With the inauguration of Vladimir Putin to the Russian presidency on May 7, 2012, Russia’s leading entrepreneurs instead of restoration of political stability can see their investments and corporate assets exposed to growing political risks.
In the fall of 2011, the country’s middle class together with diverse opposition forces and a bohemian circle of writers, singers and prominent journalists, challenged the corruption of the electoral process in Russia which led to the questionable victory of the pro-government United Russia Party following parliamentary elections. Most importantly, the opposition rallies in Moscow questioned Mr Putin’s ability to deal with Russia’s archaic and non-transparent political and economic system.
He responded with promises of extra public spending and genuine competitive elections while painting a gloomy picture of political chaos if he was forced out. Ironically, Russia’s highly divided opposition movement and a nascent middle class, so vocal during the recent public demonstrations in Moscow, are not the real threat to Vladimir Putin’s rule. His two biggest challenges in the next two years will come from growing divisions within the political and business establishment as well as potential new waves of mass discontent with unpopular economic reforms in Russia’s big industrial centres. As a result, even if Putin manages to reach his short term objective of restoring stability through political reforms and additional public spending, he may find it highly problematic to be able to retain power beyond 2014.
The planned reforms of the domestic pension, educational systems and budgetary organisations seek to decrease government spending and facilitate greater economic stability in the country. In reality, however, these reforms could lead to a considerably larger wave of widespread mass protests in comparison to last year’sMoscowrallies or the social upheaval of January 2005 which was caused by the monetisation of social benefits reform. The combination of Russia’s WTO membership and the prospective liberalisation of domestic gas prices could also have a negative impact on the big industrial centres of the country which traditionally benefited from government protectionism. Although these reforms and policies are vital for Russia, their timing and sequencing may prove politically unstable.
As a result, Putin’s position in 2013-2015 could ironically be a replay of the presidency of Boris Yel’tsin during 1998-99 when key elite groups led by regional governors and oligarchs tried to influence Yel’tsin’s succession. In the case of Vladimir Putin’s third presidential term, diverse interests within Russia’s business establishment are likely to play the main role in facilitating Putin’s departure and succession.
Big business and the growing political risk.
The key dilemma for Russia’s billionaires is how to safeguard their assets in a politically volatile environment. Although twenty years have passed since the collapse of Soviet communism, property rights are still not protected in Russia. The country’s businesses, big and small, are still exposed to a highly corrupt legal system, arbitrary executive power and non-transparent political structures. Moreover, Russian companies are often compelled to regularly contribute a large share of their gross profits to corrupt payments to the domestic regulatory, security and law enforcement agencies. In the 2000s, in order to ensure long-term protection of their investments by the international legal system, Russian billionaires increasingly started to rely on protection through partnerships with leading foreign investors (as was the case of the Russian-British joint venture, TNK-BP), and elaborate offshore ownership structures including Western contracts. However, following the Yukos affair, leading Russian entrepreneurs opted to limit their political risks through good personal relationship with Vladimir Putin.
In 2000-2008 Putin’s ‘power-vertical’ of centralised decision-making and high popularity ratings made him politically invincible. At the same time, rising global oil prices gave him domestic credibility as an “effective economic manager” and boosted his confidence in international affairs. Since party politics and democratic legislative structures were of no importance, Vladimir Putin emerged as the only force in the Russian political system that could maintain its stability. Naturally, such a system lacks an institutionalized mechanism for the succession of political power, transparent interactions between economic and political players and long-term protection of property rights. As a result and ironically, the leader, who no longer enjoys high popularity ratings and could no longer rely on the highly-corrupt law enforcement apparatus to stay in power, becomes the system’s main liability in the eyes of the elites.
Putin’s tarnished image and the loyalty of elites.
Putin’s primary problem has been a loss of his credibility as a leader of national unity who can effectively fight widespread corruption, modernise and diversify the economy, promote social mobility and deal with growing social inequality. Moreover, Dmitry Medvedev’s interim presidency, despite the limited impact of most of his policies, has created certain expectations of change not only within the society, but also among the modernising segments of big business. In this respect, the return of Vladimir Putin to the Russian presidency has become associated with a return to stagnation, not stability.
Although, in the fall of 2011, Putin averted political confrontation by allowing mass protests to run unhindered in Moscow, his condescending comments about the opposition rallies tarnished his image as a confident political leader. Moreover, public remarks, by the head of the Russian Orthodox Church, Patriarch Kirill, urging Putin to treat the opposition with respect further undermined Putin’s position as an unchallenged ruler. In a surprising coincidence, Patriarch’s comments were immediately followed by a widespread campaign against him accusing him of living a lavish life-style and benefiting from government quotas for alcohol and tobacco imports and oil exports in the 1990s. The Patriarch responded with a full backing of Putin’s presidential bid while undermining speculations about Putin losing the support of powerful members of the Russian elite.
Putin also appeared to be particularly worried that Russian billionaires would start financing the opposition movement in order to protect their assets during politically unstable times. He chose a simple but seemingly effective strategy to secure the loyalty of the entrepreneurial elite. In February 2012, he suggested that Russia’s big business should expect to pay a one-off windfall tax on the assets originally obtained during the “unequal privatisation” of the 1990s. At first glance, Putin’s idea appears to be aimed at fulfilling his electoral promise of providing extra public spending while calming social instability and appeasing communist and nationalist groups within the opposition movement. In reality, however, Putin merely used the windfall tax threat to ensure the loyalty of big business during the presidential electoral cycle and the growing political protest. In this context, Putin’s message to Russian billionaires was simple: “support the opposition at the peril of losing your assets”.
Further, Putin’s economic populism and political rhetoric, questioning the legitimacy of Russian privatisation in the 1990s, could make the earlier privatised assets even more politically toxic and expose them to further arbitrary demands. Putin’s windfall tax idea has already created rifts within the domestic corporate and political establishment and has been criticised by former minister of finance, Aleksei Kudrin, and Russian billionaires, Mikhail Prokhorov and Vladimir Potanin, as dangerous for the country’s investment climate as well as undermining the protection of property rights in Russia. Even if the Kremlin decides to abandon the tax as too divisive for the elites, it will be difficult to prevent the debate on unequal privatisation of the 1990s from dominating the domestic political agenda in the future.