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From: Ben Aris <benaris@online.ru>
Date: Wed, 22 Jan 2003
Subject: [RusBizList] RBL488 -- Jan 22 (just banks)

Russia Business List
Wednesday, January 22, 2003
1. Dobby the house-elf on trial
Roland Nash: RenCap

Dobby the house-elf is being sued; Boris Jordan, that champion of the free press, is fired; legislation is being diluted; the oligarchs are stirring...eleven months before the parliamentary vote, Russia is moving into its four-yearly pantomime of pre-election politics. In mid-December, Russia will go to the polls to choose a new Duma, and four months later will return to mandate the same President. Ivan public, politically comatose and generally ignored the rest of the time, will have their four-yearly moment in the limelight.

Until recently, there appeared to be a consensus that in their fourth post-Perestroika incarnation, elections in 2003 would be something of a non-event. With Putin's popularity seemingly fixed at 50% (the next rated politician, the Communist's Gennady Zyuganov polls 14%), and with the media firmly muzzled, the elections looked to be evolving as little more than a rubber stamp for another four years of relatively soporific Putinism.

As we have argued elsewhere (see Appendix 1 in the 2003 Outlook), this appears to us wishful thinking. The laudable success that Putin has had in anaesthetising Russian politics through the centralisation of power and the confiscation of the olgiarchs' political toys is something of a double-edged sword. While it makes it more or less possible to run a longer-term federal policy agenda, it also increases the stakes when any access to federal politics becomes available. The recent panning of the electricity sector restructuring laws is an example of the potential benefits of having a well positioned lobbying body in the Duma.

In the past, electoral conflict has tended to focus on the Presidency. Under Yeltsin, the Duma was little more than a deadweight to be dragged by the executive, and the President could be influenced through a whole range of access points from his daughter to his doctor. With Putin, at a distnace of 15 months, the presidency seems both unassailable (he is robustly popular) and unaccessible (he remains remarkably aloof from lobbying). Instead focus is likely to shift to the Duma.

Battle lines are already clearly discernible. The Putin party of power will be looking to build a solid 50% majority in the Duma, and arguably a 66% constitutional majority. It currently controls 18% directly through the Unity party, and around 40% indirectly through influence over allied centrist parties. The oligarchs and other exiled political groupings wll be attempting to gain influence (both YUKOS and Boris Berezovsky are supposed to have offered financing to the Communist party), while the leftist and the reformist parties will be looking to at least maintain their respective 25% and 10% blocks. Room for manouever within the political spectrum is therefore limited, and competition will be fierce.

Indeed, electioneering has arguably already begun. The recent execution of Boris Jordan's career as a media-mogul for unpatriotic reporting of the awful Dubrovoka tragedy is an obvious hint to the press on recommended editorial style. The uncharacteristic dithering over the electricity restructuring laws is recognition that the government will not be willing to rock the political boat with pocket-hitting reforms in pre-election year. The leaders of the strike at Norilsk Nickel may be hoping that the government will prove more publicly sympathetic with elections imminent. The increasingly brazen activities of the oligarchs in the Duma and in their devouring of the utilities sector could be a recognition that they can no longer be safely ignored. And, yes, there are reports of law suits being filed against the producers of the latest Harry Potter film for making Dobby the house-elf look a little bit too much like Vladimir Putin.

It is likely to get worse. Putin will find it difficult to resist playing the nationalist card, meaning a (further) crack-down in Chechnya and the short-term reversal of the blooming relationship with the West. Similarly, foreign policy is likely to become a little more bellicose with Putin unlikely to be so committed to ignoring the anachronisms harking back to Great Power politics. On the fiscal front, the Ministry of Finance will find it much trickier to shut its ears to pleas from the regions, particularly if the oil price swells federal coffers.

Elections, therefore, are likely to play a major role in determining the investment backdrop for 2003. Reforms will be slower, the budget less tight, foreign policy more belligerent and the oligachs less pliable. However, to end on a note of optimism, the politics should be viewed as a means rather than an end. The Putin regime has already proven their commitment to the attempt to build a viable market-based economic system, and to drag Russia towards the West. Short-term electioneering may not look pretty, but if it results in a stable majority for Putin in the Duma, it should enable the next wave of the more difficult reforms to be completed post March 2004. The market may not like the political jockeying now, but it could well become considerably more optimistic as bets are placed ahead of a Putin-party victory.

For more information on our view for 2003, see the 2003 Russia Overview - Less Risk, Lower Return http://www.rencap.com/eng/research/morningmonitors/PDF/
845d1cf4-2e64-405 8-9fa2-c1cb27c709e1.pdf
. All of our research can be downloaded by clicking on the relevant icon in our morning monitor.

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