The Putin Guessing Game

It is getting to be that time of year – it has almost been exactly four years since the last time Putin, then as President, had Russia and many foreign observers on the edge of their seats waiting for any indication of what his next step was. It was this context that made the reasonable and uninteresting decision to appoint a ‘lame duck’ government headed by Viktor Zubkov such an act of comedic cruelty.  And it only intensified the speculation until Putin announced his support of Medvedev three months later in December (and it appears  that they will follow the same schedule this year).

So, it is not surprising to see analyses from Russian observers that essentially boil down to Putin being essential for the day to day functioning of the state, due to some mystical ubermensch status. Russia has a long – multi-century – history of an entrenched and enlarging bureaucracy, spread out across 11 time zones. And during the meat of Putin’s presidency, the bureaucracy’s growth rose sharply on the back of high oil prices. As for the higher-level officials that make up the siloviki, Putin let them fill the void left by exiled, jailed, and humbled 90s oligarchs through increasing state ownership in major companies and sectors.

Putin’s Leadership Style and Delayed Retirement – Not Evil, Just Lazy

In contrast to his public persona, Putin’s approach to governing is entirely premised on avoiding fights he may not win by showering people with cash – whether its siloviki, low-level chinovniki, or pensioners. Fellow Russia blog A Good Treaty captured this disconnect amongst the Putin crew earlier this year when they failed to cut the social insurance tax by as much as Medvedev had asked. They didn’t even give a reason really, variously citing it as “fiscally irresponsible” and “technologically infeasible.” Meanwhile, the tax debt burden of small and medium enterprises (SMEs) is one reason why they comprise an abnormally low proportion of employers in the country (SMEs tend to drive employment because they  benefit more from being able to hire additional employees than do large firms).

This is why I have never understood the Putin as power-hungry authoritarian interpretation – it seems more likely that he is just lazy. As for his drawn out departure, sticking around as PM is not entirely inconsistent – it has all of the perks and none of the political and constitutional responsibilities as president (see, e.g., Kursk Sinking, Beslan). Also, the recent events in Ukraine – where former PM Tymoshenko was arrested – may give pause to Putin. Indeed, credible sources have reported that Putin’s handlers have approached European lawyers about the feasibility and logistics of obtaining international legal immunity (i.e., criminal and civil). Of course, there’s no such thing as international legal immunity, but it seems plausible that Putin is expecting from Medvedev the same immunity deal he gave Yeltsin, and he was exploring even greater protections that would prevent anyone from looking at the value and source of his assets if he were targeted with a civil action.

Foreign Investors Catch On

Over the past 1-2 years, foreign investors that focus on Russia first began to realize that the prospect of a second Medvedev term was very real.  Also, even though Medvedev has presided over less economically successful times than Putin, he is considered the smarter half of the tandem when it comes to economic growth and innovation.  With Putin, investors never knew what to expect – one year he’s enacting a flat tax and modernizing the judiciary, the next he is reversing on Production Sharing Agreements and imposing requirements for government approval on investments in “strategic sectors” that are in dire need of private investment (infrastructure comes to mind).

So no doubt investors have been intrigued by the idea of Medvedev staying on, even though almost every major Western company looking to increase its investment in Russia has done so with a “Putin” strategy (e.g., fostering connections with folks like Sechin, transactional approach of up-front “this for that” before committing to new investment).  Hence the development of joint ventures between Western corporations and Russian state  corporations, as it innoculates investors from predatory bureaucrats and probably is not much worse then partnering with a Russian firm (just ask BP).

The problem is that as an economic growth strategy, this approach to investment is limited to low-hanging fruit in extractive or heavy machinery industries, and has not led to significant technology transfers or construction of innovative manufacturing facilities.  For example, Siemens sells its ultrafast Velaro bullet trains to the Russian government (via Russian Railways), but does the manufacturing itself.  Even for the less sophisticated Velaro commuter trains, Siemens chooses to complete 80 percent of the manufacturing in Germany, and then shipping to Russian for “partly localized” production in Russia.  This is what’s called a “screwdriver assembly” factory because it does not involve any manufacturing process beyond elementary assembly.

Medvedev’s Strategy – Positive Early Results, But Under Threat[?]

But then Medvedev comes along and asks investors to take a chance on Russia, and even Siemens took note.  The Russian government still has to essentially guarantee an income stream for the factory, but at least they are getting a full-service facility out of the deal.  If you want to get a sense of the positive response Medvedev’s approach is generating, just consider increasingly long list of major Western companies pledging participation in the Skolkovo innovation park, some of which were not even thinking about a “Medvedev” strategy just last year.

But as a recent Financial Times piece reported, the enthusiasm is still restrained based on the uncertainty surrounding the election.  To put it bluntly, now that they have gotten a taste of the current president’s approach and plans, foreign investors are ready to commit to Medvedev’s Russia, not Putin’s.  This notion is at odds with the commonly repeated consensus that investors do not care about the outcome of the election – they just want “stability” (oddly, the same is said of ordinary Russians). This analysis unfortunately lacks the context of the last 13-15 years.

Russia Today – High Potential, But Fragile

Russia today is a whole different reality than the eras of food shortages and currency implosions. The country is ripe for change, but not in the Arab Spring format secretly hoped for by its Western detractors. Nor can Russia hope to mimic what Deng Xiaoping did in China or Lee Hsien Loong in Singapore (favorite scenarios of siloviki).  Russians are not suffering to get a loaf of bread, but they also are not going to respond to government-led modernization drives.  Russians don’t riot – they neglect, with stagnation more common than implosion. But the cynicism and feigned apathy conceal an intelligence and  youthful ambition that haven’t had the time or environment to develop in the post-Soviet era. So while a Putin return to the presidency would not trigger the apocalypse in Russia, it arguably would signal a turning-point away from a path where Russia realizes its full potential development. Not disastrous or criminal or evil, just disappointing.

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