Economic crisis threatens Kremlin control of North Caucasus

MOSCOW (Reuters) - The global financial crisis could cause new violence and instability in Russia's North Caucasus by forcing the Kremlin to cut subsidies that have bought loyalty in the mainly Muslim region.

Military might, deals with warlords and cash have enabled the Kremlin to re-establish a fragile control over the region since an offensive in 1999 drove rebels into the mountains.

But a decade-long economic boom that paid for the government's resurgence in the region has faltered and forced the finance ministry to revise its budget for 2009 -- a cut that is likely to have an impact in the North Caucasus.

"The kind of support that the Kremlin gets in the North Caucasus is rooted in money," said Tanya Lokshina, who specialist on the region for Human Rights Watch, a rights group based in New York.

"All those regions are living off the federal budget, so if the budget starts to run out they are in big trouble."

The North Caucasus is a poor, mountainous region on Russia's southern fringe that includes Chechnya, where separatists fought a decade-long war with Moscow's forces.

Analysts say Islamist extremists have infiltrated the region and that worsening poverty may drive people towards the rebels who have previously sent kidnappers and suicide bombers to attack Russian cities.

Financial support is a tool for the Kremlin to dampen support for the rebels but Russia's cash reserves have shrunk by some 40 percent to about $385 billion (270 billion pounds) since last summer.

In Russia's original budget for 2009, Chechnya's government said it had been promised around 24.5 billion roubles (474 million pounds) -- worth about $1 billion before the currency devalued by about a third. The other North Caucasus regions were also promised billions.

But Russia's finance ministry will soon announce a revised budget based on an average oil price for the year of $41 per barrel, less than half the initial price. Some of the shortfall will be covered by a budget deficit.

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Chechnya's pro-Kremlin president, Ramzan Kadyrov, has voiced concerns about funding.

"We're feeling the crisis like everywhere else," he told the state-owned Rossiskaya Gazeta newspaper last week. "However, I have written a letter to Moscow and I hope to defend the budget from being reduced."

Chechnya has been the main focus of the Kremlin's drive to restore its control in the north Caucasus.

Former President Vladimir Putin, now a powerful prime minister, handed the Kadyrov family power in exchange for a pledge of loyalty to Moscow and help battling the rebels.

Using Kremlin money Kadyrov has presented himself as the saviour of Chechnya, rebuilding the region.

But financial problems threaten that relative stability, said Garry Kasparov, a Kremlin critic and former world chess champion.

"The only reason he (Kadyrov) is still staying with Putin is because we are paying him a ransom," he told Reuters.

Since the financial crisis started to bite, signs have appeared that the pact between Moscow and ruling elites in the North Caucasus is under strain.

In a rare show of dissent against the Kremlin, crowds last month took to the streets of Grozny -- with Kadyrov's tacit support -- to protest the early release from jail of an army officer convicted of murdering a Chechen girl in 2000.

In neighbouring Dagestan where security forces and rebels often battle, hundreds of people protested against a new Moscow-appointed tax chief in a display of public discontent that had the support of the local leader. The tax official left the region soon after he was briefly kidnapped.

And to the west of Chechnya in violence-scarred Ingushetia, the Kremlin sacked an unpopular local leader after a tide of anti-Kremlin anger and protests.

But stability there will come at a high cost. Russian President Dmitry Medvedev last month pledged $880 million to Ingushetia's new president.

Neil MacFarlane, an associate fellow of the London-based Royal Institute of International Affairs, said the Kremlin was likely to have difficulty in meeting previous cash pledges to the region.

"I suspect that, if push comes to shove, they will focus on the core of the country rather than the periphery," he said.

"That would not be good for the overall situation in the North Caucasus. They might have increasing difficulty in holding on. So, I guess the logical outcome would be increasing levels of police and military activity."

(Editing by Jon Boyle)