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#20 - JRL 7038
Date: Tue, 28 Jan 2003
From: "Alexander Rahr" <rahr@dgap.org>
Subject: Russia Before Elections: How stable is Putin's Course of Reforms?

No. 32, January 2003
Published by Korber Department
Joint Venture of the Korber Foundation, Hamburg and the Research Institute of the German Council on Foreign Relations, Berlin
Russia Before Elections: How stable is Putin's Course of Reforms?

Vladimir Putin has successfully completed three years of his term of office. Under his rule Russia has become more stable economically as well as politically more predictable. But now the political forces are arming themselves for a double election campaign. In December 2003, parliamentary elections will take place, four months later presidential elections will follow. During this period the Kremlin will be concerned with securing power and will avoid taking any risks. Radical reform steps for a final breakthrough to a free market economy have been post-poned until the year 2005.

In his two and a half hour-long TV chat with the Russian population shortly before Christ-mas, Putin devoted a lot of time to praising his economic policy, pointing out that the Russian economy is stable and that there is no threat of a financial collapse as in 1998. Putin has in fact managed to integrate all social forces in his politics. Basically, he does not have to cur-rently fear any opposition. In the West one might consider the Russian parliament as hav-ing been emasculated. Thanks to its support of Putin's modernization politics, the Duma has, however, substantially contributed to the stabilization of the domestic political situation. The governors equally welcome the fact that once again the same rules apply to all subjects of the Federation. The governors seem to toler-ate restrictions in their power without protest, like in the case of the Communist-friendly governor of Kemerovo, Aman Tuleyev, who sang Putin's praises at a speech made at the German Council on Foreign Relations in the end of December. There were similar remarks made by the liberal Grigori Yavlinsky, a politi-cian from the other end of the political spec-trum. Both Tuleyev and Yavlinsky made no secret of their hope of joining Putin's govern-ment in the future.

In Russia a new political centre has been cre-ated, one that both the left and the right wing can identify with. In the 90s the Communist Party was the strongest political force and the reform forces were fragmented amongst the various small liberal parties, but essentially supported Yeltsin's politics. Today the political centre is much broader and stronger. Putin does not need the support of radical liberal forces. His party of power, "Russian Unity", represents the strongest force in the country. It stands for political stability and the continuation of the market economy reforms. Essentially it does not represent any clear ideologi-cal views, but rather has two sparkling political personalities in its camp: the Emergency Situation Minister Sergei Shoygu, and the Moscow Mayor Yuri Luzhkov. Some observers believe that Russia is on its way to a two-party system. Russian Unity` could assimilate the liberal parties in the next legislation period and might leave the left and nationalist camp to the Communists, who will most likely again fare well in the parliamentary elections.

Swaying Putin

There are indeed quite a few observers who believe that Putin will not be able to change his political direction in the future. They believe the President has passed the acme of his reforms and that in his second term of office he will once again come to an arrangement with the oligarchs. Moreover, they believe he will try to keep up the balance between the rightist and leftist forces just in order to stay in power and will stay clear of too radical reform steps. Putin seems to be lacking in personal alterna-tives. Since he came to power, the government staff team, which he practically inherited from Yeltsin, has hardly been changed.

The President still only trusts his long-standing KGB colleagues from St. Petersburg whom he knows for 30 years. They however seem to have lost the political drive that they showed in the beginning. Instead of vigorously pushing reforms, they are themselves turning into oligarchs and are solely interested in se-curing their own power. Perhaps some of them have been corrupted as well and in the future, Russia will witness the resurrection of the Yel-tsin regime; despite the impression of a 'dicta-torship of the law` which the Kremlin contin-ues to portray to the outside.

Looking back on the year 2002, one should note that on the one hand Putin's modernization strategy has shown successes. It was possible to hold on to the three most important pillars of economic policy, namely energy economy, armament and transportation, as driving forces for future development. A tremendous gas pipeline was built along the bot-tom of the Black Sea leading to Turkey, the shipping route through the northern Arctic Seas was modernized and the entire track of the Trans-Siberian Railroad was electrified.

On the other hand, these successes were the consequences of the state's excessive involve-ment in economic policy. The initiative for the flourishing of the free market economy has to be developed from the bottom. It is clear that there are deficits in this area. The most liberal economic reform program in Russian history, which was passed in 2001, was only imple-mented with difficulty. The key law that legal-ised private ownership of land after almost 80 years of Communism, was watered down, government bureaucracy hardly decreased. Though more financial aid flowed into the justice system and a new penal code was passed, the corruption in the courts, especially on the local level, prevented the breakthrough to a rule of law. The banking reform was postponed to the year 2005, the de-monopolisation of Gazprom and other natural monopolists was deferred, the promised laws for the sup-port of the middle class were hardly put into effect and the socially explosive communal reform was not even approached.

Though Russian capital held overseas flowed back into the country in large amounts, the widespread corruption prevented the foreign investments that were hoped for.

The initially proclaimed fight against the oligarchs turned into a farce. The oligarchs that had risen under Yeltsin, were, after initial dif-ficulties with the tax inspectors, able to hold the bastions they had conquered in the 90s. An initiative of the Presidential Administration to put some strategically important industry branches partly under state control was re-jected by the mighty oligarchs. Even the at-tempt of the High Audit Office, led by former Premier and Interior Minister Sergei Stepashin, to thoroughly inspect some of their financial empires, failed. Putin's economic advisor Andrei Illarionov recently called the oligarchs the biggest danger to Putin's reform politics. The gubernatorial posts in the provinces are almost all in the hands of influential industrial and financial groups, seats on the federal and regional level are partly bought.

In the biggest Russian province of Krasnoyarsk, a protg of the muscovite industrial-ist Vladimir Potanin won the gubernatorial election. In the privatisation of the state-held Russian-Belorussian oil company 'Slavneft', the company 'Sibneft', headed by Roman Abramovich, was able to outdo all of its com-petition, although Putin and his St. Petersburg team had supported the rivals of 'Sibneft'.

Now the financial empire of Abramovich, who himself is the Governor of Chukotka, is trying to gain control over the electricity monopolist RAO EES, which is in line for privatisation. Putin's team managed to prevent the complete takeover of Aeroflot by Abramovich`s 'Sibneft'. If political and economic power return to the hands of the oligarchs, Russia might possibly degenerate into a mafia state. The Russian oligarchs are not on friendly terms with one another, but in times of emergency, when a common enemy pops up, they quickly close ranks. This could happen if there are disputes between the oligarch empires and the Putin administration over the privatization of the remaining assets of the former Soviet Union.

An overwhelming burden in Putin's domestic politics remains the unsolved Chechen prob-lem. The horrific acts continue on both sides. The Chechen rebels continue to be successful in luring Russian troops into ambushes. On the catholic day of Christmas, Chechen suicide bombers blew up the main building of the local authority. After the terrifying hostage crisis in Moscow, the Kremlin had at first threatened to adopt even tougher military measures on the separatist Republic, but now Putin is looking for a political solution.

A constitution accepted by referendum is sup-posed to give the Chechens the highest degree of autonomy possible, without allowing them to leave the Russian Federation. A new Chechen leadership is supposed to be elected as well. It is once again corruption that makes it difficult to end the war. Corrupt military staff as well as bandits on the rebels side are making a fortune in the war and are not interested in stopping the fighting. The directors of the war are accordingly located somewhere in mafia circles in Moscow. If Putin cannot stop them, he will not be able to overcome the conflict. In Russia many people seem to ask themselves how it was possible for 60 heavily armed Chechen terrorists to occupy the cinema Dubrovka in a surprise raid last October.

Prognosis and Scenarios

Putins priorities in 2003 will lie in the further strengthening of state power, in order to push through the politics of modernizing Russia against all inner resistance. The system of 'guided democracy' should get stronger, even at the cost of a civil society, the creation of which is not considered a current priority of Kremlin politics. But there will be limits set to the vertical expansion of power, as well as in the fight against organized crime and corruption.

Even under Putin contract killings could not be prevented. The governor of the far eastern region of Magadan, Valentin Svetkov, was just recently gunned down on the street in Moscow.

The economic situation should continue to improve in 2003, because it is unlikely that the global price of oil would drop disastrously. Russia could initially even improve its export abilities under the protective wing of the anti-terror alliance. But prior to joining the WTO, painful domestic reforms like tariff hikes, which are socially highly controversial, will be unavoidable. In the election year Putin will do without any shock therapy. He will come to an arrangement with the powerful oligarchs and governors before the parliamentary and presidential campaign, as he must prevent the powerful industrial and financial groups from creating an alternative to him. This means that he can not cut their privileges and must hope that they will undergo a voluntary process of self-cleansing, due to the simple fact that transparent and uniform rules will contribute to the long-term strengthening of the Russian market, which is something they will profit from as well.

Putin's pro-western reform course does not seem to be in danger today. In the face of problems, Putin always seems to be good for a surprise. In the recent past he has often made strategic decisions against his own elite (pledge of support to the U.S. on the 11.9.01; veto against the restrictive press-law in November 2002), which were obviously made from his own conviction not to throw Russia off its reform course.

There is little doubt that Putin will be reelected in the spring of 2004. After that he will how-ever have to clarify where he stands and sacrifice his current policy of balance for a concrete sense of direction.

The liberal forces hope that the President will shake off the inherited problems from the Yeltsin-era in his second term of office and that he will become a true liberal reformer. The conservative forces in their turn believe that the President should use his acquired economic power to put Russia back on the world stage as a superpower.

Russia continues to be dogged by a host of controversial issues- the degree of Western orientation, the suitability of the Western value system for Russia and the scope for reconciling these to the unmistakable primary goal of Russian politics: the reconstruction of Russia as a major power.

The situation in Russia remains suspenseful. If one unleashes ones fantasy and dares to look into the future, one of the three following variations on Putins era might be written in history books one day:

Putin came to power in 1999 due to a political intrigue of Yeltsins. He was supposed to secure the established ruling system of the oligarchs with lasting effect, but at the same time keep Russia on a course of reform. Putin first tried to implement a policy of order with the help of the power ministries and control under his command, in order to modernize Russia according to the standpoint of the market economy and integrate Russia into the global community. In his first term of office he strengthened vertical power and accepted the weakening of democratic institutions. In real-ity, Putin was never able to free himself from his dependency on the oligarchs, who only supported his reforms in part. In Putin's second term of office there was another delay for the reforms, which resulted in slowing down the integration of Russia into the global economy and into its democratic system of values. Putin's successor was again implemented by the oligarchs.

Putin came to power in 1999 due to a coup staged by the Secret Service. He was supposed to put an end to the political anarchy and corruption of the Yeltsin regime and modernize Russia. After a bitter battle against the oligarchs, the former Soviet bureaucracy and Communist opposition, Putin was in his second term of office able to achieve a break-through to the market economy and a working legal system. The conservative forces were marginalised and the oligarchs forced to un-dergo a process of civilization. Through the broad opening of the Russian market, Putin won the political and economic support of the West, which strengthened the liberal forces in Russia. Russia was able to integrate itself in the global economy and became an associated member of the EU and NATO. Putin left his successor a country with a healthy economy, but with democratic deficiency symptoms.

Putin came to power in 1999 due to the successful reconquering of Chechnya. His politics were marked by cool pragmatism. Through cunning offers to the West, it was possible for him to gain the support of the industrial nations for his course of modernization. Broadly supported by the population, he managed to build up an authoritarian presidential system. The democratic institutions of the Yeltsin era were sacrificed for the goal of Russias resurrection to the status of a world power. Separatist movements were forcefully fought and attempts were made to tie the CIS countries closer to Moscow. The Russian constitution was changed in order for Putin to be able to stay in office beyond the end of his second term. Towards the end of his second term in office, Putin's partnership with the West was again questioned.

Copyright 2003 Krber Department Russia/CIS. Joint Venture of the Krber Foundation, Hamburg and the Research Institute of the German Council on Foreign Relations, Berlin. Program director: Alexander Rahr (ar). Address: Rauchstrae 17-18, 10787 Berlin; Tel.: 030/254231-54(-68 Fax); gus@dgap.org. Internet: www.dgap.org

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