Financial Times: Putting the state back in charge

By Neil Buckley
Published: April 20 2007 11:20 | Last updated: April 20 2007 11:20

In the vast Chelyabinsk Tractor Factory in the Urals, sparks fly from the welding guns. The equipment may be decades old, but with orders pouring in from former Soviet republics and Asia, sales for the first quarter were up 60 per cent over a year earlier.

This Stalin-era behemoth might stand as a metaphor for Russia itself. In 1998 – just before Russia defaulted on $40bn of domestic debt and pitched into financial crisis – the plant was officially bankrupt. But as record oil and gas prices have spurred Russia’s economic revival, so a rescue operation by the management saw the factory climb back on its feet.

Across Russia, many enterprises that survived the tumultuous 1990s shift to the market are thriving. A retail boom is sweeping away Soviet-era drabness from its cities. Millions of village-dwellers and pensioners still struggle, but for the 80 per cent of Russians positioned somewhere between wealth and poverty, living standards are rising.

Yet, seven years into Vladimir Putin’s presidency, Russia is more than ever a country of two tendencies. Private business shows progressing dynamism, but ever more political and economic power is being concentrated in a small circle around the president, in a regime critics call increasingly authoritarian. That dichotomy, perhaps, underlies the debate over exactly what kind of Russia Mr Putin – who under the constitution must stand down next March – will leave behind.

Russia’s oil-fuelled recovery remains robust. The economy grew 6.8 per cent last year, its eighth year of similar growth, to pass $1,000bn – putting it among the world’s top 10.

Real incomes are running 12 per cent above last year; the national average wage has increased four-fold under Mr Putin to nearly $450 a month. Gold and currency reserves, and the stabilisation fund that since 2004 has hoarded windfall oil tax revenues, are together nearing $450bn. Inflation fell to 9 per cent last year, hitting single figures for the first time since the Soviet collapse.

Forward planning can at last replace crisis management. The government has, for example, adopted a prudent three-year budget framework. Today’s stabilisation fund will be split into a reserve fund of 10 per cent of GDP – enough to prop up budget spending for three years even if oil prices halve – and a “future generations” fund to store surplus energy revenues.

Russia is switching from building reserves and clearing debts towards spending on infrastructure. Companies, meanwhile, are no longer just squeezing productivity out of old capacity, but building new plants. The finance ministry projects annual fixed capital investment will more than double from last year to $357bn in 2010.

“We now see such good conditions for business, and such dynamic indicators, that we believe investment will significantly grow,” Alexei Kudrin, finance minister, told the FT. “That is the fruit of political stability, macroeconomic stability and a favourable oil price.”

However, huge challenges remain: reducing the reliance on natural resources and creating a “knowledge” economy, renewing Russia’s creaking social and economic infrastructure and reversing its startling population decline, and narrowing the gap between rich and poor.

Chris Weafer, chief strategist at Alfa Bank, suggests the Putin era has been the first stage in what the Kremlin envisages as a transformation spanning four presidential terms. Political power has been wrested back from the 1990s oligarchs, while Kremlin-loyal national champions, often state-controlled, have been built up in key strategic sectors to help finance the renaissance. That process – in the assault on the Yukos oil company, for example, or last year’s strong-arming of control of Royal Dutch-Shell’s Sakhalin-2 energy project into the hands of Gazprom – has sometimes been brutal. The Kremlin’s determination to finish the task may underlie its obsession with political control – ensuring a chosen successor follows Mr Putin, and that pro-Kremlin parties again dominate the next Duma, or lower parliamentary house, to be elected in December.

Critics suggest other motives: the desire of those who have accumulated political and economic power to hold onto it.

“Putin’s system is a petro-state system, where a small group have monopolised resources and divided them between the political class, state bureaucrats and managers,” charges Vladimir Ryzhkov, an independent Duma member. “A couple of million live well, while the majority is poor.”

Andrei Illarionov, Mr Putin’s former economic adviser, says over-centralisation of power means economic growth is lower than it should be.

A managed political transfer looks most likely. Russians still seem ready to sacrifice broader political freedoms for higher wages; the president’s approval ratings are above 80 per cent, and 40 per cent say they would back his chosen successor without knowing the identity.

Two first deputy prime ministers, Dmitry Medvedev and Sergei Ivanov, appear to have been marked out as potential candidates. The three national TV channels, directly or indirectly state-controlled, are already giving the frontrunner candidates glowing coverage. Some criticism of the administration can still be heard on TV, and political debate remains lively in certain Moscow media. But potential opponents, such as Mikhail Kasyanov, former prime minister turned opposition presidential hopeful, are effectively barred from the airwaves.

A loose coalition of opposition groups, Other Russia, corralled by Garry Kasparov, the former world chess champion, and Mr Kasyanov, has started organising street rallies calling for genuinely free elections. Numbers, so far, are small, but they have been violently suppressed by the authorities.

One of the two presidential frontrunners suggests Russia needs stability. “It seems to me the majority of Russians will be for continuity of Putin’s course,” Sergei Ivanov told the FT. “Because no matter what you say there are concrete results.”

Perhaps Putinism’s biggest deficiency, however, is the failure to establish the primacy of the law, and an independent legal system. Instead, laws can still be used as a weapon, as against Yukos and its founder Mikhail Khodorkovsky, or against Shell.

And recent murders, such as that of Andrei Kozlov, the deputy central bank governor; Anna Politkovskaya, the crusading journalist; and Alexander Litvinenko, the London-based former KGB agent, have highlighted the failure to strengthen enforcement. Those with a score to settle still feel they can use violence with impunity.

The perception that Russia has not created a democratic, rules-based system is one factor behind a deepening chill with the US. Economic revival has given Russia confidence to start voicing its resentment over broken promises by western partners, notably over Nato expansion into former Soviet satellites.

The frustration bubbled to the surface in Mr Putin’s Munich speech, lambasting US “unilateralism”, in February.

The explanation of Sergei Yastrzhembsky, a senior Putin aide, that his speech was “not a Cold War, but a cold shower” for US-Russian relations, seems apt. But with disagreements over US plans for missile defences in eastern Europe, the status of Kosovo, and Iran’s nuclear programme, and both countries approaching elections, relations promise to be bumpy.

In lifestyle terms, as increasing numbers holiday abroad, drive foreign cars, buy foreign brands in western-style shopping malls, Russians are arguably more integrated into the global community than ever in their history.

Whether rising prosperity will generate demands for fuller democracy, or more political apathy, are the big questions for the next stage of Russia’s development.

Copyright The Financial Times Limited 2007

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