By Brian Whitmore,
Fueled by petrodollars, Russia still has a major
cushion in its $450 billion in foreign-currency reserves. But those are down by
25 percent from August
The ghosts of 1986 are haunting
That was the year when a precipitous drop in oil prices, from around $30 per
barrel in late 1985 to just over $10 by mid-1986, crippled the Soviet economy
and helped expedite the breakup of the USSR just five years later.
With crude prices again falling by two-thirds -- from just under $150 per barrel
in July to slightly more than $50 today -- the Russian political elite is
getting visibly jittery.
So could 2008 turn out to be the new 1986?
"As long as the oil and gas money is flowing, that gives the Russian government
the wherewithal to keep living standards rising," says Steven Pifer, a former
State Department official who is currently a senior fellow at the Brookings
Institution. "So when the oil and gas revenues decline, that does raise
questions about what the government can do."
Since Vladimir Putin ascended to power in 2000, petrodollars have been the key
lubricant for Russia's authoritarian regime of "managed democracy." Easy money
from energy exports has enabled the ruling elite to purchase the political
loyalty of the country's sprawling bureaucracy, to win at least the passive
consent of a critical mass of the population, and to buy friends and intimidate
It is far too soon, according to most analysts, to say that Russia is on the
brink of serious political instability, or even close to it. And nobody is
suggesting that Russia is on the verge of disintegration.
But with the regime's essential lubricant slipping away, the system Putin built
is beginning to show signs of strain. Newly emboldened regional leaders are
clashing publicly with authorities in Moscow, marquee infrastructure projects --
and the patronage that goes with them -- are being scrapped, and the Kremlin is
scrambling to amend the constitution to keep the current elite in power
"The potential damage that this fall in commodity prices could inflict is very
great," says David Satter, a senior fellow at the Hudson Institute and author of
the book "Darkness at Dawn: The Rise of the Russian Criminal State."
"Even though the leadership may be more capable of managing in a capitalist
environment than the Communist leadership was, nonetheless, it is composed of
people, because of the system that was created here, who have no hardcore
loyalty to the system or the country, but are only pursuing their own individual
personal well being."
Politics Trumps Economics
Signs that the Russian economy is in deep trouble are everywhere: From the
dramatic 70-percent drop in the stock market in recent months to news of layoffs
among major manufacturers like the KamAZ truck manufacturer and GAZ automaker.
Russia still has a major cushion in its $450 billion in foreign-currency
reserves. But those are down by 25 percent from August when they stood at
approximately $600 billion. There are also two stabilization funds - a Reserve
Fund and a National Wealth Fund -- totaling nearly $200 billion, that the
Kremlin created when oil prices were high to get the country through rough
"Russia seems to have the rainy day fund and the currency reserves to be able to
keep going. It's not going to crash immediately, they've got some time there,"
Nevertheless, the economic downturn is beginning to cause rumblings of rebellion
in the regions, where local elites showing signs of challenging the central
authorities in Moscow for the first time in years.
A group of private oil companies in Tatarstan -- which account for 20 percent of
all oil produced in the region -- is asking the government to temporarily exempt
them from paying export duties and production taxes until crude prices recover.
They are threatening to cease production as of December 1 if their request is
Moscow Mayor Yury Luzhkov angered the Kremlin by calling on November 19 for the
direct election of regional heads, which would give them more independence.
Luzhkov received a stern rebuke from President Dmitry Medvedev and quickly
backed off his comments.
Such insubordination, analysts say, could become increasingly frequent as the
economic downturn dilutes the Kremlin's authority.
"The oil regions are going to say, 'We need to keep the income here. Why do we
need to support these other regions that are parasites?'" says Marshall Goldman,
professor emeritus in Russian Economics at Wellesley College and author of the
book "Petrostate: Putin, Power, and the New Russia."
It is therefore not surprising that with the economy in crisis, Russia's rulers
are spending a great deal of time worrying about politics, rushing to amend the
country's post-Soviet constitution for the first time since it was enacted in
Both houses of parliament, the State Duma and the Federation Council, have
passed legislation extending the presidential term from four years to six. The
changes, proposed by Medvedev in his November 5 state-of-the-nation address, now
must pass two-thirds of Russia's regional legislatures, which are dominated by
the pro-Kremlin Unified Russia party, to become law.
Many Kremlin-watchers say the amendment is designed to create a pretext for new
presidential elections to allow Putin -- currently the prime minister but widely
seen as Russia's true ruler -- to return to the presidency safely before the
full force of the economic downturn hits.
"[Putin] might believe that he is the only person with sufficient credibility to
take the country through the rough patch," political analyst Vladimir Frolov
wrote in the magazine "Russia Profile" on November 25.
"The problem is that he would be wrong," Frolov argued. "His return to the
Kremlin in such an artificial way would be destabilizing, and would make the
economic crisis worse for Russia. It would reinforce an already strong sense
among Russian and international investors that Putin and his people are more
interested in holding on to power than anything else."
Cracks In The Facade
Since coming to power, Putin and his team have attempted to create a
centralized, authoritarian, vertically integrated, and unitary executive that
can manage a thorough and comprehensive modernization of Russia. In order to do
this, however, the Kremlin built a vast network of patronage -- similar to the
Soviet nomenklatura system -- in which key state posts, privileges, and favors
were doled out to the loyal and obedient across Russia's vast regions and
But in an economic downturn, when there is less patronage to pass around, some
analysts warn that Putin and his inner circle will have a harder time placating
and co-opting Russia's sprawling bureaucracy.
"The big question is are bribes elastic in a downward direction," Satter says.
"If there is less money to pay for corruption, are those people who are
benefiting from the corruption going to be reasonable and accept smaller
payments, or are they going to start fighting among themselves. All experience
suggests it's the latter and that could create enormous tension in the ruling
elite...There was clan warfare even when the situation was favorable."
There are already signs that leaner times could be on the way for Russia's
gilded bureaucratic class.
Boris Gryzlov, head of the ruling Unified Russia party's Supreme Council,
announced on November 21 that it was cutting one-quarter of its staff positions.
Gryzlov, who is also speaker of the State Duma, also said 10 percent of those
working as aides for Unified Russia lawmakers in the lower house of parliament
-- where the party has a two-thirds majority of seats -- will receive pink
Gryzlov also announced that Unified Russia would create a new Anticrisis
Commission to monitor how state funds are being spent in Russia's regions. "We
must place the regional authorities under strict controls so they behave
properly," the daily "Gazeta" quoted him as saying.
Such a move, analysts say, is not surprising. When the Kremlin has fewer carrots
to pass around, it is more likely to rely on sticks.
"I think if things get really bad, the regime will get more authoritarian, more
fascistic, more brutal, and more anti-Western. And that will be the way in which
they stave off internal turbulence," Satter says, adding that he expects to see
"an intensified search for foreign enemies" to explain the economic downturn to
an increasingly restless public.
That search for foreign culprits already appears to be under way with Russia's
state-controlled media presenting the crisis as a byproduct of financial woes in
the United States, particularly the meltdown in the sub-prime mortgage market.
At the same time, the media has largely soft-pedaled -- or completely ignored --
any hint of Kremlin responsibility for the country's economic woes.
Meanwhile, unemployment hit a seven-month high of 4.6 million people, or 6.1
percent of the workforce, in October and wage arrears rose to a one-year high of
4 billion rubles ($146 million).
Aleksei Vovchenko, deputy head of the Federal Labor and Employment Service,
announced on November 26 that Russian companies will cut as many as 200,000 jobs
in the next two months.
"To a certain extent the Russian people are aware of their loss of liberties
under Putin and Medvedev. To a degree, they have reconciled themselves to this
because of the rising living standards," Satter says. "Well, the living
standards are very likely not going to keep rising under these circumstances. So
there are enormous sources of potential tension in Russian society."
But with a weak opposition and a public that has been politically passive for a
decade, it remains unclear whether the hard economic times on the horizon will
translate into demands for political change.
"If the government fails to keep its economic side of the bargain, I don't think
we know yet how the Russian public reacts. They haven't shown themselves in the
last 10-12 years to be an especially revolutionary group," Pifer of the
Brookings Institution says.
Copyright (c) 2008 RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036. www.rferl.org
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