Beneath the façade of normalcy, social and political tensions are brewing in Russia. During a visit to Moscow last week, I was struck that prestigious restaurants were as full as ever, elite boutiques had what looked like a normal share of shoppers and the business-class lounge at Sheremetyevo Airport was crowded with fashionably-dressed Russians leaving for their holiday vacations overseas. In contrast to New York, no major Russian financial institution has gone down so far, and the Russian government has issued regular assurances that it has sufficient reserves in various state-controlled funds to deliver on all of its social commitments to the people. The Russian State Duma, the popularly elected lower chamber of the parliament, is fully controlled by pro-government parties and continues to give President Dmitry Medvedev and Prime Minister Vladimir Putin an unqualified vote of confidence.
Still, traveling by car through the Russian capital's nightmarish traffic quickly reveals signs of trouble. The vast majority of the numerous construction sites appear frozen, with cranes standing idly and no crews in sight; pages of Russian papers are filled with obligatory bankruptcy announcements; and at the Alexander House, one of Moscow's most prominent business addresses, there is no normal line in the cafeteria. Many employees of energy and consulting firms in the building have been put on unpaid leaves of undefined lengths. Nonprofits have been hit particularly hard. Few have any meaningful endowments, and with sponsors disappearing, many public policy and charitable organizations have had to cut their staff and programs dramatically.
With oil prices falling below fifty dollars, the figure on which the Russian budget is based, it is clear that 2009 will not be a rosy time for the Putin-Medvedev leadership. The regime Mr. Putin has built, while authoritarian by Western standards, has enjoyed genuine popular support because the combination of high energy prices and prudent fiscal policy has assured remarkable growth in living standards. During Putin's years in power, per capita income more than doubled. And while political liberties were severely curtailed, personal freedoms have remained largely intact. People could freely select their place of employment, move from one private company to another, travel abroad with very few, if any, restrictions, experiment with artistic shapes and forms without much official interference and even criticize the government without fear of consequences-not just in the privacy of their homes, but on the internet and to a lesser extent, in printed media.
This implicit social contract, where society allowed the leaders to rule without much public control and the leaders delivered to the public a regular dose of improvement in their everyday lives, is seriously threatened by the economic downturn. The Duma has been discussing a bill which would broaden the definition of treason in a way that would criminalize some contact with Western nongovernmental organizations or even the media. When almost four years ago, in January 2005, thousands of retired people in Russia angrily protested the controversial reform of Soviet-era social benefits they relied upon, the government treated the demonstrations with kid gloves, quickly reversing course and using the state treasury to accommodate protestors' demands. With dwindling hard-currency reserves, however, the Russian leadership has less room to maneuver. On Sunday, when hundreds of people demonstrated in Vladivostok in the Far East against increased tariffs on foreign cars, special police units responded with overwhelming force. Canceling the fees, which were recently announced by Vladimir Putin, would deliver a blow to the severely troubled Russian automobile industry. And with growing public discontent, the government clearly is afraid that even peaceful and relatively insignificant protests could easily get out of hand.
On paper, the Russian government's response to the crisis was prompt and decisive. Huge funds are being allocated to support the banking system and basic industries. A special cabinet commission was created to deal with the crisis, presided by First Deputy Prime Minister Igor Shuvalov, an able and authoritative official with strong ties to both Putin and Medvedev. Yet sources in the Russian government complain that without a clearly defined division of labor, having two leaders at the same time who make key decisions largely through private, confidential contact makes orderly decision making difficult. Often, a lot depends on who was able to speak to one of the leaders last. Meanwhile, while there is no sign of rivalry between Putin and Medvedev, their subordinates are increasingly eager to promote their bosses on the assumption that sooner or later, the demands of dealing with the economic crisis will make the dichotomy of power hard to sustain, and one person will ultimately remain in charge.
Remarkably, there is little expectation that crisis will lead to liberal reforms. In Russia, hard times normally produce hard lines, and while Medvedev has a number of advisers with liberal reputations on key policy issues, whether of conviction or convenience, he sounds very much like Putin, projecting an image of toughness and determination. As far as Russian foreign policy is concerned, the economic downturn has largely put an end to the triumphalist mood after the August victory against Georgia. And there is a growing understanding that, like it or not, a conflict-or even the perception of a conflict - with the United States would be detrimental to investors' confidence in Russia, leading to an outflow of capital and the decline of the ruble.
But economic difficulties, in addition to generating protectionist measures like the additional tariffs on foreign cars, mean that the Russian government has less room for flexibility in offering special consideration to energy customers failing to pay their gas bills, such as Ukraine. And there is increased temptation to provide Russian weapons to whomever is in a position to pay cash, Iran included. Moscow still denies Tehran's claims that it has supplied Iran with long-range S-300 missiles, but clearly, whether the denials are genuine or not, the temptation to sell to whomever or whatever is only going to grow as the Russian economy continues to go downhill and government resources dwindle further and further.
Chances are still good that Russian reserves will prove sufficient to muddle through 2009, that the Russian political system has enough stability to withstand the test of economic downturn, and that a new beginning with the United States offered by the Obama administration coupled with a new sense of vulnerability, will be sufficient to discourage Moscow from taking risks in their relationship with the United States and, more broadly, the West. Still, Russia is in uncharted waters, where few things are taken for granted, and in this time of uncertainty, it is particularly important for the incoming Obama administration to proceed with care, being mindful of unintended consequences of American actions that could tip the balance in Russia against U.S. interests.
