BEARWATCH: Following the institution-building efforts of Russia's president

By bne IntelliNews September 9, 2009

bne -

bne has introduced a new column, "BEARWATCH", that will attempt to follow in a little more detail the institution-building efforts of Russian President Dmitry Medvedev.

For all the eight years that Prime Minister Vladimir Putin was president, he was in charge and pretty much ran of the country on his own. However, at the start of 2009, Medvedev was brought in as president to be an extra pair of hands.

The two men have divvied up control of the country. Putin remains in charge of the day-to-day operations, but he is mainly concerned with controlling and coordinating ZAO Kremlin, which is made up of the politico-financial-industrial groups that constitute the Russian economy. Nominally, some of these are owned by the government (like carmaker Avtovaz), while others are privately owned (like Oleg Deripaska's BasEl), but in practice Putin controls both types.

You can think of Putin as both a PM and a CEO. As a politician he runs the government, making and implementing policy in way that is recognisable in the West. But as a CEO he regularly summons the bosses of Russia's biggest companies and "approves" their investment and business plans, ensuring they dovetail with those of the government. Not only does he ignore the traditional divide between business and government, he has reversed it and made business explicitly dependent on informal (but enforceable) approval by the government. In this sense he runs the economy as a CEO would, where his ultimate authority over the leading tycoons is that he can "sack" them (read: put them in jail).

Different roles

Medvedev's role is very different. He is in charge of institution building and dealing with all the superstructure issues like the rule of law that Putin simply hasn't had time to deal with until now.

The most obvious example is the start of a real anti-corruption drive in Russia. Putin mentioned corruption in almost every one of his annual "State of the Nation" speeches as president, but totally failed to do anything about it. But since Medvedev came to power, officials have been flung in jail and judges disbarred every month.

The two men have already launched a raft of reforms designed to promote the diversification of the economy, which has failed to garner much attention. Plans have been floated for the fishery, agriculture, textile, retail, pharmaceutical and software sectors, to mention a few. A few of these changes have already produced results, but most will take years to blossom. Even big frozen reforms like the restructuring of the telecommunications holding company Syvazinvest are visibly moving forward, although the big-ticket items are more Putin's domain than Medvedev's.

Dividing the roles of these two men up like this is only an approximation, as their jobs continue to overlap. Medvedev really does act as a president half the time and seems to have ideas of his own. The two have been said to clash on occasion (most notably over how to deal with Georgia in the run-up to the Russo-Georgian war last summer), but on the whole this division is a useful way of understanding how the Kremlin intends to deal with the issue of outstanding reforms.

By choosing Medvedev, the economic option, over Sergei Ivanov, the status quo option, to replace himself as president, Putin signalled he understood the problems that Russia faced and intended to do something about them - problems that have been dramatically highlighted by the unexpected collapse of the Russian economy since September 2008.

Medvedev's job is essentially to restart the programme to diversify economy that was abandoned in about 2003. In those days, Russia was only just emerging from the nightmare of the 1990s where the state was running an 8-9% deficit largely financed by the now infamous GKOs.

When he assumed the presidency, Putin surprised observers by installing German Gref as economics Tsar, who set off on an incredibly ambitious attempt to remake Russia's economy. The very first thing Putin did was to introduce the flat rate income tax, a reform that got lost in the noise that followed the ousting of the oligarchs from the Kremlin. In the first few years of Putin's presidency, the Kremlin sorted out the oil sector and the leading companies put in double-digit production gains for almost four years on the trot. But by 2003, attention was turning to other sectors: plans were launched to remove the ring fence around Gazprom shares (legislation that prevented foreigners buying the locally traded stock), a deal with carmaker Avtovaz and the rescue of the aviation sector, amongst other things.

However, all this effort got lost as the war with the then largest oil company Yukos broke out, which ended up eating up all of Putin's limited political capital. The then PM, Mikhail Kasyanov, was supposed to come up with a plan for the Gazprom reform in the winter of 2003, but the ring fence wasn't actually removed until the winter of 2006, and all the other reforms were simply dropped. The only thing that the Kremlin did manage to do before it got sidetracked was reform the telecoms sector, which went off so smoothly and so fast that it barely got a mention in the international press.

The defeat of Yukos and the jailing of its owner Mikhail Khodorkovsky dramatically changed the balance of power in the Kremlin and marked the rise of the statist Siloviki fraction. As this came together with the soaring price of oil, which climbed from a long-term average of $25 to over $150 in the next three years, what little enthusiasm left for reform disappeared. Rolling in money, the Siloviki didn't see the need for private ownership of the main money-spinning sectors. The strategic investment law passed in 2007 was symptomatic of the retreat from the original Gref plan, putting 39 sectors off limits to foreign investors. However, Medvedev's arrive at the top level showed that Putin was still committed to the general idea embodied in Gref's plan.

Renewed drive

The current crisis will be a catalyst for, not the cause of, what should be a renewed (and hopefully effective) reform drive that Medvedev could play an important role in leading. The jury is still out on just what Medvedev can do. Certainly the corruption drive, welcome as it is, has not even dented the problem; indeed, recent comments from the authorities suggest the problem has actually got worse - but at least they are talking about it now.

However, no one should expect Medvedev to produce dramatic improvements. The whole point of bringing in an insider to share power with, rather than pushing real political reform and throwing the race open, was so that Putin could carry out a smooth transition in politics in the same way that the two are planning a smooth transition for the economy, with the current leaders playing an important role in both processes. Medvedev has explicitly contradicted Putin on several occasions, saying he wants to see a more open political society, but he also suggests the moves towards this would be pigeon steps - such as the recent small party law that sets quotas for opposition groups in the Duma, rather than dropping the threshold a party needs to win to enter parliament.

Having said all this, you can expect Medvedev to make steady incremental progress. Happily, one of the upshots of the current crisis is that this process should go a lot faster. The Gref plan was launched when Russia was running large deficits and living hand to mouth, which is what gave the plan its steel - and here were are again in a very similar economic environment.

Going into this crisis, the Kremlin clearly thought its $600bn of reserves was enough to buy its way out of trouble, but by February it was clear that even this enormous sum was insufficient to save everyone. The reserve fund appeared as a direct consequence of the 1998 financial crisis, as the Kremlin vowed "never again." The Kremlin will vow never again this time too, but they now see clearly that this means real reforms and reducing the role of the state.

bne will follow this saga with its "BEARWATCH" column.

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