THE INSIDERS: A Russian evolution

By bne IntelliNews March 27, 2012

Mattias Westman of Prosperity Capital Management -

The Russian presidential election won by Vladimir Putin on March 4 was the fifth one I've observed as an investor in Russia. The first one was more than 15 years ago, in June 1996. We were about to launch "Russian Prosperity Fund" and were very eager to learn the result. The campaign had been extremely tense and the incumbent Boris Yeltsin had started with an approval rating in low single-digits.

The actual election was heavily stage-managed and the outcome had only a passing relationship with the wishes of the Russian population at the time. Yeltsin ended up being re-elected despite suffering a heart attack just a few weeks before polling day. But the compromised result was universally greeted across the Western world as "a great victory for Russian democracy" and a final crushing defeat of worldwide communism. While the latter was probably true (and a reason to celebrate), the former was less true.

There have been four more presidential election campaigns since, including Putin's last one. Some have been more exiting than others, but all have been interesting in own their way. This one was no exception.

Protest vote

The demonstrations and the rise of the "protest movement" raised big questions about how Russia's growing middle classes, primarily those in Moscow, would perceive the election process.

During the run-up, the main question was whether Putin was going to run again and in the long run I personally think his candidacy was a mistake. Putin had the opportunity to step aside and be seen as the politician who finally stabilised Russia, putting the world's largest country on an even keel and creating a functioning democracy, which could have secured his position in history as Russia's greatest ever leader. Instead, he chose to come back to the Kremlin and now risks "wearing out his welcome" with the Russian population.

Still, Putin remains very popular among the Russian population in general and his appeal is built on the huge economic progress the country has made since he took power in 1999.

Russia's annual GDP has increased from less than $200bn to around $2,000bn. Average monthly wages are almost 15 times higher than 12 years ago and inflation has fallen from 85% in 1999 to around 5% today. On the back of this incredible turnaround, Russia's diplomatic status has also been transformed, from a chaotic laughing-stock of a country at the end of the 1990s to a widely-respected player once more.

When Putin first took office in 1999, many Russian people felt deeply humiliated by the collapse of the Soviet Union and the decline of their country "from superpower to basket case."

Putin's high personal approval ratings don't carry over to his party. United Russia is seen as a grouping of bureaucrats, local strongmen and corrupt officials. Objectively speaking, such perceptions are at least partly true and part of the emerging middle class are becoming impatient with what they see as the slow speed of Russia's reforms. Another group contain those who appreciate what Putin has done for their country, but would still like to "move on". They want a new generation of leaders and another Putin Presidency feels like a step backwards.

Just a few years ago, Russia's middle class (or at least the Muscovites) were very preoccupied with achieving material security. Now this has largely been achieved, they're starting to demand more from their leaders - and from the political class in general. The economy needs to be further liberalised, the state needs to get out of the way of business and, above all, corruption must decline.

In recent years, the Russian population has been deeply disinterested in politics, particularly the younger generation who've benefited disproportionately from Russia's economic transformation. In contrast to many other emerging markets, there are effectively no large groups of disenfranchised youths with nothing to lose. Young Russian adults generally have few problems finding relatively well-paid jobs. Many are the business owners and entrepreneurs driving the country's economic progress.

Those who've benefited less are the older generation, who may have had more difficulty coping with the collapse of the planned economy and adapting to the new "capitalist" Russia. Even this group, though, have generally seen their living standards rise sharply. State pensions and public sector wages have also significantly increased. This older generation is, in fact, the most pro-Putin voting block.

Winner takes all

The recent protests were triggered by reported instances of voting irregularities during the Duma elections in early December. They also have their roots in the lower rate of growth that Russia has seen since 2008, which in turn was the result of the West's "sub-prime" crisis. Russian people now see that fast economic growth cannot be taken for granted and further reforms will be needed in order to avert the risk of "stagnation". This realisation has shaken parts of the urban middle class and prompted them to demand more from their government, which has been reflected in the protests.

Far from being something investors should fear, the recent protests are a profoundly positive development. They in no way represent a "Russian Arab Spring". Those protesting have been doing so not out of desperation, but from a position of economic strength. Their hands hold not Molotov cocktails but top-of-the-range iPhones and cups of over-priced Starbucks coffee.

The political system built-up over the last decade, designed by the Kremlin's eminence gris Vladimir Surkov, included a very strong "political vertical". This meant that almost all political power stemmed from the centre and, ultimately, the presidency, creating a "winner takes all" situation.

Such a system made it very difficult for alternative political forces to grow from the ground up. But in the last few months that has begun to change. Surkov has been demoted, direct elections for regional governors have been re-introduced, thresholds for entering parliament have fallen and the numbers of signatures required to register as a candidate have also been lowered.

Over time, these changes will have important consequences. Smaller victories will now be possible, and upon such smaller victories political careers and reputations can be forged. There is now no reason why a charismatic, independent candidate can't get elected as a regional governor and gain executive experience, potentially making him or her a viable candidate for the presidency itself.

A liberalisation of the national media has also begun. The three main national terrestrial TV channels have always been pro-government but, since the USSR collapsed, a plethora of independent radio channels and newspapers have sprung up.

Around 40% of Russian households have access to broadband internet. The virtual world in Russia, in contrast with some other large emerging markets, has never been limited in any way. For 20 years or more, everyone in Russia who is interested has had access to independent information.

What has changed lately is that the national state-controlled news media has also started to report extensively on the protests, while giving ample airtime to opposition presidential candidates. This is a major, welcome change - and one that will be extremely difficult to reverse.

There is currently no real credible opposition party in Russia. This is partly due to the "power vertical" described above and the numbers involved in the current movement remain small - estimates ranging from 30,000 to 100,000 people. The hope must be that this new reality will attract into politics some of Russia's "best and brightest", so laying the ground for a vibrant democracy. Russia's population is clearly becoming more politically active. Even if this process is one of "evolution rather than revolution", it is highly likely to continue.

Mattias Westman is founding partner of Prosperity Capital Management

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