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Russia 2006 Report on transformation Russia 2006 Report on transformation Collective work edited by Konstantin Simonov President The Center for Current Politics in Russia, (Moscow) III EUROPE–RUSSIA ECONOMIC FORUM Vienna, April 23–24, 2007 INSTYTUT WSCHODNI Translation from Russian Advent Translation Ltd Cover layout Paweł Noszkiewicz ([email protected]) Typesetting, printing Akant, Warsaw Publisher Fundacja Instytut Studiów Wschodnich Foundation Institute for Eastern Studies ul. Solec 85 00−382 Warszawa tel. +48 22 583 11 00, fax +48 22 583 11 50 e−mail: [email protected] www.forum−ekonomiczne.pl ISBN 83−60172−01−3 © Copyright Fundacja Instytut Studiów Wschodnich Warszawa 2007 FOREWORD I have a great pleasure to present the fourth edition of the report „Russia 2006. Report on Transformation,” prepared by Economic Forum’s experts and edited by Konstantin Simonow, the President of Centre for Current Politics in Moscow. Centre for Current Politics was created in 1992 and was initiated by a group of scholars from Russia Academy of Science and Russian−American University in Moscow, as an independent think tank. Its mission is to provide precise and accurate information and expertise. The report is the Third Europe−Russia Economic Forum’s publication, published by the Institute for Eastern Studies. The Institute also publishes reports on Central Asia region, Energy issues and European affairs. The last one, analyses economic, political and social situation in 27 countries of Central, Eastern, Southern Europe and CIS countries. Europe−Russia Economic Forum is a part of the Economic Forum agenda. The Forum has been held for the last 16 years in Krynica. In order to continue the debates initiated during the meeting in Krynica, the Institute organizes conferences on selected topics, in which internationally acclaimed politicians and experts take part. The aim of the Forum is to create a conducive atmosphere for the development of political and economic cooperation between the EU countries and their neighbours. The Forum is independent and impartial in fulfillment of its mission. I would like to thank the editorial team, Centre for Current Politics and all those, who supported the preparatory works. Zygmunt Berdychowski Chairman of the Economic Forum Program Council Chapter 1. “RUSSIA 2006. REPORT ON TRANSFORMATION” – MAIN THESIS Russia 2006. Report on Transformation 2006 proved to be a year confirming all the previously observed trends in the development of the state. A break−up in the Russian political elite led to the formation of alternative ways of the country’s development, to the emergence of entirely different pictures of the country’s future. The existence of competing nomenclature and political groups in Putin’s entourage, on the one hand, enables President Putin to stay in control without allowing a destabilization of the situation. On the other hand, it increases the risks of the system. Putin is most likely to leave office in 2008, the country will have a new president. On the other hand, everybody understands that Putin will remain the most influential figure. But what power configuration will safeguard him against the risk of his successor’s unauthorized behavior? How to satisfy the political ambitions of the two major nomenclature and political groups in Putin’s entourage which we defined yet in our previous reports as “siloviki” and “liberals”? The duality of the Russian system remains in place, the country increasingly resembles its national coat of arms, depicting a double−headed eagle that looks in different directions. Let us remind you that by nomenclature and political groups we understand cohesive administrative unions, “invisibles” that are not institutionalized. They act as informal alliances within which it is not vertical (i.e. relationship of subordination within a specific power institution) but horizontal relations, based on the factor of belonging to a single team of officials who may work at different government bodies, that happen to be stronger. That is why we are speaking of two influential nomenclature and political groups, nominally termed by us as “Petersburg liberals” and “Petersburg siloviki”. Even among members of these NPGs there can be disputes over tactical issues. Not infrequently they conflict over individual subjects. But strategically they act as a single team. They are united by a single goal – victory at the 2008 Elections. And either camp proposes its own variant of Russia’s development. We see a competition of the projects of Russia’s future. And it is quite an interesting and novel phenomenon – the national elite is learning to think about the future and to manage it – importantly, we are talking not only their personal survival but variants of the country’s development. While going through 2006, all thoughts of the political and economic elites were in fact only on the future – everything that was happening in the country was judged against the problem of continuity of power and the year 2008. Obviously, in the new year of 2007 this tendency will become even more evident. Tension in the elites is growing, there become increasingly more questions but fewer answers. At the same time, while focusing on the successor and continuity problem, the executive power forgets 6 Russia 2006. Report on transformation about the need to address a number of socially important tasks in the economy that increase the system’s risks in the mid−term. Understandably, no one wants to start painful reforms right before the elections. After the miscarriage of benefits monetization, serious innovative projects were rejected in favor of inertial development aimed at maintaining stability. Curiously, the word “modernization” in 2006 as if disappeared from the political vocabulary. Though its delay is fraught with grave negative consequences in not so distant future. “Color revolutions” in the post−Soviet space ran out of steam, and the coming to power of a counter−elite in Russia looks highly unlikely. The financial stability of the state, thanks to high hydrocarbon prices, makes it possible to go through the pre−election season without serious social unrest. In the economy Russia’s year− end results, because of oil and gas revenues, look quite optimistic. The ruble kept gaining against the dollar. The rate of industrial growth was fairly high (6−7% annually, inflation was rather high but stayed within the 10−percent limit). The country experienced a credit−consumer boom, retail trade showed unheard−of growth rates, real estate prices in Moscow easily exceeded the figures of the vast majority of world cities, similar processes were observed also in other million−plus cities, the stock market was on the rise throughout the year as well. Thus the active clans found themselves safeguarded against a possible radical change in the elites – off−system oppositionists are still clear−cut outsiders of the political process without the slightest chance of public support or success. Interestingly, the sentiments of panic and imminent “exile” prove to be more typical of the business community than the political elite. That is why we see a sharp increase in the volume of IPOs which can be viewed, if anything, as a form of sale of your own business to non−residents, while officials were in no hurry at all to “escape with booty”. A positive result of that was that last year they managed to avoid splitting the Stabilization Fund and launch large−scale capital intensive projects at the expense of the budget. The major groups were actively involved in “fundraising” – sought funds for financing of their political projects. But in doing so, they used first of all an expansionist strategy rather than that of leaving the markets. As a result, the redistribution of property was underway not only in traditional segments of the economy, but also in rather specific markets. In most cases, the “siloviki” were particularly active – it is also true for the scandal associated with the introduction of a new system of marking alcohol products, and redistribution in the cashing market, and showdowns over control of “gray” phone supplies. Struggle inside the elite itself will be tough and heated. All this may lead to further intra−elite fractionating – “factions” have already appeared inside major 7 Russia 2006. Report on transformation “political parties” pushing their own agendas and showing their political and economic ambitions. New candidates for the role of an independent center of power (Yuri Kovalchuk, Vladimir Yakunin) keep coming onto the scene. Such a case scenario may unbalance the system. The elite fractioning is reflected even in the public field – 2006 saw the launch of a “second power party” project – Fair Russia which became United Russia’s major rival on the party field. Though, possibly, over time through the second power party competition between the nomenclature groups will become more open and public, and non−public politics will be reflected in public politics. Some experts viewed even a series of high profile killings in the mid year through the lens of elite competition – the losing shadow “party” could have tried to set off a situation destabilization scenario if it had realized that Putin denied it the right to nominate a successor. But Putin not only did not sum up the results of this contest – quite the opposite, he sought to make it more intense and heated. This being the case, Putin always has an opportunity to try and reach an administrative compromise, for example, by appointing a neutral politician who has not joined any of the groups as his successor. He took this approach, for instance, when installing Mikhail Fradkov as Prime−Minister in 2004. Perhaps, it is this scenario of the future that is most likely to materialize. Then Putin will be particularly important – it is him and not his technical successor that will be the ultimate judge. In this respect, the coming to power of a “successor” comparable in clout and power with the incumbent Head of State seems unlikely.

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