Putin’s endgame? Part 2: the problem of institutions

In the second part of No Yardstick’s series on the issues shaping Vladimir Putin’s fourth presidential term, we now look at the composition of the new Russian government, formed in May, and through it, the problem of institutions. The new government is headed by Dmitry Medvedev who is now Russia’s longest-serving prime minister in the post-Soviet period. Yet, this comes with little political clout. In fact, Medvedev’s government is a strange collection of proxies, promises and personages, but real power lies elsewhere. Most importantly, it is a government of shortages.

The fact that Dmitry Medvedev will continue to lead the Russian government should not come as a surprise to anyone. As I wrote in February, Medvedev, who, following Alexei Navalny’s revelations last year became a symbol of systemic corruption more than Putin himself and whose positions had drastically weakened both in the political elite and in the population, was the perfect candidate for the position of prime minister in the transitory period that many in Russia’s political and business elite expect the next six years to be.

Ins and outs

The composition of the government went through significant changes – so significant that according to the state pollster VTsIOM, more than a third of Russians expect the new government to work better, even though they have little reason to do so. Medvedev will have no less than ten deputy prime ministers – a structure last seen under Stalin. Several high-profile members of the previous government left: the boisterous Dmitry Rogozin, in charge of defense procurements, the smooth economic operator Igor Shuvalov and the gray cardinal of foreign policy Sergei Prikhodko are all out; they were notably the focus of Alexei Navalny’s corruption investigation. Arkady Dvorkovich, the government’s most senior liberal (besides Medvedev himself) is also out. As his reassignment to head the half-forgotten Skolkovo project exposed how little say Medvedev probably had on the composition of the government, the old distinction between liberals and siloviki seems to be a thing of the past.

Medvedev does still have some allies in the cabinet: Konstantin Chuichenko, the government’s chief of staff is one of Medvedev’s former classmates. Maxim Akimov, the new deputy prime minister for transport, communications and digital economy is one of the prime minister’s protegees. However, neither of them make up for the loss of Dvorkovich. Of the technocrats in the government, most are Vladimir Putin’s allies, either personally or by proxy. Tatiana Golikova, the former head of the Accounts Chamber who returned to the government was one of Putin’s aides catapulted into positions to head institutions of oversight in the past term. Maxim Oreshkin, the minister for economy, is one of the president’s rising stars. Finance minister Anton Siluanov whose elevation to the position of first deputy prime minister is one of the more unexpected moves in the reshuffle, is a close ally of former finance minister Alexei Kudrin, one of Putin’s most trusted advisors.

At the same time, there are unmovable people in the government. The minister of defense, Sergei Shoigu who has been part of the government since 1991 (with a brief break when he was the governor of Moscow Oblast in 2012) is probably the most extreme example. Shoigu has spent the past years strengthening his positions on the back of Russia’s military campaigns from Crimea to Syria as well as in Russia’s regions. But success is not necessary to become indispensable. Not even Russia’s doping scandal and his lifetime ban from the Olympics were enough to remove the former minister for sports, Vitaly Mutko from the cabinet: he will stay on as deputy prime minister in charge of construction. The explanation is probably that Mutko’s links to Putin go back to the early 1990s when both of them worked in the St. Petersburg city hall. Similarly, it is the president’s unwavering trust that has elevated Yevgeny Zinichev, a former member of Putin’s security detail, to head the Ministry of Civil Defense, Emergencies and Disaster Relief. Never mind the name: the ministry is, in fact, a powerful security apparatus with its own intelligence capabilities.

A novel feature is the importance of an even stronger bond than trust: family ties. Dmitry Patrushev, the new minister for agriculture is the son of Nikolai Patrushev, the secretary of the Security Council and Russia’s chief foreign policy hawk. He is not the first “prince” in the Putin era to land a well-paid job. Sergei Ivanov Jr., the son of Putin’s chief of staff was appointed CEO of the diamond miner Alrosa last year. Pyotr Fradkov, the son of former foreign intelligence head Mikhail Fradkov was the head of Russia’s export center before agreeing to head the bailed-out Promsvyazbank this year. However, Patrushev is the first to be appointed to the government and unlike Ivanov and Fradkov, his father continues to be a powerful figure in day-to-day politics.

Similarly telling is the list of the people who are not going to be part of the new government: Alexei Kudrin, though practically a candidate for prime minister since 2011, is going to head the Accounts Chamber instead; an institution weakened into insignificance by Tatiana Golikova who on the other hand returns to the government. Neither will Igor Sechin, the CEO of Rosneft be part of the new government, despite weeks-long speculations in the Russian press and on Telegram channels. This is not a government of heavyweights or technocrats: it is a government of carefully balanced proxies of a handful of heavyweights. Shoigu and his allies balanced by Zinichev. Sechin’s people balanced by deputy prime minister Dmitry Kozak and Anton Siluanov. It is also a government, in which oligarchic groups – the Rotenbergs, the Kovalchuks or Sergei Chemezov – exert a more and more unbalanced influence on whole sectors of the Russian economy.

Most importantly, however, this will be a government of shortages.

Short of economic options

It will be a government short of economic options. 2018 showed that following four years of animosity between Russia and the West, new sanctions can still bite. The latest American sanctions against a number of Russian businessmen forced Rusal, one of the world’s biggest aluminum producers, to its knees. Even more importantly, they led to uncomfortable questions about the willingness of the Russian government to take responsibility for its foreign policy decisions.

At the beginning of this year, it was announced that Russia’s government would use the ongoing cleanup of the banking sector to turn the bailed-out Promsvyazbank (PSB) into a bank servicing the defense sector. The step was supposed to ensure that the defence sector, itself affected by Western sanctions, would continue to have access to financing, while not endangering other banks. PSB was going to be recapitalised and steps were going to be taken to hedge against future sanctions on its management.

The bank started bailing out businessmen affected by sanctions, too. Viktor Vekselberg’s Renova group received a credit line from PSB this month. Alexei Mordashov, the owner of Power Machines asked the government for help, and it is safe to say that probably, other oligarchs were going to do the same thing, creating, essentially, a secondary economy. But it seems that the government got the proportions enormously wrong.

In May, the State Duma passed a law that gave the government extensive powers to ban products as a means of countersanctions (which itself raised the threat of gutting the Russian health care system that is dependent on American drugs). More importantly, however, it stopped short of adopting another bill, which would have allowed the government to punish, both by fines and by prison, the act of observing foreign sanctions, calling for new ones or releasing information that could lead to new sanctions.

Passing this law would have meant, in practice, that the Russian government shifts responsibility for certain consequences of its foreign policy choices to the private sector. Russia has tucked expenses, deficit and debt away in the budgets of state-owned banks and enterprises as well as of regions before. Vladimir Putin’s “May Decrees”, issued in 2012, shifted billions of dollars of expenses brought about by Putin’s presidential campaign, into regional budgets. This time, however, it’s private business. And private business decided to draw a line. The Russian government’s bill was a sign of how thin the secondary economy that was going to be built around PSB really was – and the backlash was a sign of how short the government is running on the patience of business.

But it is not only these new sanctions that bite. Due to hope that sanctions will eventually be withdrawn or chronic denial, the Russian economy has failed to switch to an alternative development model in the past years. It has tried to balance its trade links with Europe by seeking closer ties with China: this happened, but save for a gas deal, which is unlikely ever to become profitable, a large-scale oil deal that ultimately fell through and certain Chinese investments into Russia’s strategic sectors, China is not even close to the importance of the EU in Russia’s foreign trade. Import substitution largely failed, in any case, remained forced and dependent on the financial support of the state. As Yakov Mirkin pointed out on Republic, the share of imported food in Russia’s retail sector only decreased from 36% to 22% in four years, while certain sectors, e.g. electronics still massively depend on imports. Construction has plummeted and save for state orders, has not recovered. The banking sector is significantly more independent of Western banks than it was four years ago, but the price of this was a significant increase of state ownership. Small enterprises are also increasingly dependent on state-owned behemoths.

Russia cannot hope to outgrow its economic problems, not even with a recovering oil price. EBRD’s projected growth for the region of its operation is 3.3%. For Russia, it is less than half of this at 1.5%. The global economy is experiencing its fastest growth rate in a decade, while the best Russia can hope for is modest and uneven growth, tugged ahead by islands of profitable, state-sponsored industries as well as construction projects doled out to cronies, and held back by moribund industries and growing social problems. The government is not equipped for economic reforms, nor does it have the means to adopt such reforms. The flagship policy for the following years is a $162 billion spending spree on education, health care and infrastructure, but not on structural reforms or policies that would allow Russia to reintegrate into the global economy. Neither are any efforts made to this effect: with hundreds of leading figures in the Russian public administration, political and business elite now facing sanctions, there is a very small number of people who are qualified and allowed to talk to the West. Here is another shortage.

And sanctions are here to stay. Besides the United States, Australia, the Netherlands and the UK may now spearhead calls for new sanctions against Russia, following the botched assassination attempt of Sergei Skripal in London as well as hard proof of Russia’s role in the downing of flight MH17 over Ukraine in 2014. Even if the government is aware of the devastating effect further sanctions may have on the Russian economy, Vladimir Putin can hardly afford to admit defeat on any of the two issues above. As long the EU, the US and their partners remain united and consistent on these issues (which of course, is far from guaranteed), Putin’s interests are fundamentally opposed with those of the Russian economy.

Short of rent

This is even more so, considering that the government is short of rent required to guarantee political loyalty. Just how short it is, was illustrated by a very telling story last week. A leaked study signed by Sberbank’s analysts showed that three gas pipelines under construction – Nord Stream 2 between Russia and Germany, Turkish Stream between Russia and the Balkans and Power of Siberia, between Russia and China – are all likely to benefit mainly the contractors building them, rather than their shareholders. Two of the main companies involved in the construction of the pipelines are Stroygazmontazh, owned by Putin’s judo partner Arkady Rotenberg and his brother, Boris, and Stroytransneftegaz, partly owned by another Putin ally, Gennady Timchenko.

The analysts highlighted the $55.4 billion Power of Siberia pipeline, a flagship project agreed in 2014 to reorient Russia’s gas exports towards China. The project was chosen in spite of earlier plans to build another pipeline called Altai, five times cheaper than the pipeline that was eventually agreed, ostensibly due to the preferences of the Chinese party. Even at relatively high oil prices, the analysts estimated that Gazprom would be unable to recover the costs of the project: it would fall short of $11 billion. However, the additional investment necessary to build the pipeline will benefit the companies of Rotenberg and especially of Timchenko.

The two pipelines connecting Russia with Europe are similarly costly with comparatively low rates of return. For instance, Sberbank estimated that Nord Stream 2 will cost $17 billion, almost twice as much as the estimates published by Gazprom, which deliberately disregard the cost of ground infrastructure. Even if the construction is accompanied by a growing demand for gas in the EU, the pipeline will take decades to turn in a profit.

One of the analysts authoring the report was fired the same week, together with his supervisor, for “unethical behavior”. Alexander Fak had tried to warn about the wasteful nature of Gazprom is not the only state-owned company in Russia that has been dangerously mismanaged in the past years. Following 2012, the state oil giant Rosneft started aggressively expanding in the domestic market. The company spent $55 billion on purchasing the British-Russian joint venture TNK-BP in 2013 and spent more than $20 billion on further acquisitions in the following years. The massive debts that the company accumulated, coupled with the free-fall of the price of oil in 2015 led, despite the acquisitions, to a shrink in value relative to the pre-acquisition figure: quite a stunt.

Rosneft had also supported its expansion with questionable court cases, i.e. against the Sistema holding, which in 2014 was forced to give up the oil company Bashneft following the detention of its owner. This year, the arrest of Ziyavudin Magomedov, the owner of the Summa investment group who had previously entered a dispute with Nikolay Tokarev, the head of the state-owned Transneft company while also refusing to repatriate his fortune, echoed the court cases against Bashneft. The damage that these cases have caused to Russia’s economy through the deterioration of the investment climate is difficult to quantify, but is certainly considerable. They also showed that the Russian government is unable or unwilling to break out of the extractive, rent-seeking economic model that has characterized Russia in the past decades.

The tragedy of state-owned enterprises in Russia is that the extractive nature of the economy and the oligarchic structure of the political system leaves no other option for the executive in a period when resources are shrinking (due to sanctions, low oil prices, the lack of structural reforms, etc.) than to start killing the geese laying the golden eggs. This is yet another example of how, in times of economic shortage, the interests of political elites often turn out to be fundamentally opposed to the interests of the population and the interests of the economic elite.

Short of institutional power

The shortage that should worry those fearing the escalation of Russia’s problems is the shortage of institutional power. Medvedev’s government was hardly a decision-making organ in the past six years, but it certainly participated in the preparation of policies and decisions, even if its suggestions then had to go through the filter of institutions such as the Security Council or the Central Bank. The new composition of the government promises even less: with the government becoming, essentially, a collection of proxies and the grooming ground of technocrats, while heavyweights are sitting in other institutions, the cabinet will most likely play a negligible role in the decision-making process. First prime minister and finance minister Anton Siluanov, for instance, is most probably only expected to provide a counterbalance to statist hardliners in the government, but he has little political support to do anything beyond that. The communication between the government and the Security Council, an important forum that influences executive decisions, will logically go through Dmitry Patrushev, the minister of agriculture, by virtue of his being the son of the Council’s secretary, and not the prime minister. Policies will be prepared in the Presidential Administration, the Central Bank, the Accounts Chamber, Vneshekonombank, the Security Council or Rosneft. The government will implement them and take responsibility for them.

This will lead to a reinforcement of Russia’s peculiar system of governance, in which weak people lead nominally strong institutions and strong people lead nominally weak institutions – with the one exception of the president.

Here, again, Putin’s interests clash with Russia’s. In this six-year period that many expect to be transitional, he will have to face increasingly violent battles both for his succession and for the self-preservation of the political elite. The reason for this is that in Russia, unlike, for instance, in Ukraine, there is no system or mechanism that could guarantee an orderly political transition, nor has there ever been. Russia’s present political and business elite knows all too well from the experience of the years that followed the handover of power from Yeltsin to Putin almost two decades ago that their fortune, perhaps even their freedom, are closely tied to the person holding the paramount political office. Every change in that position is a regime change. Every regime, in turn, has or produces its own political and business elite. They cannot afford to wait until Putin’s power expires, one way or another.

Therefore, on the other hand, Putin cannot afford to give the impression that the system is, or can be, fine without him. The more opaque the government is, the weaker the people who head its institutions are, the deeper strong people are buried under the weight of weak institutions, the more crucial the president is. This produces hapless Medvedevs, corrupt but reliable Mutkos, silovik princes used as guarantees as well as Kudrins and Sechins biding their time.

What it does not produce is the institutions that Russia will need to survive Vladimir Putin. And thus Duma speaker Vyacheslav Volodin – who in 2014 famously said: “If there is Putin, there is Russia; if there is no Putin, there is no Russia – becomes a visionary.

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