Friday, 20 July 2018

Growth – the authoritarian way

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Russians endorsed 10 years of Putin’s rule by voting overwhelmingly for Medvedev to continue the work of his predecessor. Foreigners howl at perceived attacks on democratic principles. So what exactly is going on at the Kremlin – and should it matter to the markets? Ben Aris reports.

From the outside Russia looks horrible. A cabal of authoritarian spies run the country and kill their opponents with radioactive tea. The political opposition has been squashed. The media is in the state’s hands. The Kremlin has renationalised large swaths of the most profitably parts of the economy. And the secretive KGB-clan that is in power has nuclear weapons that we are still not sure they won’t use against us. Voters in the recent Duma and presidential elections did what President Vladimir Putin told them to do, because they were given no real choice.

From the inside the story looks very different. The oligarchs that ran and robbed the country blind are gone, replaced by a government that has real policies that work. Hyperinflation has been mastered. There is political stability. Personal incomes are up ten-fold in eight years. And personal time horizons have stretched from a few days in 1993 to over a decade – enough to consider buying a new home, plan a family and develop a career. Voters in the elections were happy to vote for Putin, as they simply want more of the same.

It’s a confusing picture as both descriptions fit the facts. Russia has made a lot of progress on the economic front under Putin, for which he gets a lot of credit at home and little abroad. But it has also gone backwards on the political front, for which he is condemned abroad but not by the Russian people.

This dichotomy has been apparent since Putin took office. The radical slashing of income taxes to a flat 13% arrived almost at the same time as the first oligarchs were driven into political exile. At that time it was easiest to image two Putins: a liberal economic one, which is loved by the investors and a heavy handed political one, which they hate. As Putin is due to step down in May this dichotomy has not gone away; it has become institutionalised into two Kremlins.

Political Kremlin

Russia twin parliamentary and presidential elections in December and March were widely criticised by international observers. In what was clearly a tightly choreographed political ballet, Putin nominated his long-time friend and close political ally First Deputy Prime Minister Dmitry Medvedev as his chosen successor for the March presidential elections a few weeks before the Duma elections in December.

Medvedev was right back at him “suggesting” that Putin would make a good Prime Minister (and would nominate Putin if he happened to win the presidential elections). The pro-presidential party United Russia then joined in to make a **pas de trios** by putting Putin as the soul candidate at the top of its party list for the December parliamentary election (there are usually three candidates at the top of the list).

The result was a predictable landslide victory in both elections for the establishment. It all looks very undemocratic, but what is less appreciated is the gamble Putin has taken, especially in the Duma election and the fact that this punt wouldn’t work unless Putin was genuinely popular.

Putin has just done something no other leader in the CIS has done voluntarily: he stepped down from office at the end of his constitutionally term. And he is about to do something that has never been done in any industrialised country: subjugated himself to his former deputy by becoming prime minister. In theory Medvedev can sack Putin at any time.

“No one wanted Putin to go. The people don’t want him to go. The elite don’t want him to go. The only person that wanted him to stand down was Putin himself,” said Chris Weafer, head of strategy at UralSib in Moscow. “You have to understand how destabilising it is for Russia to change presidents. Over the last eight years an entire system to clients and alliances has been built up. To change the men at the top destroys most of these relations and some people in power are very afraid their enemies are going to emerge winners in the change over.”

This is why the Duma elections were key. By standing at the head of the United Russia list in the Duma elections Putin turned the whole poll into a referendum on his two terms as president. United Russia swept to victory with 63.4% of the vote that re-endorsed Putin’s mandate with the people, which has been his real source of power all along. Moreover, the 315 seats now controlled by a single party tightly controlled by Putin also has the power to override a presidential veto and can change the constitution at will, going a long way to redressing the balance of power between the two offices.

The upshot is Russia now has Putin-Medvedev double act in charge. “Mission accomplished!” was how Weafer described the results of the presidential election, with a wry reference to Putin’s KGB past.

Comfort over Democracy

But can the results of the elections be called democratic? The English language Moscow Times daily reported that the voting returns from the polling stations show clear spikes at the round numbers strongly suggesting ballot stuffing. The consensus is United Russia’s real results were only about 5% less – which would have put them under the magic 300 seat mark need for a constitutional majority.

Despite the western complaints, the Russians themselves find the whole debate over democracy confusing and are mostly apathetic. The majority prefer a healthy economy to democracy or, rather, they do not wish to risk the current growth and stability in the economy for greater democracy.

A poll from the Levada Centre conducted on the eve of the Duma elections in December reported - in a multiple choice questionnaire - that 44% of people thought democracy means freedom of expression. Another 30% said it represented order and stability, 26% said it stands for economic prosperity, and 21% said it is law and order. Finally, 11% of respondents said they believed democracy was empty talk. Another poll from the Levada Center found that 68% of people prefer order to democracy, while only 18% said that they believe democracy is the most important factor.

The bottom line is most Russians are happy with Putin’s version of “managed democracy” as it works. The Russian Public Opinion Study Center (VTsIOM) found in January that 55% of respondents to a poll said that the country was developing in the right direction, law and order were being enforced, and nothing threatened its democracy, up from 51% in 2004. The share of those that said democracy is in danger has fallen to 20% from 30% over the same period.

Put another way, there is little democracy in Russia – if you equate democracy with debate – as there is little discussion about what needs to be done. Putin has created a broad consensus that is unheard of in more politically mature economies. The interests of the Kremlin and the people are very much aligned. No one wants a repeat of the 1990s chaos; everyone wants more growth and increasing prosperity. And the Kremlin has proven it can deliver.

But this can’t last forever. The current strong economic growth masks bad government, corruption and all the other problems. At some point when the growth slows the interests of the growing number of middle class and the government will start to diverge. Only then will “true” democracy appear in Russia, argue many.

“It will be a grassroots revolution,” said Bernard Sucher, manager of Merrill Lynch Securities in Moscow. “The small businessmen will start to put pressure on local government to fix the things that are hurting their business and it will grow from there.”

Indeed Putin is sowing the seeds of this own destruction if this is correct. Small business currently accounted for 13% of GDP in 2007 and is the bastion of Russia’s middle class. In February Putin said the middle class should account for 60% of the population by 2020 – an extremely ambitious goal.

And the process could go even faster. Peter Halloran, managing partner of Pharos Capital thinks the losers amongst the elite in the recent elections could catalyse the process by entering the Duma.

“Going forward we are going to see a consolidation amongst the business elite,” said Halloran. “All these people are currently on the same page, but that is not going to last forever. There is going to be a natural divergence and this will probably be expressed via the Duma so we need to watch the whole political process very carefully over the next four years. The changes will be lead from the top.”

Economic Kremlin

Putin has backtracked on Yeltsin’s conmitment to liberalism, but Putin has put in place many of the economic reforms Yeltsin failed to even begin; the big change in Russian politics between 2000 when Putin came to power and today is the shift from power to policy.

Putin was widely seen as a puppet of the oligarchs that ruled the Kremlin in the 1990s until he began jailing them. Indeed, Russian oligarch and Chelsea FC owner Roman Abramovich was at the centre of the so-called Family clique around Yeltsin that ran the country at the time and is widely credited with handpicking Putin for the job of Prime Minister and then president.

“When Putin took over it was all about power as he battled to take control from the oligarchs,” said Halloran. “This time round the elections were all about policy and Medvedev laid out most of agenda two weeks before the elections [in a speech in Krasnoyarsk].

Analysts have welcomed the choice of Medvedev as a victory for the economic Kremlin over the political Kremlin and the best possible choice from the limited range of those on offer.

There were two obvious choices for Putin’s successor: Medvedev and Sergei Ivanov, who was until recently Defence Minister. Ivanov would have been the political Kremlin’s choice as he, like Putin, has a KGB background and is seen as affiliated with the so-called Siloviki, the security services clique that rules the Kremlin. By contrast Medvedev studied law, speaks English, has no known affiliations with the Siloviki and is seen as a mild liberal. Analysts have called the Putin-Medvedev alliance a “dream team” outcome.

Putin’s main gift to Russia’s recovery has been political stability, but he has used the calm to push a range of real and badly-needed reforms, making fair progress in his eight-years in office. No one doubts that he is sincere in his desire to make Russia a working market economy or that Medvedev will continue this work: Putin is the first modern politician that has almost always done what he said he would do.

“There are lots of metrics showing corruption in Russia and the like, but if you were to have one measuring political honesty then Putin would come out on top,” said Halloran. “He doesn’t have to politic like Blair, Brown or Bush as he doesn’t have a diverse constituency to cater to. Unlike politicians elsewhere he usually means what he said. The odd thing is that no one believes him.”

His departure, though planned, has surprised many. “No one believed it when he said he was going to step down. To the last minute you have a lot of highly paid Washington analysts who thought he would change the constitution at the last minute. He didn’t. Now Medvedev has spelled out his programme for reform and I don’t see any reason to believe that he won’t attempt to implement it,” said Halloran.

So what is the plan? In broad terms it can be split into three phases: retaking control of the “commanding heights” of the economy such as the oil and gas sector; setting up a series of national champions and big funds to rescue or resurrect some of the struggling big industrial sectors; then a gradual withdrawal from industry via privatisations and IPOs. The first phase is coming to end. The second phase is well underway. And there have been a few big state IPOs from the third phase already. Medvedev laid out the details in a speech two weeks before the parliamentary elections and surprised analysts by offering more than they were hoping for.

“The difference between a Putin-Kremlin and a Medvedev-Kremlin is likely to involve more change in style than substance, but that itself can actually be rather important,” said Roland Nash, head of research at Renaissance Capital in Moscow. “Much of the substance of the Putin presidency in the economic sphere has been impressive, but this has been overshadowed by a presidential style which, while playing well domestically, has often proved confusingly abrasive abroad. Most observers agree that there will be little change to the economic reforms, but Medvedev is likely to be a lot less combative and that should be welcomed.”

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