Kremlin at crossroads over financial crisis

By Shamil Baigin - Analysis

MOSCOW (Reuters) - The Kremlin is at a crossroads over how to respond to the global financial crisis -- by tightening its control over the economy and public life, or by using it as a catalyst for reforms.

It is not clear which way President Dmitry Medvedev and Prime Minister Vladimir Putin will turn, but the stakes are high because political analysts fear the economic downturn could lead to a deep social crisis.

Russia's stock market has fallen about 70 percent this year and government measures to help businesses hurt by the global liquidity crunch will cost $200 billion (121.9 billion pounds).

A battle is under way between Russian liberalisers who favour long-delayed reforms and hawks who see greater state intervention in the economy and political life as the best way to prop up the economy and keep a lid on discontent.

"One (option) is to find a scapegoat and resort to populism," said Igor Bunin, head of the Centre of Political Technologies think tank. "Another is to try and create certain pluralistic institutions, which could help dampen the crisis."

The hawks, many of whom have security backgrounds and links to major state-owned corporations, believe the Kremlin should combat economic problems by ramping up the state's role.

Analysts say the hawks hope to defend their own interests by blaming the crisis on financial mismanagement in the United States and liberal economic policies at home, making these the scapegoats. Both are targets for criticism among voters.

The hawks' liberal opponents want the economy modernised to make it more competitive, and say the crisis underlines the need for a more spirited media, truly independent political parties and stronger civil society.