26 сентября 2003

Putin´s Penchant for Control Crowds Out Reform

Alexander Bim and Kim Iskyan, The Wall Street Journal

As he travels to meet President George W. Bush at Camp David, an old question hangs over Russian President Vladimir Putin: What kind of ruler is he? Authoritarian, reformer or guardian of the status quo?

The attempt to assess the Russian president has produced many competing views on what drives him. But a look at the key decisions he has made recently, and this summer´s controversy involving oil giant Yukos, suggest that Mr. Putin´s personality and policy-making style do more to degrade Russian democracy and the cause of reform than to advance it.

The president deserves credit for ending the chaotic policy drift of the Yeltsin years, and making Russia´s movement toward a market economy largely irreversible. The tax, land, pension, administrative, judicial, corporate governance and labor reforms of the Putin government -- assuming they are implemented seriously, which is far from a foregone conclusion -- have inspired economic activity and helped lay the foundations of sustainable economic growth, while reversing capital flight and significantly boosting Russian asset prices. Nevertheless, in most areas, reforms have fallen short of what they need to be to create a more liberal market order.

A big reason for the short-fall is that Mr. Putin prefers policies that enhance state -- and, in particular, presidential -- control over the economy and the political sphere. Democracy, reform, and economic liberalism, by definition, devolve and disperse power and decision-making across different economic and political actors. Mr. Putin acts as one who fears the "chaos" that these processes bring. For him, it appears, success is measured by the control he is able to exercise over the sprawling country he rules.

Mr. Putin´s penchant for control is well documented, from his early domination of the Duma (the lower house of parliament) through establishing control over Duma factions after helping centrist parties win seats on the back of his personal popularity, to the Kremlin´s moves to close down (ostensibly for financial reasons) Russia´s remaining major independent television stations. This proclivity extends to electoral politics too. The Kremlin has spared no efforts in trying to influence the December parliamentary elections by vociferously supporting pro-presidential parties, and quietly discouraging popular political figures from teaming up with opposition parties, despite laws prohibiting the intervention of the executive branch in parliamentary elections.

Unlike his predecessor, Boris Yeltsin, President Putin is not sanguine about potential political opponents. The root cause of the conflict with oil giant Yukos was the infamous social contract with Russia´s oligarchs whereby they would be permitted to keep their privatization booty as long as they stayed out of politics. Yukos chief Mikhail Khodorkovsky broke that contract by expressing political ambitions and openly funding opposition parties; and Mr. Putin has determinedly made an example out of him.

Another casualty of Mr. Putin´s control-freakery was the burgeoning federalism that he inherited from Boris Yeltsin. Mr. Putin created an additional layer of presidential representation in the regions that reported directly to the Kremlin. He also increased the influence of the center at the expense of the regions by changing the composition of the Federation Council -- Russia´s upper house of parliament. After the changes, the Council was no longer made up of regional governors but by their representatives, who could be more easily influenced by the Kremlin.

Mr. Putin has also strengthened the executive branch, and particularly the presidency (already endowed with a disproportionate amount of power by the Russian constitution). He has done this in part through the government´s control over the broadcast media, its domination of the parliamentary agenda, and the intimidation factor created by the growing powers and influence of the intelligence services, which have also permeated all levels and agencies of the government. But Mr. Putin´s efforts to present the public facade of consensus sometimes temper his focus on control. When regional governors protested Mr. Putin´s reconfiguration of the Federation Council, the Kremlin effectively stifled press coverage of their dissent, and used various back channels to suppress and silence the governors. Economic reforms have suffered from the president´s desire to maintain the appearance of balance, and his fear of bold, liberalizing measures, particularly where key state assets are concerned. For example, the Kremlin permitted regional political interests, oligarchs, and minority investors to debate the shape and substance of electricity reform for more than two years.

The final result of the process was an incrementalist approach to reform that backs away from bold change and price liberalization, and gives the oligarchs scope to scoop up regional power facilities on the cheap. This solution enables Mr. Putin to satisfy two key constituencies -- energy consumers, who will continue to pay subsidized prices and the oligarchs, who will obtain more assets on the cheap -- and presumably will repay the favor with loyalty and contributions to pro-Kremlin campaigns.

Similarly, the extended debate over the course of reform for gas producer Gazprom was settled when the reformist proposals of Economic Development and Trade Minister German Gref lost out to the status quo approach of Gazprom CEO Alexei Miller. Mr. Miller´s perspective was favored by the Kremlin mainly because he is a member of the siloviki, the favored faction comprised of former KGB and law enforcement officials that turned on Mr. Khodorkovsky of Yukos.

Where will Mr. Putin take Russia´s economy? One possibility is an increasingly interventionist approach to economic policy, aimed at the redistribution of financial flows (through relieving the oligarchs of "excessive" profits) to the benefit of the ruling bureaucracy, and the now-favored siloviki. That doesn´t mean Russia´s heading toward a round of nationalizations. Control over financial flows and managers -- and not over assets per se -- appears to be the primary objective of Mr. Putin and the siloviki.

A frightened oligarchy is more cooperative and valuable to the Kremlin than one that is stripped of its assets and/or in exile. However, this approach will not allow Mr. Putin to accomplish his aim of doubling Russia´s GDP within a decade, which will require a re-energized liberal reform program, and the weakening -- rather than strengthening -- of the bureaucracy.

A weak authoritarianism combined with balanced pragmatism in domestic and foreign affairs, and sporadic efforts at reform, has proved effective in Russia. But Russia should be able to hope for more. And the longer it takes to solidify democratic processes and reform in Russia, the greater the possibility that the progress since the collapse of the Soviet Union can be undermined by excessive concentration of control in the hands of the president.

Mr. Bim is a political analyst at IMAGE-Contact Consulting Group in Moscow. Mr. Iskyan is a former securities analyst for the Russian equity market.