin will be the savior – Kudrin and the Stolypin Club will not get credit for getting Russia through this crisis. But if something goes wrong, he can blame them. This way, he is not only finding solutions to fix Russia’s economy, but consolidating his position as well.
Russia’s Political and Economic Transition
Russia’s economic development has not been linear since the end of the Cold War. The 1990s delivered little in terms of a growth platform – most of the reforms were aimed at keeping the country from sliding back into communist rule. Most of the population remained at the poverty line and most state enterprises were privatized at heavily discounted valuations.
The default crisis in 1998 and the protests of tens of thousands in the late 1990s brought about regime change. The population was ready for stronger government and welcomed a stronger ruler. Putin’s platform was to fix the economy first and then start political reform. Since then, Russia’s development has been based on energy exports, which in turn fueled budget spending and consumption.
The financial sector experienced the most reforms, with a booming credit industry. Putin didn’t abandon control over the economy, even if he didn’t have it completely. His solution was to support a two-tier economic system: he controls one tier through his “inner circle” that runs state-owned companies, while the other tier is subject to free market laws. These state-run companies make up about one-fifth of the economy, which ensures that any Kremlin reforms are implemented.
But the Russian people trust Putin, not necessarily his appointees. They regard both the oligarchs running the companies and the regional administration as corrupt. So Putin needs to balance between these perceptions and come up with the right mix of policies for preserving stability. This is of particular importance in times of crisis when a few disenfranchised employees can quickly turn into wider popular unrest.
Russia’s economic problems have not only decreased GDP per capita, but also increased unpaid wages, which were the main reason for more than 50 percent of the protests in 2016. Labor protests have been growing since 2014, according to the Russian Center for Social and Labor Rights. While the scale of protests is not comparable to the 1990s, most of the protests focus on local economic demands.
While there has been a decline in the number of protests in big cities, protests in small cities have increased by 40 percent in the last year, according to the Federation of Independent Trade Unions of Russia (FNPR), Russia’s largest workers’ association. The number of regions involved in protests has also grown. Furthermore, in 2015, FNPR reported the growth of interregional protests through so-called solidarity protests. Besides labor protests, Russia has recently seen protests related to different economic causes – the truck drivers’ protests have essentially been taxpayers’ protests.
In addition to the economy, the protests are also tackling corruption, which is seen as one of the main causes of inefficiency. The oligarchs around Putin are seen as above the law. The system he created is about the Kremlin interfering directly in the economy. This is a system that, while not designed to be corrupt, encourages rent seeking and corruption through the non-competitive way state-directed lending is carried out.
Considering that 2016 is an election year and 2018 is just around the corner, Putin understands the urgency of implementing measures to stop protests at the regional level. While he needs to maintain control over the economy in order to make sure reform plans are successfully implemented, he also needs to address corruption. Both the economic and the corruption problems are strategic and need to be addressed in the medium and long term. Winning the elections is a short-term concern. This is why Putin has been working to build up support in the regions while also addressing economic problems.
The Russian Social Contract Redefined
Just a day before announcing that he wants to combine the two economic reform programs, Putin signed off on a government reshuffle of federal district bosses, regional governors and state-owned company bosses. Putin also reshuffled the presidential envoys to several federal districts.
This surprised most. However, it is all but surprising. The reshuffle came as a lower-level anti-corruption drive has been gathering momentum, with at least three regional governors investigated for taking bribes and several senior officials put under investigation or arrested. It also comes along with a restructuring of the security apparatus, which began earlier in the year as a result of increasing tensions within Russia.
On April 5, Putin announced the formation of the National Guard troops, unifying several domestic security forces and bringing them under the direct control of the president. The troops’ listed functions are protecting the public order, countering extremism, guarding government cargo and facilities, assisting with border protection, fighting terrorism and controlling the arms trade.
The head of the new law enforcement body is Putin’s ex-personal bodyguard Viktor Zolotov. On April 30, the same day that Kudrin was appointed deputy chairman of the Economic Council, the Kremlin announced a major reshuffle of the security services, including the FSB, the main security agency in Russia.
Eight high-ranking law enforcement officials were fired, including regional officials. Some of the firings were reportedly related to corruption and other public wrongdoings. The same day, Putin appointed Igor Krasnov, who investigated the killing of opposition politician Boris Nemtsov, as deputy head of the Investigations Committee.
The Investigation Committee is the Russian version of the American “Untouchables,” a key law enforcement agency. Krasnov uncovered large bribes paid to high-placed officials in the committee – including the deputy branch chief Denis Nikandrov, head of its Internal Security Directorate Mikhail Maximenko and his deputy Alexander Lamonov – who have been arrested. The charges relate to a $1 million payment – the first tranche of a $5 million bribe from notorious gangster Zakhari Kalashov.
In May, reshuffling of security institutions continued, as top officials of the Federal Protection Service (FSO) and the Foreign Intelligence Service (SVR) were replaced. June saw changes in the FSB directorates and ended with the rather dramatic purge of 50 senior officers of the Baltic Fleet, including fleet commander Vice Adm. Viktor Kravchuk and chief of staff Rear Adm. Sergei Popov.
These purges only set the stage for the July purges, which were much more public. Putin appointed Sergei Korolev as head of the FSB Economic Security Service, replacing Yuri Yakovlev. This department investigates financial crime and corruption in Russia. This has shown that Putin is determined to clean house and effectively fight corruption.
In early August, the longtime head of Russia’s Federal Customs Service, Andrei Belyaninov (said to have been one of Putin’s close friends), was arrested after his home was raided by the Investigation Committee and the FSB. The investigations and attacks are coming from the FSB, run by Putin loyalist Alexander Bortnikov and backed by the newly appointed Korolev. Putin appears to be behind all the reshuffling, leading the public to see that he is serious in fighting corruption. However, the anti-corruption drive is not only a stunt for election season. It is also an opportunity for Putin to put people he trusts in key positions within the national security apparatus.
Putin not only needs to maintain control, but also to show the people he is responding to their outrage. Protests in the regions could be threatening in the long term. To have full control, Putin has established the National Guard and appointed people he fully trusts to high-level security positions. This way he controls two essential processes: getting intelligence on potential unrest in the regions and ending any eventual protests.
Russian history proves that while Russians can indeed endure a lot, labor unrest and thwarted expectations can lead to regime change. The 1990s taught Putin that the people’s trust is the most important asset a leader can have in Russia, even if it is built on a set of rigid rules that are also meant to inspire fear. Trust is taken away only by pessimism – when people’s expectations are not met and they perceive security to have weakened.
This is why security forces are key to maintaining order. Putin also understands that there are certain limits that need to be respected. Russian history, again, offers lessons on that as well. The industrialization crisis of the 19th century ended in the oppression of the poor working class. Then when soldiers fired on a peaceful march, hoping to present a loyal petition to the czar, it triggered the 1905 Revolution – a wave of nationwide local unrest, which was a precursor to the 1917 Revolution.
Just as in 1905, people expect the central political figure in Russia to solve their problems. In the regions dominated by single industries, unpaid wages and unemployment are increasing. The people hold the local authorities and elites responsible. Considering the polls, they are hoping Putin will step up and fight corruption and push money and contracts their way.
With the latest corruption cases and reshuffling, Putin is rewriting the social contract in Russia and telling the elites that corruption and incompetence will be less acceptable, considering the current problems. While the elites are clearly disappointed, Putin’s strategy is to gain support from the public and this has been endorsed regionally by the newly appointed officials, who will surely oversee peaceful elections in which United Russia wins the most seats in the Duma.
Russian history offers a lot of lessons on the danger of increasing divisions between the elite and the rest of the population. To control the effect of the economic problems on society, the Kremlin needs to get reliable information on potential unrest and have the means to limit such unrest.
The creation of the National Guard early this year gave the Kremlin direct access to many towns that do not have an interior troop garrison. This adds to the effect of reshuffling the regional administration. A local official who gives the Kremlin what he thinks the Kremlin wants to see, rather than what is necessary, can no longer take the matter into his own hands because Moscow will be informed.
Technology has made information more accessible, even in rural Russia, and increased its sense of political activity. What has not changed is the fact that Russia has always looked to a central figure, trusting that the leader has the solutions. As problems get more difficult, solutions become more complex and involve a lot of maneuvering. This, in turn, weakens the Russian ruler. This has been true in Russia before, and Putin is no exception.