Today, we are very fortunate to have a guest post from Andrey Sazonov of the University of Iowa:
Recent developments in Russia suggest that the regime is experiencing major economic challenges. Low oil prices in combination with sanctions have led to serious budget deficit (4.3% of GDP in the first half of 2016) and pressured Kremlin to look for other sources of revenue.
The overall situation is complicated by the fact that Russia’s parliamentary and presidential elections are approaching quickly, and soon the eyes of the Russian population will be focused on their country’s regional and national economic well-being. Thus, it is very probable that in the near future the Kremlin’s exceptionally developed propaganda machine won’t be as effective in diverting its citizens’ attention from internal economic and political developments. This is indeed something that worries Kremlin and Russia’s President Vladimir Putin.
After initiating a silent takeover of Crimea in 2014, Putin simultaneously started a large scale disinformation campaign that was meant to convince domestic and international audiences that Russia’s actions in Ukraine and Crimea were defensive and fully justifiable. More importantly, Putin took advantage of an opportunity to divert the attention of the domestic audience from internal economic and political matters to Russia’s accomplishments in the international sphere.
Putin successfully mobilized nationalist sentiments inside Russia as he convinced his fellow citizens that he will restore Russia’s “derzhavnost” (greatness) while regaining a superpower status for his nation. Confidence in, and admiration for, Vladimir Putin among the Russian population has escalated together with Putin’s ability to avoid discussions about the state of Russia’s regional and national economy.
Sanctions and low oil prices have made a significant impact on Russia’s economic performance over the past two years. Currently, in order to avoid public discontent and questioning of Putin’s decisions and policies, and make reelection possible for Putin and his team, the regime has to convince people that their country is doing “great” not only abroad but at home as well.
Since elections are approaching, Putin has to plug the budget holes and ensure that poor economic performance of certain regions does not lead to unrest or provide a chance to challenge his policies at home or abroad. As a consequence, Vladimir Putin initiated a series of decisive moves on his chessboard – putting pressure on Russia’s largest establishments and replacing political leadership of various regions.
Budget Holes, Siloviki, and Rising Dividends
The Kremlin currently has two funds that can potentially be used to plug the budget holes – the National Wealth Fund that contains $78.3 billion and the National Reserve Fund that contains $50.6 billion. The Russian government, however, has been quite hesitant to use these resources since they are designated for use only during emergencies – in fact, one of the main purposes of the National Wealth Fund is to pay future pensions.
Instead of using the above mentioned funds, the Kremlin has decided to look for other opportunities to offset the effects of sanctions and low oil prices on the country’s budget. As a result, the eyes of the regime shifted to state-owned enterprises.
At the end of April 2016 Kremlin passed a decree that required state-owned companies to pay 50% of their earnings (under International Financial Reporting Standards) to the regime via dividend payments. This particular decree targeted eight state-owned enterprises (Gazprom, Alrosa, Bashneft, Transneft, Roshydro, Sovcomflot, Zarubezhneft, and Rosneftegas) that engage in the production and distribution of oil and gas. It is estimated that this move will bring $1.5 billion into Russia’s 2016 budget.
Such a decision certainly indicated that the regime is experiencing very significant difficulties with plugging the budget holes. However, more interestingly, it also provided Putin with an opportunity to eliminate potential challengers and opposition to his rule in economic and political spheres.
In order to understand why Putin is concerned about being challenged, it is essential to look at Siloviki – individuals who Putin himself appointed to powerful position. Siloviki are comprised of Russian elites who rose to power in early 2000s. Most members of this group had extensive experience in military and defense spheres and played a crucial role in helping Putin to eliminate influence that was possessed by oligarchs who came to power during 1990s.
As Siloviki helped to eradicate and replace oligarchs, they were rewarded by Putin with powerful positions within Kremlin, state-owned companies, and military and defense establishments. With such positions also came a larger degree of trust from Putin. When sanctions were introduced and the economic situation started to deteriorate, however, Putin began to worry about the Siloviki. In fact, the reasons to worry appeared even before sanctions were implemented.
In 2011, as well as in 2013, the Russian government experienced difficulties in the financial sector and needed liquidity to stabilize the situation. In order to obtain more cash for the regime, Putin turned to the Siloviki and to the remaining oligarchs and made a request that they pay a larger share of their companies’ profits to the state. Such an attempt, however, turned out to be unsuccessful. Siloviki and oligarchs instead were able to unite their efforts in lobbying Putin to scale back his appetite for their assets. Faced with pressure to back down, Putin had no other options but to use the Kremlin’s two reserve funds that are designated to serve as emergency pools of cash.
When low oil prices and Western sanctions started to impact the nation’s budget, Putin decided to take advantage of the presented opportunity and completed what he attempted in 2011 and 2013. He passed the decree that required Russia’s major enterprises, most of which were controlled by Siloviki, to pay 50% of their dividends instead of previously required 25%. While this action certainly provided Russia’s budget with much needed inflow of money, it raised concerns among powerful leadership of major Russian companies and enterprises.
Efforts by the leadership of each company to lobby for a decrease in dividend payments turned out to be unsuccessful, and this outcome indicated that the power and influence of the Siloviki was placed under stricter control by Putin. It also showed that Putin strives to have people around him who do not question his decision-making and always follow his orders.
Such action also might indicate that Putin is concerned about an emerging coalition of potential challengers who might want to question his decisions or place him under pressure. A perfect opportunity to execute such actions will appear during Russia’s parliamentary and presidential elections where attention will be placed not only on Russia’s foreign policy but also on domestic performance.
Putin’s Chess Game Continues
In addition to making changes in Russia’s economic realm, Putin also initiated a shake-up in the political sphere. On July 28th Putin replaced five governors and appointed four new presidential envoys. Two out of four newly appointed governors turned to out to be career FSB (Federal Security Service) and FSO (Federal Protective Service) servicemen who belong to the Siloviki circle. Kaliningrad’s FSB regional chief Evgeny Zanychev was appointed a governor of the Kaliningrad region and FSO officer Dmitry Mironov took charge of the Yaroslavl region.
President’s spokesman Dmitry Peskov classified the reshuffle as a “regular rotation conducted by the head of state.” The true reasons behind such action, however, are more complex.
First, as it is described above, Kremlin is preparing for September’s parliamentary elections and the presidential election that is going to take place in 2018. Putin is certainly interested in keeping a strong grip on power, and in order to avoid public discontent and persuade voters to vote for his “team” (and possibly for Putin himself in 2018) he needs to improve regional and overall economic performance. Indeed, this is the main reason why new governors were appointed to regions that have poor economic indicators.
Secondly, the recent reshuffle reinforced the fact that Putin places emphasis on allocating influential political and economic positions only to people whom he can trust. Because of Putin’s career in the intelligence sphere, the majority of individuals who comprise a trusted circle that surrounds the leader comes from military, security, and defense establishments. By appointing the trusted few on key positions, as it was yet again evident on July 28th, Putin wants to ensure that the show is run by those who he can rely on and control.
The major problem with such an approach, however, is that Putin has to select people from quite a scarce sample. The majority of individuals who were removed, perhaps with a few exceptions, will be given other positions. This leads to a question – what is going to happen when the Siloviki pool shrinks further? It has been recently reported that the children of notorious Siloviki are not as enthusiastic about establishing their bona fides by serving in military or security services and are not keen on following the footsteps of their fathers. The financial sector seems to be a more attractive option for the next generation of Siloviki.
Finally, the new political appointments also signaled to all remaining governors and individuals who occupy powerful political posts that poor performance and failure to follow the agenda of Kremlin and that of a major political party – United Russia – will lead to serious consequences. A perfect example of this is the recently ousted Kirov’s governor Nikita Belykh – who was not a member of United Russia and was known to have disagreements with the Kremlin’s views.
All the developments mentioned above indicate that Russia’s economic situation is not ideal for the Kremlin. While Putin was able to successfully divert the attention of his domestic audience to Russia’s international “accomplishments” – such as annexing Crimea and eliminating terrorists in Syria – as election time approaches, Russians will most likely focus on the economic situation in their regions and in the nation in general.
As a result, Putin needs to not only plug holes in his nation’s budget, but also stabilize or even improve regional economic indicators. If the Russian people notice that Putin’s appointed Siloviki, or even Putin himself, failed to improve Russian economic performance, we may witness unrest and increase of public grievances as we approach the parliamentary and presidential elections. The potential for minor unrest and protests in particular regions does exist and this is indeed something Putin is trying to avoid at all costs.
Currently the priority of the regime is to make Russia “great” in the eyes of regular people and while such efforts have been successful previously, it is much harder for Putin to keep the attention of the Russian public focused on external matters.