The tired, the poor and the huddled masses

March was Alexei Navalny’s month. One year before Russia’s next presidential election, protests prompted by a corruption investigation by the opposition candidate into the fortunes of Dmitry Medvedev conquered the streets of Moscow and what is probably even more important, other Russian cities. Four years after his somewhat haphazard mayoral campaign in Moscow, Navalny is turning into a formidable politician on the federal level. Anti-corruption protests are an important part of this, but perhaps even more importantly, Navalny is also tapping into the animosity of regional elites against Moscow.

Alexei Navalny may be on to something this time.

On 26 March, thousands took the streets in Moscow, St. Petersburg and a lot of other Russian cities in the biggest demonstrations of the past five years against corruption, the Russian government and Vladimir Putin. Hundreds were arrested, including Navalny himself, but the Kremlin was clearly surprised and baffled that such a loud and clear manifestation of public anger can rattle Russia a year before the 2018 presidential election. Only days later, the Kremlin seemed almost ready to sacrifice one of Russia’s most influential politicians, Dmitry Medvedev when the Communist Party demanded an investigation into Navalny’s allegations of massive corruption related to Medvedev that started the protests.

Navalny, whose last memorable stint as a politician of national standing was in 2013 when he ran for mayor of Moscow, has shown remarkable professionalism and political instincts lately. The Medvedev video was just one of many similar documentaries posted and explained online, all of which are worth to watch to appraise the institutionalised corruption that is the Russian state today. Still, the Medvedev video hit perhaps unexpectedly hard. And this is partly because Navalny did not only know how to present his findings, but he knew when to do so. Two or three years ago such revelations would not have led to such an uproar. But the grand story of Vladimir Putin’s third presidential term, the annexation of Crimea is wearing off. Three weeks ago, Putin chose not to participate in the official celebrations of Crimea’s “return” to Russia. With good reason. Three years have passed, the glory has faded and Crimea turned out to be what it had always been: a poor, problematic region that needs a lot of subsidies. Moreover, despite a reputation that he has been carefully building, Putin did not manage to outsmart the West – at least not when it comes to sanctions. Both the EU and the US, even with Donald Trump, seem to be unwilling to return to business as usual and Putin’s populist momentum in the West may be over this year. Sanctions have stayed and the Russian economy is stagnating at best. A presidential election is coming up next year, and Putin does not have a story to tell to Russians. And apparently, Navalny does.

In another clever decision, Navalny attacked someone who is clearly a weak part of the system. Medvedev has been a fixture of Russian politics in the past ten years, first as anointed successor, then president, then prime minister – one should not forget that for a while he and Putin were referred to as a “tandem” – this is something that no one else could claim to have achieved under Vladimir Putin. But Medvedev’s main appeal was his loyalty, not his own power base, which has constantly weakened over the past years. The fact that the Communist Party dared to initiate an investigation into Medvedev’s affairs showed that the prime minister is expendable. Very soon, he may end up as president of the Supreme Court – a stubborn rumour made plausible by the ageing of the court’s incumbent president who turns 74 this year – or, in the worst case for Medvedev, a presidential envoy for digitalisation.

Navalny understood that the key to political success if you come from outside of the system is finding and exploiting an issue that allows both harnessing loud public support and splitting the political elite. Medvedev’s corruption was such an issue. But it was not the only such issue and possibly not even the most important one. Navalny’s visit to Tatarstan on 5 March showed a much deeper understanding of what is probably the biggest simmering problem of today’s Russia.

Overburdened, underfunded

Navalny visited the region only two days after the central bank had revoked the licences of three banks, in which the region’s government is a majority shareholder. Among these was Tatfondbank, Russia’s 42nd biggest bank. The move should not have come a s a surprise: already in December 2016, Tatfondbank had suspended cash services to its clients and the regional government started talks with the central bank on the stabilisation of the bank. The central bank had been working on the stabilisation of the Russian banking system for years, closing down dozens of banks. In March, however, when the central bank revoked the licences of the three banks and therefore it seemed that all of a sudden, clients will not be reimbursed, the outrage turned political. Several hundred people, primarily the clients of the three banks, picketed the headquarters of the region’s government and urged the resignation of Ildar Khalikov, the republic’s prime minister who was also Tatfondbank’s president. At stake was also 40 billion roubles that clients demanded to be repaid to them.

When Navalny flew into Kazan, Tatarstan’s capital two days later to open his campaign office, instead of criticising the leaders of the region, he scolded the government in Moscow. “The existing system has failed. Look at Putin and his people. For 17 years, they have been gradually taking away money [from the regions] and reducing their autonomy,” he said, adding: “Under President Navalny, agreements [between Moscow and the regions] will not be needed at all, because I will in any case ask for more money and more autonomy to be given to the regions.”

Navalny pressed the right button. Perhaps the most important of the stories that got undeservedly little attention in the past years is the growing conflict between Russia’s regions and the federal government. I have touched upon this topic several times on this blog, but it would be hard to overstate its importance.

The financial burden on Russia’s regions has been rapidly growing for years. A turning point was Vladimir Putin’s re-election in 2012, after which he issued his so-called May Decrees. These prescribed a heavy social spending plan, most of which had to be implemented by regional governments. At the same time, regions saw their revenues slashed, as the federal government demanded an ever growing share of tax revenues. Presently, almost two-thirds of the regions’ income goes to Moscow and only about one-fifth comes back in the form of subsidies. To fulfil their financial obligations amidst worsening economic conditions, regions started borrowing heavily and at high costs. Big state-owned banks, mostly Sberbank, VTB and Sovcombank were happy to oblige. In past years, the debt of most regions grew rapidly, some by breathtaking speed (Tyumen’s debt almost two-fold, the debt of the Nenets Autonomous Okrug more than three-fold and Crimea’s debt more than thirteen-fold in 2016).

Few regions could afford this. According to the Finance Ministry, at the end of 2016 only 10 of Russia’s 83 (+2 if you count Crimea and Sevastopol) regions were financially stable. In 2015, there were twice as many. With a heavy centralisation of revenues and decentralisation of duties, there are only 14 so-called “donor regions” that finance the rest of Russia, while thirty regions are dangerously dependent on subsidies and seventeen have deficits over 10% of their GDP. Among the regions most dependent on subsidies are Putin’s trophy, Crimea; several restive regions in the Caucasus such as Dagestan, Chechnya and Stavropol; as well as far-eastern regions that the federal government fears may be taken over, at least economically, by China, such as the republics of Tyva and Altai.

The biggest single debtor last year, with 150 billion roubles in debt, was the Krasnodar Krai, home of Russia’s Black Sea resorts and the host of the infamously expensive and corrupt Sochi Olympics. Unsurprisingly, we also find a large-scale sports project in the region with the biggest debt compared to its revenues. Mordovia, a region that famously hosted some of the Soviet Union’s most notorious labour camps, will host some of the matches of the 2018 FIFA World Cup. However, the region produces and sells little. Its debt rose to more than 190 percent of its revenues in 2016. Tellingly, even the players of the football club of its capital, Saransk, were striking over unpaid wages last year.

And there is Tatarstan: a net donor, and probably the most vocal region when it comes to articulating the regions’ feeling of injustice. Last year, when the Kremlin suggested increasing the portion of the tax on profit going from the regions to Moscow, Rustam Minnikhanov, Tatarstan’s president called it an “extremely dangerous move” and “stupidity”, even comparing it to Stalin’s policies. Tatarstan has always been one of Russia’s most autonomous regions. But Kaluga, a rare region that had recently joined the small club of donor regions, also spoke up against the move.

In December last year, even Vladimir Putin had to speak about the growing debt of the regions in his end-of-the-year press conference, admitting that the total debt was above two trillion roubles. Tatiana Golikova, the head of the Chamber of Audits said that the regions’ cost of servicing debt had doubled since 2013. The problem did not come as a surprise, either. Regions started going downhill during the 2009-10 economic crisis and in 2015, Russian economists predicted that the problems of the regions would become acute in two or three years.

To ease the burden, Putin ordered lending rates to be slashed, and the government budgeted 510 billion rouble in 2016 and 2017 to convert regional debt into debt to Moscow. By February 2017, Moody’s estimated that regional debt had stabilised. However, Moscow’s debt engineering is hardly a lasting solution, especially since the government squarely rejected the Finance Ministry’s proposal to raise budgetary support to regions by 9 percent. With only a handful of regions meeting the criteria for financial stability, a crisis may hit almost any time, almost anywhere. In a way, it has already hit: last year saw an unprecedented uptick in protests over unpaid wages and growing poverty in the regions. The federal media remained silent and so did the federal government. Regions, it seems, are not only obliged to do more from less money: they are also supposed to bear the brunt of the anger when this does not work.

Old recipes

This is not the first time that Vladimir Putin has to deal with regions in crisis. It may be only a footnote in the president’s CV today, but for a few months in 1998, at the start of Putin’s career in Moscow, he was the deputy head in Boris Yeltsin’s presidential administration, responsible for regions. The prime minister in this period was Sergei Kiriyenko who today is Putin’s deputy chief of staff.

After Russia’s financial meltdown, as the banking crisis accelerated insolvency, regions started adopting unconstitutional laws in order to prevent what they feared would be upcoming uprisings. Nizhny Novgorod announced that it would pay salaries before taxes and even raised the possibility of the separation of its banking system. Kaliningrad and the Sverdlovsk region contemplated declaring a state of emergency and initiating price controls. Khakassia also threatened Moscow with withholding tax revenues. Some regions even made independent foreign policy initiatives, which alarmed the Kremlin.

Putin’s task in 1998 was collecting data on how governors spent subsidies and preparing agreements spelling out the powers of regional governments. Later, as president, he cancelled these agreements and instead, centralised power over the regions by scrapping gubernatorial elections. Today, he is doing essentially the same: changing the heads of regions, if necessary and putting out fires with federal funds, if needed; however, responsibility remains with the governors while the power and the funds stay in Moscow. Putin probably thinks that devolving power would bring back the unconstitutional legislative attempts of 1998, or even encourage separatism – therefore it remains taboo.

Several regions have seen changes in their leadership recently. In the past couple of months, the governors of Buryatia, Karelia, Perm, Novgorod and Ryazan were replaced. But these replacements have little to do with governance or the state of the economy. The logic was mostly political. To ensure loyalty, Putin has recently also started to appoint former members of his security detail to head certain regions. This, however, led to two problems. First, there is a visible conflict over regional leadership between the FSO – the Federal Protective Service, to which Putin’s body guards belong – and the FSB, the Federal Security Service as well as state officials with links to it who have a large regional clientele (i.e. Sergei Chemezov, the head of Rostec). Second, Putin’s new governors did terribly at last year’s legislative election when they delivered some of the lowest turnout figures.

New answers

The Kremlin seems to have navigated itself into a dead-end street.

This can matter. In an authoritarian political system with limited political competition, turnout says a lot about the popular legitimacy of the regime. The Presidential Administration set itself a target named 70/70 for 2018: a turnout of at least 70 percent and 70 percent support for Putin, up from 65/63 percent in 2012 and an alarmingly low turnout of less than 48 percent in the 2016 legislative election. This will be tough to carry out without a compelling political narrative or without competent and loyal regional leaders.

Perhaps most governors are not yet setting up their own security forces like Chechnya’s thuggish president, Ramzan Kadyrov.  Perhaps they are not going to adopt unconstitutional laws as their predecessors did in 1998. It seems very unlikely that any of them will side with Alexei Navalny who promises them more independence. But they surely listen; and if they hear things that they agree with, perhaps they will be a little more lenient towards the opposition this time. Perhaps they will put a little less pressure on civil servants and voters to ensure the required turnout. Perhaps they will tacitly contribute to an embarrassment for Vladimir Putin. And while this happens, Alexei Navalny can plan the next step.

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