Publication: Eurasia Daily Monitor Volume: 2 Issue: 18

Some observers continue to hope that Russian President Vladimir Putin’s centralization of power will at least produce more effective economic decision-making, along the lines of South Korea in the 1960s. Alas, that does not seem to be the case. The government of Mikhail Fradkov, who replaced Mikhail Kasyanov as prime minister in March 2004, has been paralyzed with inertia.

Recent developments such as the Rosneft takeover of Yuganskneft and the bungled monetization of social benefits vividly illustrate the government’s inability to implement a viable economic strategy. High oil prices have bought Russia a few more years, but if the policy drift continues, the revival of the Russian economy is seriously at risk. Tatiana Gurova noted that it is hard to find anyone coming up with rosy economic development scenarios, not even the Kremlin’s paid propagandists (Ekspert, January 17).

This policy limbo can be attributed to several causes. First, there is the sheer mediocrity of most of the men Putin has chosen to fill the ranks of his government. Second, there was a massive and largely unsuccessful restructuring of the government bureaucracy launched with the arrival of the new prime minister, a process that paralyzed state agencies for months on end. Under Fradkov the individual ministries gained more autonomy and have slipped out of cabinet control. “According to businessmen, while a problem could be solved within a month on average under the previous government, people now wait six months” (Moskovsky komsomolets, December 29).

In September the chief helmsman of the reform, government Chief of Staff Dmitry Kozak, was dispatched to head the Federal District covering the North Caucasus in the wake of the Beslan siege. Vladimir Pligin, the head of the State Duma Committee for Constitutional Law and State Structure, says that the administrative machinery “worked more or less well up until 1985” but then essentially collapsed. No new administrative model has emerged, in part because the state has lost contact with the population. “Unfortunately, at present society regards the state as an enemy” (Ekspert, January 17).

Third, there is the ongoing standoff in the government and presidential administration between the security men (siloviki) and the liberals. Andrei Uglanov described the government as “a push-me/pull-you with two heads” (AiF, January 13). While this struggle indeed continues, one should not exaggerate its extent. Most government officials are conservative, nationalist bureaucrats who do not belong to either camp, but who have gone into slow motion in the absence of clear orders from above.

The leader of the liberal camp is Minister of Trade and Economic Development German Gref. He was responsible for preparing the government’s economic strategy for 2005-2008, but he was unable to achieve a consensus among the ministers. The Cabinet approved an economic plan on December 22, but Gref maintains that he did not see the final draft until the morning of the government meeting (Moscow Times, December 23).

One key point of disagreement is reform of the Gazprom monopoly. Gref complained, “Gazprom is a huge clumsy monster. It won’t drag on for long, the way it is now” (RIA-Novosti, December 17). However, Fradkov disagreed. Rather than breaking up the gas giant, the government instead chose to merge it with the oil producer Rosneft, in the process raising the state’s stake from 38% to 51%.

At a meeting of the government’s competition council last week, Prime Minister Fradkov heard a succession of business leaders complain that business-state relations are at their lowest ebb in a decade. Electricity chief Anatoly Chubais suggested that one-third of those present had been approached with tax demands for 2001. Even Kremlin loyalist Sergei Mordashov, the owner of the Cherepovets steel mill, complained that recent court rulings “contradict common sense.” Tax claims aside, the businessmen were also disturbed by ambitious but vague plans for more active state investment that have crept into the strategic plan (Vedomosti, January 21).

The liberal members of the government are increasingly isolated. They have few political allies in the State Duma, in the mass media, or in society at large. And the liberal ministers are the most likely to be fired if the benefits scandal requires some sacrifices. Commentator Mikhail Leontiev, the Russian equivalent of Fox News’ Bill O’Reilly, said of Finance Minister Alexei Kudrin and Health and Social Development Minister Mikhail Zurabov: “These people have deliberately organized acts of political provocation against the existing regime. What made them do it? Either they wanted to steal money or they’re working for imperialist intelligence” (Ekho Moskvy, January 15).

Just how worrying is the economic situation? Oil revenues have boosted the budget surplus, and the excess is being socked away in a stabilization fund “lock box” that now stands at $19 billion. However, last year, GDP growth eased to 6.8% (down from 7.3% in 2003), while inflation was 11.7%, driven by increases in utility bills and a 31% hike in gasoline prices. The ruble rose 5.5% against the dollar in nominal terms in 2004, further eroding the competitiveness of domestic manufacturing. Light industry fell 7% over the year, and for the first time foreign car imports exceeded sales of domestic cars in total revenue. The oil and gas pipelines are already working at maximum capacity, so even that sector cannot continue as the growth driver unless new pipes are laid, and fast. Russia’s economy is not sufficiently robust that the government can afford to leave it on automatic pilot for much longer.