Yesterday, PM Putin did his annual sit-down with the Valdai discussion club. Since its inception, the Valdai meeting has come to be seen as a forum where Putin relaxes the message discipline and says what he thinks without much of a filter. Whether this is true or just another stage-managed PR gimmick, one can only guess (likely, Putin himself hardly knows anymore). In its previous sessions, Putin’s theme has been resolute – criticisms are unfounded and perhaps motivated by a desire to weaken Russia, and the Putin era has been a unequivocal success. Putin’s argument has consistently relied on two main premises: (1) that the Russian people overwhelmingly and unconditionally support Putin and the political system he created; and (2) that there was no end to economic growth in sight, with general economic well-being improving at a rapid rate. Ironically, to the extent that premise 2 has been correct, it has made the sustainability of premise 1 increasingly less viable.
Russian Magic Show
Russia’s economic “miracle” over the Putin years was largely based on the incredible contraction of GDP following the collapse of the Soviet Union and the subsequent devaluing of the ruble and deleveraging of state finances. Thus, Russia not only enjoyed a devaluation-fueled export boom, but it had existing un- or underutilized capacity available to fuel that boom. The spike in oil prices was icing on the cake, which allowed the Russian government to accumulate funds for social projects and to avert crises. Due to the low starting point and additional stimuli, the lives of ordinary Russians improved dramatically during this time period. Rather than having to encourage the growth of new industries, the Russian government could create jobs “out of thin air” with spare capacity. And instead of structuring state expenditures and obligations around tax revenues, Russia financed social stability with its oil revenues windfall. The rapid rise in disposable income jump-started the growth of the retail and real estate industries. Consequently, Russia’s economic growth from 2000-08 was concentrated in legacy industries from the Soviet Union (extractive industries, some manufacturing) and new “fluff” industries dependent on consumer spending.
Recent Economic Forecasts Look Grim
Recent economic forecasts do not bode well for the Russian economy either. For example, the Ministry of Economy’s 2010-14 forecast assumes a GDP growth rate largely driven by investment in fixed capital assets. But others have designated this “wishful thinking” because investment growth has been extremely volatile. So far investment has only grown 4.1 percent this year, and Russia will be lucky if quarter IV growth pushes the annual number to the predicted 6 percent. Moreover, MinEcon is assuming investment growth of 7.8 percent in 2012, 7.1 in 2013, and 7.2 in 2014, which all seem unlikely in light of the current dynamics. Most important, even if MinEcon’s investment growth projections are correct, these numbers will be “insufficient for large-scale modernization of the economy,” and thus the estimates are predicated on the continuing import of capital assets.
With respect to foreign investment, the picture is also bleak. Although foreign investment increased so far in 2011, the proportion of foreign direct investment (FDI) fell dramatically, by over 50 percent. The biggest growth was in “other foreign investment,” which mostly included loans and other financial credits to Russian firms, the majority of which had a term of 180 days or less. Such short-term financial credits are the type of foreign investment least likely to spur modernization. In fact, many of the financial credits are probably inter-company loans within a group of companies where cash is held offshore.
Unhappy Dialectic of Putin Power
The logic is simple: as Russians’ economic well-being rose at a rapid rate, their support of Putin and the Power Vertical softened because it was based on expectations that would be inherently unsustainable in even the healthiest, most innovative economy (i.e., unchecked, rapid economic growth over an indefinite period of 10+ years). Russians have not only grown to expect that their incomes will rise every year, they have grown accustomed to a high rate of income growth as well. So, the campaign slogan is not – “are you better off now than you were four years ago,” but rather “are you 3x better off now than you were four years ago.” This is in addition to the political science theory that a growing middle class will demand more representative forms of government, which is not clearly applicable to present day Russia.
In the case of pensioners, Putin backed down from a fight over pension reform in 2005, instead opting to retain mandatory military service for young students. This approach has set the tone for all benefits debates, again with any reduction posing a serious risk to the Power Vertical. Similarly, Putin grew the size of the bureaucracy to pursue his centralization project in the regions, which also served as a de facto jobs program. If modernization requires that the bureaucracy be slimmed down, it undermines the stability of the Power Vertical.
In sum, Putinism was so successful, that it ensured its own demise. Most countries have adopted “safety valves” for situations like this – some use elections, others purges, and still others coups. But there is a sense that this time is different, as evidenced by unrest in both developing and developed countries. And Russia is in the unenviable position of having no safety valve (in fact, several were dismantled during Putin’s post-Beslan reforms).
Putin on Ice
Putin’s comments at Valdai seem to reflect Putin’s lack of understanding of the predicament he is in, as he is poised to return to the presidency for another 12 years. Putin did the familiar victory lap about this political era, albeit with less vigor than in previous years. But he did admit that the “world is changing” and that “we are thinking about it too,” referring to Medvedev’s modernization program. According to Putin, Medvedev took the modernization issue “out of the paper and office sphere” and into the “public consciousness.” Putin also acknowledged that Russia’s political system is “not perfect” but hastened to note that he “does not know of any perfect systems.”
According to journalists at the meeting, Putin proposed introducing something called “direct democracy” to help rebuild trust and connections between the authorities and Russian populace. An unfortunate turn of phrase perhaps: “direct democracy” was the name of the political model elaborated in the late-Muammar Gaddafi’s Green Book.
Medvedev’s Modernization Ghost
In some ways, Putin’s comments on Medvedev and the public consciousness are prescient. Although Medvedev did very little of substance during his term, he did not fail to use the “bully pulpit” to harp on the ills of corruption and the need for a modernized, innovative economy. It does not take much thought to see that the targets of Medvedev’s critique are byproducts of or encouraged by the Putin political system. Thus, Medvedev legitimized attacks on the Power Vertical by adopting a chief national priority – modernization – that is inconsistent with the Putin model. By assuming the mantle of modernization at Valdai, Putin indicated that the ghost of Medvedev’s presidency will continue to haunt him.
Video of Valdai Meeting