Mikhail Rostovsky
PUTIN CABINET GRAPPLES WITH "IMPORTED" CRISIS
"This is not about the negligence of individuals, it is about the negligence of the whole system. A system that is incapable of providing leadership and even making absolutely vital decisions to overcome crisis phenomena." Prime Minister Vladimir Putin thus squarely and bluntly put all the blame for the storm in the world economy on Washington. But while "the house that Bush built" is no good, what about the house that Putin built? Pampered by sky-high oil prices and an upturn in the world economy, the political and economic system created by Putin appeared to be relatively effective. But will it be as competitive when the world is heading for trouble?
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As hordes of experts, government ministers, presidents and other professional analysts have discovered, making forecasts in the early stages of a massive crisis is a very thankless task. However, the very first weeks of the "great economic earthquake 2008" have highlighted the strengths and weaknesses of the Putin-Medvedev model of running the country.
STRENGTH
On the surface, the White House (the seat of the Russian Government) still looks like a stirred anthill. Putin's own office has been repaired, but as recently as a couple of weeks ago, one could see cardboard boxes stacked in the main entrance to the Government House. A refurbished dining room was recently inaugurated with a lot of fanfare. To emphasize the pomp and circumstance of the event, First Deputy Prime Minister Igor Shuvalov cut the ribbon and shared a several-course meal in the company of Ms Mukhomedzhan, the chief of his staff. However, many of the middle-level "apparatchiks" who have come to the Government together with Putin still feel shocked by the manners of the local staff. "The staff is as rude in the cafeteria as in the worst of the Soviet times. Also, it takes several weeks to get your office hooked up to the Internet. It's a ‘Slough of Despond'," one of them complained.
The government mechanism is not running smoothly. Until very recently, Mr Putin tried not to spend more time at the White House than necessary, and devoted himself entirely to performing his leading functions. As a result, two parallel chains of command emerged inside the building. "Shuvalov makes not only operational, but also operational-tactical decisions," says a source close to the top of the Cabinet, "but the Government staff does not report to him. The net result is that Shuvalov works with the ministries and Deputy Prime Minister Sobyanin, with the Government staff".
Setting aside details and trivia, the White House incumbents have something to be proud of in the short term. In September, all the top members of the government staff were given new official portraits of the country's leader. For the first time in history, it is a double photo, in which Medvedev is pictured cheek-to-cheek with Putin. If political scientists are to be believed, such undisguised "dual power" is a sure recipe for disaster.
The early months of Medvedev's presidency, however, seem to belie this conclusion: for the time being, the "double-headed eagle" method of running the country seems to be working. Yes, the Prime Minister and the President do not always see eye-to-eye. This paper knows of at least one instance when V.V.P. blocked the appointment of a St Petersburg heavyweight to the post of Deputy Minister, after he had been approved by Medvedev. True, the relations between the two retinues often resemble the "friendship" between the Musketeers and the Cardinal's Guard from a famous novel by Dumas. Indeed, the people surrounding one member of the ruling tandem came up with a pretty insulting nickname for the other co-ruler. However, no one can cite any signs of a major cleavage between the Medvedev and Putin camps.
"Our mechanism of making key decisions is working far more effectively than in the U.S.," a marginal member of Medvedev's retinue brags. The circle of people who have a say in decision-making is much smaller in Russia. "The people within the circle" know very well what resources they have and what goals they must strive to achieve. And, most importantly, perhaps, the decisions taken correspond to the personal interests of the decision-makers. The current crisis has cemented the elite. Why lock horns if it is much easier to stay afloat together?
A leadership speaking with one voice is by no means always good news for the ordinary folk. In this case, however, the lack of squabbling at the top has benefited everyone. The above mentioned source close to the top of the government recently made a paradoxical observation: "Fluctuations of oil prices are the result of a mass psychosis. There is no economic justification for this or that price of ‘black gold'. It is all about speculative shifts."
Still, the jitters impact not only oil prices, they also awaken the herd instinct among the citizens. Several days ago I caught an economic expert close to the Government in a very worried state: "Most people are aware that there is something wrong with the economy, but they don't understand exactly what it is. Considering our traditional proclivity for gloom and doom, a run on bank deposits may begin any day now. You are telling me that the country has huge financial reserves? As soon as these reserves are touched a massive panic may ensue."
The apocalyptic forecast has not yet (?) come true. The reason is not only the actions, but also the configuration, of power. V.V.P. staying in the driver's seat after his presidential term may be at odds with the spirit of the Constitution, but for the time being, Putin's position as Prime Minister and his peaceful coexistence with Medvedev are the cornerstones of psychological and indeed economic stability. As a major expert not noted for being sympathetic towards V.V.P. remarked, "Putin is still the pivot that sustains the whole system of running the country."
With the roles clearly defined at the very top, they can be defined just as clearly at the level of the Government's economic team. It is no secret that Economics Minister Elvira Nabiullina and Finance Minister Alexei Kudrin have been engaged in a long-drawn out ideological dispute. Ms Nabiullina is convinced that only a tax cut, notably a cut of the value added tax (VAT), could breathe new life into the economy. Kudrin, as the "chief treasurer", is fiercely opposed to the idea, and the ministers and vice premiers have been unable to resolve the dispute. The official head of the Government's economic team, Mr Shuvalov, seems to be leaning more towards Nabiullina's viewpoint, but Kudrin does not regard Shuvalov as his boss.
Medvedev's recent order to put the issue of the VAT tax cut on hold until 2009 does not resolve the dispute or signify that Nabiullina has lost. A prominent member of that camp told me that only the easing of the tax burden next year could ensure at least some economic growth without spurring inflation. The President's edict has, however, enabled the ministers to concentrate on more pressing matters. The main parties involved in the dispute - Shuvalov, Kudrin, and Nabiullina, plus Central Bank Chairman Ignatyev - today form the backbone of the unofficial government crisis management headquarters.
Among other senior Cabinet members, Igor Sechin, formerly the main "Kremlin silovik" and now Deputy Prime Minister in charge of the fuel and energy sector, has made an impressive showing. "Mr Sechin quickly solved the problems of interaction with the OPEC oil cartel, protected the interests of the oil sector in its face-off with the Finance Ministry and took a firmly pro-market position," an influential liberal close to the Government told me with undisguised surprise. As for the former Premier Zubkov, he is Putin's First Deputy largely in name.
Be that as it may, the interim results of the Putin Cabinet's work could have been worse. The trouble is that in politics, like in sports, it's the final results that count...
WEAKNESS
Experts on social security matters looked forward to August 11, 2008 with ill-concealed impatience. A short while earlier, the Modern Development Institute presented the Chairman of its Board of Trustees, Dmitry Medvedev (who doubles as President of the Russian Federation) with a blueprint for a drastic reform of the healthcare system. On that day, Medvedev was to meet with the "Institute colleagues" to discuss the details of the proposed reform. Then, with the meeting only several days away, Saakashvili's army invaded South Ossetia. Naturally, the palaver with social security people was postponed indefinitely.
Last week, the Cabinet revisited the much-touted Putin programme of breakthrough reforms known as Plan-2020. However, considering the current economic situation, talk about structural reform in the social sphere is quickly losing its relevance. Most experts in and outside the Government agree that we have not yet seen the worst of the world crisis. Things in the West may take another turn for the worse before the end of this year, or in 2009. And even though Russia has been described as a "safe haven", its chances of becoming a modern-day economic "Noah's Arc" are nil.
Of course, it is encouraging that this time around, problems have stemmed not from our own mistakes, but from those of foreigners. Still, this is only part of the truth; alarming phenomena in the Russian economy had begun before the American financial crisis. In the first half of 2008, food prices in Western Europe rose by an average 5%, compared with nearly 20% in this country.
The same "pre-crisis" six months of the year saw wage cuts in six important Russian regions. Even the seemingly forgotten phenomenon of wage arrears is reappearing in our country.
In spite of all the social initiatives launched by the Government in recent years, the average death rate per 1000 was higher in the first half of 2008 than in the same period of the previous year.
It would be more than simplistic to try to reduce all these mirthless and diverse phenomena to a "common denominator", but there is actually something that connects them. The current decision-making system, of which the Kremlin and the White House are so proud, has a down side.
The fact that decisions are made by a narrow circle of people who are not accountable to anyone increases the probability of mistakes many times over. The bottom line is that such a vast country as Russia is under "manual control", and we are now seeing that there are limits to the effectiveness of such an approach.
The authorities recently decided to protect the banking system from the crisis, but what happened next was a "clotting of blood vessels", to use medical jargon. The money allocated by the government settled in major banks, despite the fact that the default crisis is fueled mainly by the lack of money "in the provinces".
Before he flew to the Far East as part of Medvedev's team, First Deputy Prime Minister Shuvalov confided to his aides that he had a very vague idea about what the region's development strategy should be. This is a strange statement coming from the First Deputy Prime Minister, especially given that about 100 million roubles had been earmarked for a comprehensive development concept for the Far East.
The above two incidents could, by some stretch of the imagination, be dismissed as results of negligence or evil designs of some people charged with implementing the plans, but the fact is that the members of the ruling circle are only human. Like all the rest, the higher-ups at the Kremlin and the White House can only process so much information and supervise only so many processes.
In the nearly two decades since the collapse of the USSR our economy has changed beyond recognition. Nonetheless, monopolies, that scourge of the Soviet economy, are still very much alive. In fact, it seems as if nobody has tried to curb their growth. "Our economy has turned into a gigantic state corporation, in which supposedly private entities are just cogs in the wheel," a former important government official laments. It is not just a state corporation, but a state corporation in the retro sense. The monopolism at the federal level is replicated in every region and every community. Look at the sorry state of our small and medium-sized businesses, in spite of all the solemn declarations to the contrary that are being made at the top. This system thwarts competition and in the long term is uncompetitive in the event of a crisis."
Some might consider these worries to be justified but irrelevant to the current concerns. In reality, this is a graphic illustration of the link between theory and practice. The fact that it is impossible to do business without patronage at the very top confines most industries outside the "extractive" sector to a "ghetto". If this is the case, we have to depend more and more on imports, pushing food and other prices sky-high. Talking about the link between big-time politics and the price of eggs!
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The members of the ruling elite are well aware that the present governance mechanism is far from ideal. Attempts to design a new bureaucratic "miracle machine" continue non-stop. An informed government official says that deputy chief of the Government's Staff, Kirill Androsov, has recently been charged with proposing a more effective government structure. Androsov, who is close to First Deputy Prime Minister Shuvalov, reportedly has been instructed to do the planning himself, without listening to any advice.
The results of his efforts are still unknown, but it is unlikely that he will come up with a miracle drug for the malaise affecting the current economic management system. Monopoly in economics is a direct consequence of monopoly in politics. However, our authorities believe that this phenomenon is not a problem, but something to be proud of.
So, three cheers for Alexei Kudrin. In recent years the Finance Minister has received a lot of flak for keeping the Stabilization Fund intact and not allowing anyone to tap into it for the sake of investment projects that are of "vital importance for the country". Now Alexei Kudrin's "book-keeper's instincts" have been vindicated. With foul economic weather in the world, we still have two "crutches": high oil prices and, should they collapse, oil revenues stashed away for a rainy day.
