Europe’s game – Part 2

In the previous entry, I argued that Europe had to push forward with sanctions on Russia, despite the imminent threat of a Russian economic crisis. However, Europe’s game does not end here. It has to carefully observe the movements within the Russian political elite. Russia’s looming economic breakdown and Western sanctions have indeed affected power relations within the elite – but not everyone suffered equally.

In order to trigger political change, the EU has to ensure two things. First, as I blogged last month, it has to show the Russian political elite that it is more determined than Vladimir Putin has ever expected it to be (similarly to the aftermath of the downing of Flight MH17). Second, it has to make the elite understand – which they may have understood already – that sanctions are there to stay until Vladimir Putin is in charge.

Running low on fuel

According to the reports of Minchenko Consulting, a think tank researching the composition of Russia’s political elite, the first two years of Vladimir Putin’s third term initially saw the emergence of two important bases of power: the state-run energy industry, notably a rapidly expanding Rosneft, and the arms industry that was guaranteed a stable and hefty cash flow until 2020, both through the state’s military modernisation scheme totalling $500 bn and declared efforts to make Russia the world’s single biggest arms exporter.

Previously, Rosneft has successfully increased its edge over its rivals in the energy industry. Gazprom has faced decreasing demand in Europe along with losing its fight with the European Commission on the Third Energy Package and (most recently) on South Stream. Gazprombank is on the EU’s sanctions list, and the gas deal with China will require substantial investments before it can produce revenues. Meanwhile, its monopoly on gas exports was practically defeated. The arch-enemy of Rosneft CEO Igor Sechin, Gennady Timchenko was forced to sell its commodities trading company, Gunvor after having himself been sanctioned by the EU and the US.  Meanwhile, Rosneft became the world’s leading oil company after its aggressive expansion (in particular after gobbling up TNK-BP).

However, in spite of his increasing clout in the energy industry, Sechin’s influence relative to the rest of the Russian political elite has weakened. First of all, the oil industry was particularly seriously affected by Western sanctions: the ban on exporting Western technology to Russian oil firms practically barred Rosneft from developing lucrative Arctic fields. The slump of oil prices, a phenomenon on which Rosneft has little influence, radically decreased the company’s expected revenues, and together with a weaker rouble and a ban on long-term financing at Western debt markets left Rosneft officials scratching their heads in perplexity over how to repay the loans the company took to finance its expansion.

As Minchenko also hints, further decreasing Sechin’s influence was, quite ironically, the marginalisation of liberals. Throughout most of Dmitry Medvedev’s presidency and the first two years of Putin’s third term, when the residue of the former “tandem” was still visible (though waning), Medvedev and his rival to some extent, Alexey Kudrin were widely considered to be the two heads of the liberals’ circles. But Kudrin was fired in 2011 and by 2014, Medvedev was reduced to no more than what in Russian political terms is called a “technical PM”, that is, an executor of the President’s orders. Unsurprisingly, the defeat of the liberals led to a schism on the other side. Not united even by a common enemy any more, and facing a rapidly shrinking pie of distributable wealth, “conservatives” realigned themselves.

Sparring for arms

While the second influential power hub, the arms industry has also suffered from the decline of the Russian economy – the future of the government’s military modernisation scheme under the present conditions has been heavily debated and will probably face cuts next year – it suffered significantly less than Rosneft. On the contrary, Russia’s actions in Ukraine and its posturing as a hub of global security misalignment seemed to have increased its relative importance and therefore, its influence.

The past couple of years gave rise to a rivalry between Dmitry Rogozin, the government’s Vice-PM in charge of arms procurements, and Russia’s minister of defence, Sergey Shoigu, appointed in 2012.

While Rogozin cannot be called Sechin’s man, he stands fairly close to the CEO of Rosneft. The vice-president of the oil firm, Mikhail Leontyev is member of the so-called Izborsk Club, a loose network of Russian nationalists led by Rogozin. He also has powerful allies among regional governors, including Valery Shantsev, the governor of Nizhny Novgorod or Nikolay Merkushkin, the governor of the Samara Oblast. They were both among those regional leaders that contested plans to allow more political competition at the regional level last year.

Shoigu, on the other hand, is a rarity in the cutthroat world of Russian politics: a smooth operator whose rise had began in the chaotic 90s, considerably before Putin was appointed the successor of Yeltsin, as an ally of the late president’s clan, “The Family”. The former Afghanistan veteran proved himself a talented politician at the helm of the Ministry of Emergencies (and its predecessor, the government’s committee on emergencies), an institution that he led for a staggering 21 years, under 15 Prime Ministers and three Presidents. While the ministry’s unique characteristics allowed Shoigu to rapidly increase his popularity, he also managed to put close allies in key positions: one of his fellow Afghanistan veterans, Boris Gromov, was the governor of the Moscow Oblast, an important, “donut-shaped” piece of land around the capital containing Russia’s most expensive real estates, highways, forests and several airports, for 12 years and Shoigu’s influence in the region is still considerable.

Following his appointment to head the Ministry of Defence, Shoigu was eager not to commit the mistakes of his predecessor, Anatoly Serdyukov, a victim of the power struggle between the arms industry and the government. Unlike Serdyukov, Shoigu made sure to play along with one of Putin’s closest allies, the head of Rostec, Sergey Chemezov, thus ensuring his position as the real head of the government’s military modernisation scheme.

The position of Rogozin weakened: he was demoted to vice-chair of Russia’s Military-Industrial Commission (with Vladimir Putin taking the chairmanship of the institution) while getting Shoigu’s deputy, Yury Borisov to work with, the latter being appointed as secretary of the commission (with agenda-setting powers). Shoigu also managed to convince the government that two institutions overseeing arms procurements under Rogozin’s watch, Rosoboronzakaz and Rosoboronpostavka should be scrapped. This essentially put Shoigu in charge of military modernisation, including orders.

2015 may be a risky year for Rogozin: as Vice-PM, he is in charge of Transnistrian affairs, therefore a lot will depend on whether he manages to force a political turnaround in Moldova. Despite the successful mobilisation of pro-Russian and undecided voters before the November elections, pro-European parties managed to keep a slim majority in the legislature, so Rogozin may feel inclined to turn to riskier instruments in the new year.

On the other hand, another project, the annexation of Crimea greatly benefited Shoigu, not only because of the swift and smooth takeover of the peninsula from Ukraine, but also through the appointment of Oleg Belaventsev, an ally of the minister of defence, to the position of presidential envoy to Crimea. This greatly increased the influence of Shoigu’s group over the energy-rich region, even considering that, similarly to a number of other influential positions in Russia, Belaventsev has to share his power with Oleg Savelev, the government’s minister for Crimean affairs, whose loyalty, through a close Putin ally, Dmitry Kozak, supposedly lies with the president.

Flexing the presidential muscles

The series of appointments of loyal Putin allies to important positions is another sign of the growing intensity of intra-elite fighting. This blog has been covering this phenomenon from the beginning. We have established that the Russian president’s trustees, mostly technocrats, have been appointed to positions that are financially less rewarding, but whose holders exercise important supervisory powers, stock up kompromats, etc. While it is unsure if these appointments, by themselves, are able to prevent a serious revolt within the elite, they are sure to give anyone who tries a difficult time.

Recent addition to this list of cadres, apart from the aforementioned Savelev, include Yury Trutnev, who, after a brief period in the Presidential Administration, was named vice-PM last year, and, of course, Alexey Kudrin, a long-time Putin ally, who, as presidential adviser, left his touch on Putin’s initiatives to liberalise the economy, announced last week. Many suspected Putin’s attempt to strengthen his own “clan” behind last month’s press reports on the imminent dismissal of interior minister Vladimir Kolokoltsev, whose rumoured successor, Viktor Zolotov is the president’s former judo partner and body guard.

Rising from the bottom

The fourth, increasingly important factor in the power struggle is the increasing tension between regional elites and the federal centre. A number of governors are facing an increasingly dire economic situation in their own regions. As I have blogged before, regions face decreasing revenues, partly due to the federal government taking a bigger portion of their revenues, while they are responsible for carrying out the lion’s share of Vladimir Putin’s so-called “May decrees”, a hefty increase in social spending. Some of the regions have to battle with uncompetitive industries that are harder to support or replace as federal budgetary revenues plummet and major infrastructure projects (such as the Kazan high-speed railway) are shut down. The Vologda, Kostroma, Saratov, Ryazan and Belgorod oblasts, the Krasnodar region the Chukhotsky district as well as the Republics of Mordovia, North Ossetia and Mari El are the regions facing the most serious debt problems. A growing scarcity of resources and fierce competition for them at the federal level means less opportunities for upward mobility, while regional elites have to face growing political competition at their own level.

Tensions are bound to explode, maybe as early as next year, especially if regions face bankruptcy. However, governors do not form a power group: they constitute a layer, but their loyalties lie with different camps. Furthermore, both Rosneft and the All-Russian People’s Front, a pro-Putin group supervised by the deputy head of the Presidential Administration, Vyacheslav Volodin, have their own instruments to exert pressure in and on regions – making them an even likelier battleground of the near future.

The fifth power factor, often neglected, is the Russian electorate. While the swift, smooth annexation of Crimea was one of Vladimir Putin’s best PR stunts and – with active support from an increasingly tightly controlled media – sent his ratings skyrocketing, it was obvious from the beginning that the tide had to turn sometime. On the back of rising food prices and a tumbling rouble, Levada Center recorded a six point drop in Putin’s ratings last week (from 88 to 82 in one month). While this still makes Putin overwhelmingly popular, in view of a further drop in oil prices and the continuation of sanctions, a further decrease or even an implosion of Putin’s ratings looks all but probable – especially if public disappointment reaches a level where it can be used for political goals.

From this point of view, Shoigu has an advantage: he is one of the best-known and most popular Russian politicians – more likeable than the shrill and nationalistic Rogozin or Sergey Ivanov, Putin’s chief of staff and old KGB colleague, another potential contender who stands closer to Sechin. Moreover, Shoigu may be a more acceptable successor for the West and for China than any of the latter two. But these are just two of the many dimensions of the upcoming battle for succession.

Right now, the interests of Shoigu’s group, as relative beneficiaries of the war in Ukraine, at least in the short term, are more in line with Putin’s than the oil industry’s and the continuation of the war will make the group relatively stronger than Sechin’s, who in turn is more interested in a quick policy change.

But make no mistakes: both groups are only biding their time.

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