The bonfire of rationality

Yesterday I was going to post a long and detailed entry about Vladimir Putin’s priority list. About the way priorities were exposed during times of crisis and scarcity. I was going to draw a comparison with my college days in Dublin, where, due to my meagre funds, I had to decide which parts of a full Irish breakfast I wanted to keep, as I could not afford them all. I was going to tell how I decided the lack of which ingredient would not disrupt my morning. I was going to point out how Putin seems to have decided which elements of the Russian political system were essential and worth keeping and how others were being cut off. At the end, I was going to point out how this ended up producing a very different system from what it was before – just like a student’s breakfast was not nearly the same as a proper one would have been. But I was late. The murder of Boris Nemtsov told more about the state of Russia and Putinism that I could have. Regardless of how important or unimportant a personality Nemtsov was in contemporary Russia, and regardless of a series of similar murder cases in the past years, the context makes this case different. It shed light on the weakness and the vicious circle hiding behind the robustness of Russia’s geopolitical posturing.

Boris Nemtsov was a man of the past. He was a face of the chaotic nineties, just like Mikhail Khodorkovsky, but less of a symbol. He was a bright and principled politician. He was an icon for Russia’s liberal opposition. He was also relatively insignificant in 2015, in the world of Navalnys, Kudrins and Volodins.

What I found really striking about the murder, besides its sheer brutality, was the variety of theories that emerged in its aftermath. ran an article today summarising these explanations, some of them bizarre, some of them believable. And then some are bizarrely believable, like the one suggesting that Nemtsov was killed by supporters of East Ukrainian separatists or the separatists himself, due to his damning views on Russia’s policies in Ukraine and his work on exposing the presence of Russian troops in Ukraine. When Anna Politkovskaya was murdered, most threads led ultimately to Vladimir Putin. When a journalist, a civil society activist or an opposition politician was attacked, say, five years ago, suspicion clearly suggested the involvement to the Investigative Committee, the thuggish youth organisation Nashi or, again, Putin himself. Not this time. Both the timing and the brutality of the assault – even if its purpose was to scare protesters – was counterproductive. Something that the Putin of five years ago would not have done, or not this way. This time around, alternative scenarios are deemed plausible. For all we know, Putin’s labelling the murder “a provocation” may even be a genuine reaction. And this is what makes Nemtsov’s murder even scarier.

What would you call more unsettling? A tyrant occasionally murdering and bullying the critics of his regime or when innocent people are used as pawns by warring factions in an ailing autocracy? Difficult to say.

Whoever did it for whatever reason, the murder of Nemtsov makes the Russian state reek of incompetence, mismanagement and weakness. The same incompetence, mismanagement and weakness that was present at the Moscow apartment bombings in 1999, in the Dubrovka theatre in 2002 and two years later, in Beslan. Except now it happened at the walls of the Kremlin and the perpetrators may very well be loose cannons set free by the mismanagement of the president himself. It will, in some way,backfire on Putin. Two explanations are plausible but neither of them are reassuring.

A failing state

The Ukraine crisis and the Russian economic crisis that ensued showed the naked reality of Putinism 2.0 – a system that was built on scarce resources, populism and virulent nationalism rather than the oil boom and the welfare compromise of the original system. The Ukraine crisis cut Russia and Russian companies off the West, its know-how and its financial resources. It alerted Russia’s allies and put the project of the Eurasian Union into danger. The war damaged Russia’s international standing and burnt resources meant to fund projects that made more sense but were less politically rewarding. However strongly the Russian government is trying to call it an “Asian pivot”, the conflict also served Russia up on a plate to China. Falling oil prices exacerbated problems rooted in Russia’s faulty system of governance, extractive economy and cronyism, and made the federal budget for 2015 collapse. Cuts had to be made across the board – RBC reported $21bn worth of cuts last week – still the deficit will rise to 3,2% of Russia’s GDP, half of the Reserve Fund will be drained this year (and the Fund may be fully exhausted in 2016). Yet, the Russian state cannot afford to help everyone. Companies’ debt skyrocketed following the rouble’s free fall, industries that rely on imports are struggling, consumers face steep inflation and several regions are on the verge of bankruptcy. At the same time, Crimea needs to be propped up and Moscow has to pump money into politically important projects, such as the armed insurgency in Eastern Ukraine but also pipeline construction connecting Siberia with China. A bucket only half full but one which has twice as many holes on it than before.

In such a situation, leaders’ priorities become obvious. For Vladimir Putin, these seem to be the war in Ukraine, the arms industry and pensioners. Despite the across-the-board cuts, Russia’s military modernisation program, the arms industry’s money pump, has been untouchable. Even if it faces cuts, eventually, as RBC thinks, they will be minor, about 1% of all expenses, as opposed to 10% elsewhere. One of the reasons why spending cuts had to be larger than expected was that pensions were indexed to higher-than-expected inflation. As far as the war in Ukraine is concerned, its cumulated effects clearly represent the largest drain on Russia’s budget presently. Nemtsov was right in stating that the most effective anti-crisis measure available for the government was stopping the war.

But this does not seem likely. The importance of the three priorities above can hardly be overstated: one only has to look at what has been cut or scrapped in order to protect them. One-third of spending cuts will mean cancellation or delay of state investment, cuts in child benefits, public sector salaries and industrial subsidies. Of these, reductions in public sector salaries and industrial subsidies come across as most striking. By slashing public sector wages, Putin takes money away from some of his most loyal supporters, the class of officials that has been one of the echelons of the system. The reduction of industrial subsidies will not only lead to the elimination of jobs, most of them in already vulnerable regions, but it will anger Russia’s business elite as well.

Take for example Igor Sechin, the head of Rosneft – the company that provides the lion’s share of Russia’s energy revenues. Rosneft now faces sanctions that limit its access to Western financial markets and technology, a mounting debt due to its expansive policies in the past years, expensive projects in the Far East and low oil prices. Last year, Rosneft requested more than 2 trillion roubles from the state to help the company finance its obligations. The government reluctantly agreed but stressed that only part of the money would be provided. On the other hand, Bashneft, a lucrative oil company was forcibly taken away from Vladimir Yevtushenkov and seized by the state – an opportunity for Rosneft to take over the company at a later date.

However, when in early February Sechin, once thought to be Russia’s second most powerful man, approached Putin to request more money, this time for a project in Russia’s Far East that became unprofitable following Russia’s “tax manoeuvre” in 2014, meant to encourage refinery modernisation, Putin slammed the door at him. “Rosneft’s interests are important, but the entire economy also has interests”, said Putin and sardonically asked: “Where should I look for the real Sechin? Before or after his becoming head of Rosneft?” Putin’s usual show of force, but this time directed at an unusual target.

Sechin is not the only one to be annoyed by the state of affairs. The 21 most affluent people in the country lost a total of $61 billion last year, a quarter of their combined fortune, according to the Bloomberg Billionaires Index. Gennady Timchenko, one of Putin’s closest associates, profited from food sanctions by buying up food holdings, but this failed to set off the losses he suffered due to sanctions: his wealth dropped from $11bn to $4.1bn last year. The Rotenbergs, another family close to Putin were similarly disenfranchised by losing $3.2bn from their $5.3bn worth of fortune. When the years of scarcity came, these people turned out to be lower on the list of priorities than they might have anticipated, based on their perceived importance and power. And they may as well be right.

Regions on the edge

Besides the growing discontent in the upper echelons of the elite, Putin may have created a new layer of opponents to his policies: regional elites. As I have blogged before, problems in the regions started much earlier than the crisis in Ukraine. After 2012, regions were obliged to finance Putin’s so-called “May decrees”, that is, fiscal expansion and social spending based on promises made in his presidential campaign. At the same time, regions faced shrinking resources mostly due to the centralisation of revenues. The sole aim was to hide Russia’s worsening fiscal indicators. published a detailed article on the dire economic situation in certain regions, which is worth reading in its entirety. However, here are a couple of key figures. In 2013, the combined budgetary deficit of regions tripled to 642 billion roubles and remained high in 2014 at 469 billion roubles. In late 2014, their total debt was 2.1 trillion roubles. The spread of debt was not even. Regions with insufficient revenues and low shares of transfers fared worse. Amur and Udmurtia recorded deficits of 21-22% of their respective GDP. Magadan, Kostroma, Novgorod, Komi and the Jewish Autonomous District had deficits of 16-17%. In half of Russia’s 83 regions total debt amounted to 50-130% of the regions’ income. Only oil and gas regions as well as Moscow were able to pursue a balanced fiscal policy, but with oil prices falling, even this is called into question. Furthermore, as major infrastructure projects had to be cancelled due to the scarcity of funds, regions are bereft of investment. The weaker rouble did help export-oriented industries, but the wave has lapsed as imports became prohibitively expensive. The assistance regions have received since the beginning of the crisis is meagre.

On the other hand, Crimea, a project with high political returns, received 125 billion roubles from the federal budget in 2014 only. This was 8% of all federal assistance. To put this into perspective, the entire Far East, a priority (on paper) for the Russian government received 210 billion and the North Caucasus got 189. This made Crimea Russia’s region requiring the single highest amount of state support.

It was under such circumstances that Putin and his chief of staff, Sergei Ivanov gave “field guidance” to regional leaders last months, urging them to solve problems themselves instead of relying on the central government and reminding them not to forget to clamp down on protests. Hardly what governors expected to hear.

The mad man in the room

The decisions of the Russian government are questioned by its allies as well. As I have blogged before, countries of the Eurasian Customs Union have become increasingly displeased by Russia’s policies. Moreover, they now feel threatened. Kazakhstan, a country that even before the crisis in Ukraine had reservations against the ways the Customs Union worked, last month announced its intention to reduce imports from Russia as Kazakh producers could no longer compete with Russians, owing to the weak rouble. Restrictions would affect imports of meat, machinery, cars and oil. Kazakhstan’s president, Nursultan Nazarbayev who was warned last year by Putin that Kazakhstan’s statehood might be called into question, should he consider distancing himself from Russia, threatened leaving the Eurasian Union.

A similar warning was voiced by Alexander Lukashenko of Belarus, once the staunchest ally of Russia. Belarus suffered both from Russia’s tax manoeuvre and restrictions imposed on food imports due to suspicions that European foodstuff, repackaged in Belarus, found its way to Russia. These were enough to give way to the most serious spat between the two countries in the past decade, with Belarus threatening to leave the Eurasian Union. Lukashenko’s worst fears are, however, of a different nature. Similarly to Nazarbayev, he is afraid of Russian military intervention, or rather, a stealth invasion similar to Ukraine’s. He has every right to be so: Belarus holds a presidential election this year, where Russia may try to usher in a new, more obedient leader. Lukashenko is mending fences with the EU and perhaps even more importantly, with NATO, and the Belarusian parliament recently redefined “military aggression” to include tactics used by Russia in Ukraine. “Hands off Belarus!” Lukashenko seems to be telling Putin.

Even relations with the Eurasian Union’s weakest member, Armenia seem to have soured. A massacre committed by a Russian soldier near the Gyumri military base led to anti-Russian protests in Armenia and disputes over which country had the right to try the suspect. A much-publicised recent public row between the Armenian president and the supposed financial backer of his adversary, Robert Kocharyan, said to be close to Putin, led to questions about the state of relations between the Armenian leadership and Russia.

Relative to Ukraine and the arms industry, even the whole of the Eurasian Union seems to be lower on the list of priorities.

Whom Putin listens to

Putin’s choices of what to keep financing to the detriment of what else tells a lot about the changes in the inner circle of the president, the people Putin is listening to in his revamped power equation.

According to Sergei Markov, a political consultant close to the Kremlin, Putin mainly relies on the advices of Nikolai Patrushev, the secretary of Russia’s security council, Alexander Bortnikov, the head of FSB, Russia’s state security apparatus, Mihail Fradkov, the head of the Foreign Intelligence Service and Sergei Shoigu, the minister of defence, one of the biggest winners of the Ukraine crisis. All of them military officials or spies. None of them economists or political strategists. Alexei Kudrin, a former finance minister with strong links to Putin may have returned to active politics, perhaps, by joining the Presidential Administration and leaving his mark on some of the pro-business reforms announced by Putin at the end of 2014; he may even be next in line to lead the government, when Dmitry Medvedev gets the sack, but this does not mean that he has considerable influence on Putin’s decisions.

Instead, those decisions seem to have been under the growing influence of a different sort of strategists. Novaya Gazeta reported, last week, on the existence of a document prepared, supposedly, with the guidance of Konstantin Malofeyev, an out-of-this-world, “Pravoslavic” oligarch, that suggested the division of Ukraine and the integration of the country’s Eastern provinces into the Eurasian Union already in early 2014, when Viktor Yanukovych was still Ukrainian president. What is particularly striking about this revelation, if it is true, is not its content, but that a document prepared by a motley crew like Malofeyev’s found its way to the desk of the Russian president. Alas, this would not be the only sign. According to an account given by a former employee on the state of the Russian foreign ministry, extreme nationalist circles seem to have taken control over the ministry in the past years, following the footsteps of obscure Orthodox associations like the ones tied to Vladimir Yakunin, the head of Russian Railways or deputy PM Dmitry Rogozin.

As I stressed several times before, probably the most dangerous moment for a weak autocracy is when leaders start to believe in what was originally meant to be propaganda. With the removal of feedback from the system, rationality will not stand in the way. And then the door will open to tragic miscalculations and fatal mistakes. The murder of Nemtsov may have been one of these.  But it can get much worse. If a plan on the division of Ukraine really existed a year ago, it is safe to assume that plans, at the very least, exist on Belarus and Kazakhstan too.

Keep in mind that this scenario, according to which the Russian president is under the influence of violent extremists, but still in control, is the better one.  According to the alternative scenario, Nemtsov’s murder was indeed a provocation. That would mean that Putin and his paranoid inner circle alienated enough of his key supporters to lose control over Russia and scores will be settled in the “Russian way”.

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