Putin's Viagra problem and Russia's Plan K

Putin's Viagra problem and Russia's Plan K
Putin's team has ruled Russia for 15 years, but can they keep it up?
By Ben Aris in Moscow February 5, 2016

This article is part of a series looking at the impact of the fall in oil prices on the region's biggest oil producers. The previous articles were on Kazakhstan and Azerbaijan.

"There are no real checks and balances on [Russian President Vladimir] Putin's power. There is no well-developed strategy. The government is weak and can't make decisions. Putin has been reactive, but he needs to react faster and faster. Crimea was a gift to the people and the euphoria lasted a year. Then there was Syria. It's like Viagra: it works for a while, but you have to keep taking more and more."

That, in a nutshell, is what is wrong with Russia today, professor of political economy Nikolai Petrov from Moscow's Higher Economic School tells bne IntelliNews in an exclusive interview.

The headlines might be focused on the impact of $30 a barrel oil price and the knock-on effects, but for the Kremlin, the fall in oil is only secondary to its main problem: how will it maintain control of the Duma in September's general election if people's lives are getting visibly worse?

For Putin the showdown with the West over first Ukraine and now Syria has been a political gift. His sky-high popularity over the last decade and half was predicated on the political stability and economic prosperity he brought. When he took over from an ailing and increasingly erratic Boris Yeltsin, Russia's economy was worth just under $200bn; at its peak in 2013 it was worth $2.1 trillion. The wealth of the country didn't just grow on Putin's watch, it decupled.

Today, the economy is worth a lot less, approximately $1.2 trillion according to VTB Capital's calculations, and if Russia puts in another year of recession it could drop below $1 trillion. This should have translated into faltering support for Putin and his proxy in the Duma, United Russia, but he masterfully played on national sentiment to actually increase his popularity to record highs. The Russian superpower is back on the international stage – or so it seems to the Russians.

But the heady effects of these big geopolitical plays wear off very quickly, argues Petrov, who believes that Putin is a master tactician but lacks a long-term strategy.

"The costs are increasing all the time. Syria was a positive result for Putin, but now he can’t get anything else positive out of it. He needs to capitalise on that deal. The benefit is fixed, but the costs are rising constantly. And the capital he made has already all been spent," says the economist, who specialises in Russia's regional politics.

In the past, Putin simply bought off the voting public. In the run-up to his re-election in 2012, he increased pensions by 50%. In the run-up to this one, and before the next presidential vote in 2018, he has effectively reduced pensions again by capping indexation at 4% – way below the 13% rate of inflation. And the bad economic news keeps getting worse. Real incomes fell by just under 10%, the economy contracted by 3.7% and the ruble is in the mire, lurching between RUB75 and RUB80 to the dollar, whereas it was in the low RUB30s just over a year ago.

Nationalism gave Putin's popularity a boost, but the underlying reality of the situation is already starting to eat into his, and more importantly, the government's support. Putin's personal approval rating fell from 85% to 82% in the last week of January, according to the independent pollster the Levada Center. However, the number of respondents that think "Russia is going the wrong way" has jumped, as has the number that worry Russia is on course for another financial crisis like that of 1998 – now almost half the country. 

"On the eve of the elections, the Kremlin is in an even worse position than it was ahead of the previous elections five years ago," says Petrov, whose institute is on Moscow's slushy Ilinka Ulitsa, right next door to the Ministry of Finance and a stone's throw from Red Square, the heart of Russian power.

Party politics

United Russia only just scraped a majority in the 2011 elections after winning a constitutional majority in the previous polls in 2006 with a 66% share. In fact, it didn't earn either of these votes, as in both cases it was shown after the fact that the count was rigged to deliver on both these key thresholds (there were visible spikes at the round numbers consistent with election officials rounding up vote counts in favour of the ruling party). In 2006, the population took the vote-fixing lying down. They did not in December 2011; Moscow was rocked by the first mass protests in a decade with over 100,000 taking to the streets. Those protests have changed everything.

It is already obvious that left to its own devices United Russia has little chance of winning 50% at the polls this September. So the Kremlin is getting ready to hedge its bets.

In January, a new law quietly slipped through the Duma, passing in all three readings at once that allows for the creation of more parties. On the face of it, making it easier to register a political party is a good thing. But in Putin's Russia the only really efficient political machine is the Kremlin itself, and it intends to set up its own parties to cater to the electorate's slowly growing desire for more plurality at the ballot box.

"It's like the Kremlin is producing an election 'menu'," says Petrov. "If they see that pensions are going to be a problem, then they will create a party of pensioners; if they think the problem is going to be with [small business], then they will create a pro-business party."

And a new pro-business party has already appeared: on January 25, Kremlin spokesman Dmitry Peskov said business ombudsman Boris Titov was forming a conservative party to represent the interests of business in the upcoming elections. Peskov didn't explain why it was the job of the presidential press spokesman to break the news that a nominally independent political party was about to take to the public stage – but then he didn't have to.

"The Kremlin needs more parties, as it will create more competition. The problem they have now is if a party becomes unpopular like United Russia, what can you do?" asks Petrov. "But if you have lots of parties, then you can just switch from one to the other if things go badly."

It's a hybrid system similar to the way the banking and gas sector are organised: the state sets up two competing state-controlled entities to introduce competition and improve efficiency, but ultimately both entities (Gazprom/Rosneft, Sberbank/VTB) are controlled by the state.

Titov has long represented the interests of business as the head of the independent business association Delovaya Rossiya (Working Russia). In late 2012, as bne IntelliNews reported in its cover story interview with Titov, "Russia's corruption tsar", he was charged with leading the fight against graft.

This is actually the Kremlin's third stab at setting up a controllable business party. Oligarch and close Putin confidant Mikhail Prokhorov set up the identical Party of Civic Platform that was supposed to run in the 2011 election, until the whole experience went to his head and he started to have real opinions about what needs to be done. The party was quickly shut down and Prokhorov withdrew from political life.

The only other parties in Russia are: Vladimir Zhirinovsky's Liberal Democratic Party of Russia (LDPR), which was co-opted by the Kremlin long ago; the Communist Party of the Russian Federation (KPRF), which is a spent force and also Kremlin friendly these days; and  A Just Russia, which was set up by a stooge but is a real, if small protest vote in the Duma. The same thing happened with Rodina, which was set up to appeal to the middle classes but had too many ideas of its own and was merged with the pensioners' party to form A Just Russia in 2006.

The "true" opposition, headed by figures like Alexei Navalny, has failed to form a united front and even if they did, it is highly unlikely they would be able to surmount the bureaucratic barriers the Kremlin is bound to put in their way and actually field candidates in a national vote.

As if to emphasis the point, on Febuary 1, veteran Russian liberal opposition party Yabloko turned down a proposal from the PARNAS opposition party that they merge to compile a single list of Duma election candidates. This left both parties small and unlikely to pass the 5% of votes threshold needed to enter parliament. 

Regional games

The new parties will play an important role in the election, but the Kremlin's main effort will be to get the regional elites to deliver votes on election day. And here too Putin has a serious problem.

In the 2011 elections, the regions delivered just enough votes to allow United Russia to take just over 50%. But according to a bne IntelliNews drill down into the results by region, two-thirds of Russia's regions gave United Russia less than 50%. It was only because of the extremely high count in the "loyal" regions (Chechnya under Ramzan Kadyrov claimed close to 100% support) that the party squeaked into office and promptly took control of all the important Duma committees that make policy.

A handful of other regions, mostly in the Caucasus, turned in close to 100% support for the party. Like the Moscow mayoral election, the extraordinarily strong support for United Russia in only six regions was enough to ensure its majority.

Despite the image of Putin's monolithic control over Russia's polity, his grip on power in the regions is actually limited: the spread between the highest vote for United Russia in Chechnya of 99.5% and the lowest in the Yaroslavl Oblast of 29% in 2011 was extremely wide.

The Kremlin is now terrified of sparking another round of mass protests and, as the victory of an opposition Communist candidate in last year's regional vote in Irkutsk showed, it would rather lose the vote than blatantly fix the result. The result must have sent shockwaves through the administration.

The biggest change in the way things are run from 2011 is that the Kremlin will be relying heavily on the regional elites to deliver victories – and in doing so Putin will hand them real power in the process. "They have decided it is easier to win single mandate seats in the regions than to deliver a mass win using partly lists, but this means you need a strong local candidate," says Petrov.

Petrov argues that Putin significantly weakened his hand by getting rid of local elections and replacing governors with political appointees. During his term as president, Dmitry Medvedev tried to reverse this decision, but the project went nowhere. The upshot is poor regional management and political discontent in the regions, which only weakens Putin's position further.

"This has led to a military-style election in the regions," says Petrov. "The Kremlin is not interested in the legitimacy or hearing other voices. But it also means that the regional elite will find it harder to deliver victories for the Kremlin in their regions."

The competition to find strong regional players to stand for the Kremlin will start soon and there will be a lot of horse-trading involved. The regional elites (the administration bosses together with the local oligarchs) will demand some quid pro quo and will want to see their own representatives in the Duma. In the past, the centre has just poured money into the regions.

"The centre is still able to fix all the [regional] problems manually – by giving out money [to regions in trouble]," of which there are many, says Petrov. "There is no reason to expect serious protests in the next couple of years. But the mistake [former finance minister Alexei] Kudrin and others are making is to assume that if there is enough money, there will be no crisis."

Petrov argues that all this means progress, as power is devolving to an extent from the centre. But he also worries that Putin's system is inherently unstable and is failing to keep up with the demands of the times. "The system has become more sophisticated, but the danger is whether it has enough time to modernise in this way or whether it will collapse before," says Petrov.

Plan K

All this only takes us up to the winter of 2016. What happens then? Petrov worries that while Putin has run circles around the EU and US in his various geopolitical clashes (the advantage of having a weak democracy is he is not slowed down by checks and balances), he has no long-term plan.

Or maybe he does. The need for deep structural reforms is painfully obvious, but Putin has made it clear that he is going to sacrifice Russia's economic health for his geopolitical goals by refusing to cut military spending, which now makes up a third of the budget. Financial wellbeing and social support should be the top priority areas of national policy, according to respondents of a recent poll by the Levada Center, while democracy, reforms and freedom of speech are seen as less important.

Petrov says that Putin is distracted by the game of geopolitics he is currently playing with the West, but has a "Plan K" in mind: bring Kudrin back as prime minister and unleash him on the economy. Kudrin quit his job over a clash with then president Medvedev, insisting that military spending should be cut. But Putin has kept him close ever since.

"Kudrin wants it and is clearly preparing for it. His civil society institute has been travelling the country and drilling down into the nitty-gritty of Russia's economic problems. But no one knows for sure what Putin really has in mind and that is the root of the problem," Petrov says.

Speculation over Kudrin's imminent return continues to swirl, but Putin is unlikely to start on such a radical plan until he has capitalised on his investments into the Ukrainian and Syrian conflicts with an improved position for Russia on the international stage. He will also have to wait until the September autumn elections are passed, says Petrov.

In the meantime, Putin is running the risk of an implosion, as Russian politics are entirely centred on himself. To highlight the point, Petrov asks: what would happen if Putin were killed in a car crash tomorrow? "No one has any idea of what would happen next. There is no one on the stage who is an obvious candidate to take over," says Petrov. "It would be chaos."

Features

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss