Vladimir Putin has returned to the post of president, with the official result of 63% of the vote, a set of unprecedented social promises, and without a clear program for the economy. According to IMR’s Pavel Ivlev, the shape of the economic policy in Putin's third term is one of the greatest controversies of this political season.
The outlines of Putin’s new, third term (although it wouldn’t be a stretch to call it a fourth term) policy will begin to appear with the new government appointments, which will be made once Putin has assumed office, in May of this year. However, we may already begin to analyze how the policy will develop. We can do this by looking at the relationship between the three groups whose interests will determine its shape.
Over the past 12 years, Vladimir Putin’s economic policy has been formed by the rivalry between three central ideological camps. Each of these has been represented in the administration, the Kremlin, or in both places; each had its own range of powers, all of which stem from personal relationships with Putin.
Contention regarding the approach to building an economic policy began with the sharp rise in world oil prices during Vladimir Putin’s first presidential term. The real battle was over the best way to incorporate the flow of petrodollars into the Russian budget. This led to the formation of two of the three camps: the so-called stability camp, primarily comprised of the Ministry of Finance and Alexei Kudrin; and the growth camp, made up of the Ministry of Economic Development, which was initially represented by German Gref, and then by Elvira Nabiullina. Putin’s second presidential term saw the rise of the third camp, the executives' camp. Each of these proposed their own versions of how the new funds should be used, keeping in mind the various business interests associated with their own.
Growth camp (left to right): German Gref, the first Russian Minister of Trade and Economic development; Elvira Nabiullina, who took over his post, and is a current member of Skolkovo Innovation Center Foundation's Board of Trustees; and Mikhail Fradkov, the former Prime Minister of Russia, current Chief of the Russian Foreign Intelligence Service
The first group had always favored the maximal stockpiling of reserves in sovereign wealth funds, a conservative budget policy, controlled growth of expenditure, and limited tax reduction. Essentially, this was the policy of the Ministry of Finance, which had the political support of Vladimir Putin. The growth camp had much broader interests. Its ranks included the Ministry of Economic Development and Trade, industry ministers, and it also had the support of a large number of the elite. One of its active leaders was Prime Minister Mikhail Fradkov, who, with the support of the majority of ministers, business leaders, and the United Russia party, insisted on VAT reduction and compensation for reduced revenue from the Stabilization Fund.
After Dmitry Medvedev was elected president, the growth camp was represented in the Kremlin by presidential aide Arkady Dvorkovich, who regularly butted heads with the Ministry of Finance and Kudrin personally. Currently, the future Prime Minister Dmitry Medvedev is moving to the growth camp. As Vladimir Putin confirmed two days before the presidential elections, Medvedev will be appointed Prime Minister. The idée fixe of the growth camp is modernization and securing millions in funding for numerous projects including the Skolkovo Innovation Center, development institutions such as the Russian Venture Company, and nanotechnology industries.
Growth camp vs. stability camp (left to right): the presidential aide Arkady Dvorkovich vs. Alexei Kudrin, the former Minister of Finance
Finally, there’s the third camp, the interventionists. If the growth camp proposes to spend money on modernization and infrastructure projects while carrying out market reforms at the same time, the interventionists are in favor of having the money spent by major state-owned enterprises in the mechanical engineering, energy, and heavy industries. This group started to form in 2005-2006, right as there was a boom of state-owned enterprises. (In Russia, major state-owned corporations exist as a special category of nonprofit while actually conducting commercial activity).
How did the enterprises come into being? First, under dubious auspices, Rosneft took over Yukos’ main oil-producing enterprise, Yugansknefetgaz. Then the so-called “institutions for development” began to appear, i.e. the Institute of Economics and Industrial Engineering, the Institute for Innovative Development, and others. These were the organizations through which the government was planning to finance projects significant to the economy via public-private partnerships.
The ideologues and active members of the executives' camp include Igor Sechin (at that time the deputy chief of the presidential administration, now a deputy prime minister); the head of Rostekhnologii Sergei Chemezov, who had served with Putin in East Germany; and the Kremlin’s current Chief of Staff, Sergei Ivanov. The central objective of this group is directing resources towards building up the assets of state-owned enterprises and realizing politically-significant projects such as the construction of oil pipelines, Olympic facilities, as well as preparations for the Asia-Pacific Economic Cooperation Summit (APEC). Naturally, all of these projects would be overseen by members of the interventionist camp. The fuel and energy complex and industry leaders favor Russia developing as an energy superpower that relies on powerful state-run corporations.
Executives' camp (left to right): Sergei Chemezov, head of Rostekhnologii, and Igor Sechin, deputy Prime Minister
The international economic situation had augured favorably for the growth and executives' camps. That is, until the crisis of 2008-2009 had a dramatic effect on the situation. The government was forced to cut spending and budget deficits appeared. However, it seems that the time of plenty is returning along with Vladimir Putin as President. Now the main danger is an increase of ineffective spending, a dearth of structural reforms (because who needs structural reforms when everything is so great?), an increase in red tape, and with it, in corruption and the siphoning off of funds.
So, what does the future hold for the ideological camps that determine Russia’s economic policy?
The stability camp’s position will most likely remain unchanged. Although it recently lost its politically influential leader Alexei Kudrin, the faction has generally maintained its relevance. The objective situation and common sense favor the stability camp’s fiscal conservatism. It ought to be mentioned that Putin has always understood this, hence his support of the Ministry of Finance, which made it possible to maintain a strict budget and keep petrodollars in sovereign funds despite powerful pressure from lobbyists and populists. The importance of this policy was reflected in the Fitch Ratings agency’s assessment of March 5th, 2012, the day after Putin was re-elected. According to their report, Fitch Ratings stated that they would lower Russia’s credit rating if following Putin’s anticipated victory, the authorities did not “reform the Russian economy and hasten fiscal consolidation.” “Putin made large spending commitments prior to and during his election campaign, while members of the government’s economic team recommended fiscal consolidation,” says the report. Furthermore, the agency noted that in Putin’s coming six-year term, the increase in wages, pensions, subsidies, and military spending may come to $160 billion, or 8% of the projected GDP. “We have previously said that a failure to make progress in reducing the non-oil and gas fiscal deficit back down towards its pre-crisis target of 4.7%, is one of the factors constraining Russia’s rating at ‘BBB’.”
The threat of international financial crisis and the unpredictable situation on world markets plays into the hands of the stability camp. The political and administrative influence of this group will now depend on who becomes the Minister of Finance, whether he will also keep the position of deputy prime minister, and finally, whether the Chairman of the Central Bank Sergey Ignatyev will remain in his post. Ignatiev is another staunch supporter of the stability camp. Nonetheless, the possibility of Kudrin replacing Ignatiev has been seriously discussed in the Kremlin.
Favorable world energy prices work against the aspirations of the Ministry of Finance. Prices once again being high spurs on the ambitious plans of the growth and executives' camps. The former has essentially lost its leader since Dmitry Medvedev has left the Kremlin and moved into the administration (but more importantly, since his political position has weakened considerably). Medvedev had previously been an active—albeit not very successful—advocate for allocating funds towards innovation and modernization.
Despite the politically weak position of the growth camp, it is this group, as represented by the Ministry of Economic Development, that is now preparing the future program for the new cabinet alongside a team of leading Russian economists. Judging by the leaks from within the government, the Ministry of Economic Development is revving up to deal a powerful blow to executives' camp's ambitions. The ministry has supported a proposal to essentially ban state-owned enterprises and banks from acquiring new assets. New regulations would require such acquisitions to be approved by the head of state, who is currently Dmitry Medvedev. Head of the Ministry of Economic Development’s Property Relations Department Alexei Uvarov has promised that the corresponding draft law will be prepared by the end of March.
The growth camp today (left to right): Dmitry Medvedev, president and the future Prime Minister of Russia, and Alexei Uvarov, head of the Ministry of Economic Development’s Property Relations Department
“Otherwise, what’s the point of privatization? We sell some companies, and others expand,” he told Vedemosti. Incidentally, the scale of privatization is another source of conflict between the growth and interventionist camps. The Ministry of Economic Development is in direct opposition to the position held by Sechin, who proposed that Putin postpone the privatization of major energy companies indefinitely.
With the election of Putin, the "executives" have a chance to maintain their position at the very least, or even to strengthen it. As for the growth camp, it is still a group of analysts that launches an endless number of “programs” that have nothing to do with real state policy. In fact, everything proposed by them has either stalled in the negotiation phase or been blocked by Sechin personally.
Regardless of what post Igor Sechin holds in the new administration, he will probably remain a key figure with a great deal of influence over industrial policy. It is important to understand that in Russia, the formal and informal status of the figures affecting economic policy differs considerably.
For example, the first deputy prime-minister Viktor Zubkov has never wielded anything close to the influence over the choice of priorities for the economy policy as first deputy prime-minister Igor Shuvalov. Zubkov was sent to the agro-industrial complex, which is traditionally considered to be a dead end, while Shuvalov was put in charge of key areas of economic policy. Apparently, Zubkov lags considerably behind Shuvalov. He was sent to the dead-end and given a position on the board of directors of Gazprom: what influence can he have from there? Alexei Kudrin was generally more influential than Prime Minister Mikhail Fradkov, who was merely a figurehead.
Igor Sechin is Putin’s close ally, and as long as Putin is at the top of the power structure, Sechin will remain enormously influential. Today, Sechin is in charge of the fuel and energy complex in the cabinet. He also informally controls the activity of such major energy companies as Rosneft and Inter RAO UES. Putin has an interesting decision ahead of him: should he move Sechin into the presidential administration, or to let him stay at him post in the cabinet of ministers? In the administration, Sechin would have to work “under” Sergei Ivanov, which will disrupt the existing informal chain of command – Ivanov lags far behind Sechin in the hierarchy of Putin’s friends. The second option is no less problematic. In the cabinet of ministers, Sechin will have to work “under Medvedev,” whose presidency was actively opposed by Sechin in 2007.
None of these options would diminish Sechin’s having Putin’s ear, rendering his formal post nearly irrelevant. In the end, Sechin will continue to influence industrial policy, remaining the key interventionist within the Russian power structure.
Also in the "executives’" favor is the fact that the head of the presidential administration is Sergei Ivanov, another close ally of Putin, who oversaw the operations of the United Shipbuilding Corporation and the United Aircraft Corporation. Ivanov met Putin at the Leningrad department of the KGB, where he was sent after graduating from the KGB Academy in Minsk.
Left to right: Chief of Staff for Dmitry Medvedev's presidential administration Sergei Ivanov and the once-again President Vladimir Putin
However, Ivanov’s role should not be exaggerated: since 2008, Ivanov, who in the period of Putin’s second presidential term was seen as a likely successor and Medvedev’s rival, has seen his position fall considerably. In the role of head of administration, Ivanov will probably become a confidante of Putin’s who does not intervene in the real affairs of the state. (We should remember that Ivanov did not participate in making the lists of candidates for positions reserved for members of the government on corporate boards this past January.)
In the absence of a strategic program for the future of the economy, economic policy will continue to be written “manually”; decisions will be made based on ongoing rivalries between the three centers of influence, where the balancing role will be played by the stability camp and Putin personally, using his party as support.
Putin already has experience with this manner of governing from his second presidential term. The result was incompetence: because of constant in-fighting, all the reforms that were scheduled in the early 2000s were put on ice, decisions that were vitally important for the country were postponed for years, and Putin gained the reputation of the president of missed opportunities.
On March 4th, Vladimir Putin got a second chance. But if he’s still playing the same old game with the same old key players, how will he be able to avoid being the president of irrevocably lost hope? Will long-term plans for development finally beat out the short-term goals of siphoning off funds?
