Thursday, May 1, 2014

Window on Eurasia: In Pursuit of Stability, Putin is Turning Against Private Sector, Gontmakher Says

Paul Goble

            Staunton, May 1 – Vladimir Putin is taking care of his basic electorate, pensioners and government employees, at the expense of the private sector, Yevgeny Gontmakher says. And because Moscow increasingly lacks the funds to do so, the Kremlin leader will take ever more money from business, a shift popular in the near term but dangerous in the longer one.

            In an article in “Yezhednevny zhurnal” today, the economist says that Putin has not presented his policies in any specific document but that the Kremlin’s actions allow one to conclude that he is creating new classes of winners and losers in the hopes of maintaining his base and preserving stability in the country (

            As it has become obvious that there are insufficient government funds to fulfill Putin’s earlier promises– the economy is in recession, more people are working off the books and not paying taxes, and the government is boosting spending on defense and law enforcement – Moscow has been cutting spending but in a “very selective way.”

            Among those who remain “’sacred cows’” whose incomes cannot be cut without undermining support for Putin are the 40 million Russian pensioners, who are now getting even more because of indexation, and 15 million government employees, including the military and other siloviki,

            But supporting them has come at a price. On the one hand, because support for education and medicine are in the regional budgets, regional officials have had to reduce the number of employees in those sectors in order to boost the pay of those remaining, as well as cutting back on all other spending for facilities and the like.

            And on the other, the shift in the Kremlin’s budgetary priorities is hurting everyone else, everyone that is who “does not fall under the wing of the government as their employer and does not work in Gazprom or Rosneft because with these companies as with all monopolists everything remains in order,” Gontmakher says.

            Not only are people in this sector seeing their incomes fall as profits have, but Prime Minister Dmitry Medvedev has said that now, unlike in 2008-2010, the government will not “artificially preserve ineffective work places.”  That means, the economist says, there will be an increase in unemployment in the private sector. And that sector will bear most of “the growing costs” of medical care and schooling.

            That trend, Gontmakher continues, leads one to ask how stable is such a situation going to be and for how long “because for Putin, ‘stability at any price’ is a real mantra.” Any political, economic or social unrest is unwelcome, even though the division of society into a privileged and protected group and all the rest would seem to make such unrest more likely.

            “Several months ago,” Gontmakher says, “this question was purely theoretical, but after the beginning of events in Ukraine, a certain answer appeared.” It is now clear that Putin sees this situation as dangerous to himself and has concluded that if nothing changes, he could face a serious challenge in “two or four years.”

            The Ukrainian events have given Putin the opportunity to make use of patriotic propaganda that has as one of its goals convincing Russians that any “tightening of belts and worsening of the social situation is first being done for the salvation of Russia and second is connected not with Putin’s policies but with external circumstances” and the actions of “’a fifth column.’”

            His logic, Gontmakher says, is approximately this: “’Enemies surround us, we are almost in a state of war, and for this high spiritual goal it is necessary to sacrifice some things in the material level.’”  This theme, not yet predominant over the notion that “Russia is rising from its knees,” is likely to become ever more important.

            Putin’s use of it, the economist says, is going to arrive more quickly “as a result of sanctions” and even more the ways in which they in turn will lead both foreign and domestic investors to conclude that putting their money in Russia is not a good idea. That will accelerate Russia’s slide into recession.

            Of course, promoting Russian investment in Russia as Putin has been doing is not in itself a bad idea, Gontmakher says, but in the current situation, it may have some consequences that won’t promote the ends the Kremlin leader says.

            In the past, Putin sought to have Russian businesses invest in big business ventures like the Sochi Olympics, but now, with the worsening of the Russian economy, he is likely to view their money as a solution to the country’s social problems and to demand that they “invest” in the solution of those.

            “Russians will applaud the president” for such a step, for the latest iteration of the old idea of “’expropriating the expropriators.’”  For a short time, extracting more resources from businesses and investors will thus help Putin, but it will not work for long: The amount of money he can get this way is limited, and seeking to take a lot of it will drive business underground or abroad and reduce tax collections as well.

            Consequently, Gontmakher concludes, while such an approach may help Putin in the short term with his electoral base whose paternalism may be satisfied by “’bread and circuses,’” it will cost him support in the elites and, over the longer term, “lead to the worsening of the situation on all fronts”  -- killing off any prospects for development.

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