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Wednesday, March 05, 2008

The Economist Rips Putin a New One

The Economist devotes it's most recent issue to "the trouble with Russia's economy." It includes a long feature on the "smoke and mirrors" Potemkin Village created by proud KGB spy Vladimir Putin, as well as the following leader reviewing the "election":

Most elections have an element of uncertainty about them. Not Russia's. This weekend, barring a miracle, Dmitry Medvedev, Vladimir Putin's handpicked successor, will win the Russian presidency by a landslide. The emasculation of the country's fragile democracy—from the Kremlin's monopoly over television to the crushing of any serious opposition candidates—is enough to ensure that. But so is Mr Putin's popularity: he enjoys an approval rating above 70%.

This figure is artificially exaggerated, as is to be expected in a country with no democratic tradition, almost no free media and no independent power centres. But there is little reason to doubt that many, perhaps most, Russians are satisfied with Mr Putin's apparently successful eight years in office and willing to accept his choice of Mr Medvedev. Yet Mr Medvedev's chances of maintaining this level of satisfaction seem remote.

Mr Putin's reputation rests on four chief claims advanced by his supporters, both at home and abroad. The first is that he brought political stability after the chaos of his predecessor, Boris Yeltsin. Second, he imposed peace in Chechnya and across the north Caucasus. Third, he restored Russia's rightful position as an influential world power. Fourth (and most important), he presided over sustained rapid economic growth and a sharp rise in Russians' living standards.

Claims of Straw

Yet a closer look reveals big flaws in all these claims. Russia's purported political stability rests on a perversion of the normal meaning of democracy and an excessive concentration of power in the Kremlin that has wiped out regional autonomy and fostered corruption, thought by businessmen to be worse now than in the Yeltsin years. The so-called peace in Chechnya has been won by handing control of the republic to a former rebel, Ramzan Kadyrov; the rest of the north Caucasus is more troubled than ever (see article).

As for rising influence and higher living standards, both depend critically on the economy, which Mr Putin touts as his proudest achievement. Average annual growth rates for GDP of 7%, and for real wages in double digits, are certainly impressive at first blush. And it is true that, from early in his presidency, Mr Putin did much to restore macroeconomic stability through fiscal and monetary discipline and the appointment of liberals to the main economic posts—though, given Russia's debt at the time, he had little alternative. Even so, during the Putin presidency growth has been lower than in most other ex-Soviet countries. Moreover, it has relied heavily on surging commodity prices, especially for oil and gas (see article).

Russia's consumption splurge has, in short, been driven by a natural-resource boom. The competitiveness of the non-oil economy has eroded sharply since the devaluation of 1998. The concept of manufacturing for export scarcely exists, outside the arms industry. By the end of his first term, Mr Putin had abandoned most of his tentative attempts at economic liberalisation. Worse, the long-drawn-out Yukos affair, which began in mid-2003, presaged not only an assault on property rights and the rule of law but also a resurgence of state control over, and interference in, the economy. Russia's own history offers powerful testimony of the harmful effects that state intervention tends to wreak.

Even macroeconomic stability, the final legacy from Mr Putin, is under threat. Inflation has already crept up to double figures. It could rise further if the government gives way to growing pressure to spend more from the stabilisation fund, which has so far acted as a useful absorber of oil-and-gas revenues. The trade balance is deteriorating as imports boom. A weakening world economy will not only soften demand for primary commodities, but may even lead their giddy prices to fall.

A grim inheritance, Dmitry

In retrospect, Mr Putin was lucky to inherit a recovering economy and an incipient oil- and commodity-price boom from Mr Yeltsin. Mr Medvedev is in a much worse predicament. He will find it far harder than Mr Putin did to do his job as president at the same time as retaining the support of ordinary Russians. He will take over weakened institutions and a cash pile that promises nothing but headaches as people fight to spend it. The economy is simultaneously overheating and facing the threat of imminent global slowdown.

Mr Medvedev is a canny lawyer who owes his political career entirely to Mr Putin, for whom he worked in St Petersburg in the early 1990s (see article). He comes with two points in his favour: unlike Mr Putin and most other cronies in the Kremlin, he has no background in the security services, not least because he is too young (just 42) to have worked for them in Soviet times; and, as he has confirmed in two recent speeches, his instincts are to favour liberalisation and a reining-in of the state's role in the economy. Unfortunately, his failure to reform Russia's gas monopoly, Gazprom, when he was its chairman, offers less reason for hope.

Worse, Mr Putin will probably still be around as prime minister (he stood down as president only because the constitution sets a limit of two consecutive terms). Nobody can predict exactly how this duo will work, although Mr Putin has made it clear that he intends to be highly active, not least in foreign and defence policy. For his part, Mr Medvedev has promised to stick to the “successful” policies of his predecessor.

In some countries, a division of power might be welcome, not least to avert the risk of too much accruing to one man. But in Russia, where the notion of a tsar survived the Soviet Union, divided power is usually problematic. Maybe Mr Putin will slowly fade out, building up Mr Medvedev as a strong successor. More likely, either Mr Medvedev will be a figurehead atop a strong Putin government, perhaps an interim leader before Mr Putin returns as president; or he (and those around him) will set about using the president's immense powers to try to sap Mr Putin's strength. Either way, a double-headed government promises to be a source of extra instability. At a time when the challenges for the next president are harder than ever, that is the last thing Russia needs.

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