October 30, 2008 / 1:55 PM / 10 years ago

Kremlin at crossroads over financial crisis

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 (122 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.


Crisis measures have included regular market interventions, drawing on Russia’s vast gold and foreign currency reserves.

The government also plans to use $50 billion of its reserves to help corporations redeem foreign debt. The choice of which businessmen, including billionaire oligarchs, are bailed out is highly political.

Echoing the hawks’ demands for a larger state role in the economy, nearly 60 percent of Russians want the property of Russia’s biggest businessmen nationalised and 70 percent favour state regulation of prices, an opinion poll by the VTsIOM polling group showed.

“A ‘development dictatorship’ may realistically be a scenario if the crisis persists,” Georgy Satarov, a liberal former Kremlin official who heads the INDEM think tank, said.

The liberalisers, many of whom have business backgrounds, believe the solution is not only to make Russia’s economy more competitive but to reinstate some of the institutional safety valves to head off any social unrest.

Analysts say Russia’s political system is vulnerable to popular discontent because, with deferential television stations and a parliament loyal to the Kremlin, there are insufficient political safety valves in times of economic difficulty.

“Right now a completely managed structure is of no use to anyone,” said analyst Andrei Ryabov. “In the conditions of a crisis ... people want to see those organisations which can really represent their interests.”

Many Russians were glad to let Putin concentrate huge power in the Kremlin when he was president, from 2000 until this year, because their incomes were rising steadily in the longest economic boom in a generation.

But the crisis has brought sharp falls in the price of Russia’s main export, oil, and analysts say this could undermine the unwritten contract between the Kremlin and the people.

“If the current negative trend continues, the country could plunge into a full-scale social crisis,” Yevgeny Gontmakher, an analyst with the independent think tank Sigma, wrote in the Vedomosti business daily.


The hawks mainly identify with Putin, who remains powerful as prime minister, and the liberals tend to look to Medvedev, although neither has taken sides.

They have been careful to put up a united front over the crisis, but it could yet drive a wedge between them.

Economists say the biggest long-term challenge is a fall in the oil price from more than $140 a barrel in July to slightly over $70. Oil and gas sales are the motor of the Russian economy and the budget depends on revenue from taxing energy exports.

Russian media say some people have been stocking up on non-perishable goods such as vegetable oil and pasta — behaviour which in the past signalled a looming economic crisis.

In the past six months, Medvedev has cheered investors by saying he wants to create conditions that would let business flourish, promote a modernisation of the economy and empower civil society to hold the government to account.

In a videoblog posted last week (www.kremlin.ru), he said the crisis was an opportunity to push this agenda.

“We must use the current situation to modernise those spheres where we have been acting too slowly,” he said.

Dmitry Badovsky, the head of the Institute of Social Systems, said the real test will be if Medvedev follows up those words by presenting a detailed modernisation plan.

Before that can happen, the rival Kremlin clans must battle it out. “At the moment, the elite is split,” said Badovsky.

Writing by Oleg Shchedrov; Editing by Timothy Heritage

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