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The Power Vertical

Is Russia's Social Contract Breaking Down?

Just how nervous is Russia's elite about the ongoing financial crisis?

Just a couple of weeks ago, Deputy Economic Development Minister Andrei Klepach received a stern Kremlin smack down for suggesting Russian was entering a recession.

But now, in an interview published in the magazine "Novoye Vremya" on December 22, Anatoly Chubais, the head of the Russian Nanotechnology Corporation and the architect of the country's economic reforms in the 1990s, says it is basically anybody's guess whether Russia's current political and economic system will survive the current downturn:

"If we talk particularly about Russia and try to analyze the risks, I would say it's fifty-fifty. It's 50 percent that the current political and economic system, which has formed in the past eight years, will endure and 50 percent that we are facing serious  economic, social, and perhaps even political turmoil."

Chubais predicted that the economic crisis would begin to have serious social repercussions by springtime.  "Whether the social crisis turns into a political one is a question of the stability of the system that has been built in the past eight years," he added.

Since Vladimir Putin ascended to power in March 2000, Russia's social contract -- or more correctly, its social bribe -- has been simple: the authorities will assure that living standards rise and in exchange, ordinary people will keep their noses out of politics.

Now there are clear signs that the deal is breaking down.

On December 21, OMON riot police broke up street demonstrations in the far eastern city of Vladivostok where residents were protesting higher import tariffs on imported used cars. You can watch video of the demonstrators being hauled into police vans here. It was the second consecutive weekend that such protests took place and the authorities clearly felt it was time to nip them in the bud.

Deputy Prime Minister Igor Sechin referred to the protestors as "swindlers." But as Alan Gutnov, a blogger from Vladivostok points out in a very informative post on Live Journal, the imported used car business is one of the key sectors of the local economy -- along with fishing and wood exports -- and the increased import duties could have a devastating effect.

The authorities are presenting the tariff increase as a necessary measure to protect the domestic auto industry. But, as political analyst Yulia Latynina points out in a December 24 article in "The Moscow Times," cronyism appears to have played a large role in the decision:

"Most likely, the decision on import duties was made in order to help Kremlin favorites like Sergei Chemezov and Oleg Deripaska whose holding companies own the AvtoVAZ and GAZ carmakers. But it is highly questionable whether this tactic will save the domestic car industry."

And for Latynina, the dust up in the Far East over imported Japanese cars is a microcosm of the Kremlin's dangerous dilemma as oil prices tank:

"In reality, Russia is not going through an economic crisis. The real crisis is that its government model is fundamentally flawed. Under Putinomics, when petrodollars are flooding state coffers, the government can afford to make bad decisions without worrying about the consequences... But starting in the fall, it became clear that the country's national wealth was acquired thanks to high world oil prices and not as a result of any individual's personal wisdom. But now the party is over, and any decision the authorities make...will come at a very high price indeed."

Easy petrodollars allowed Putin and his cronies to purchase the loyalty of Russia's sprawling bureaucracy and to buy at least the passive consent of a critical mass of the population. Now something clearly has to give.

December 21 in Vladivostok may turn out to be an omen of things to come, and Russia's rulers are most likely getting very very nervous indeed.

-- Brian Whitmore

Tags: vladivostok,anatoly,chubais,economic,demonstrations,crisis,Russia

This forum has been closed.
Comment Sorting
by: Peter Lavelle from: Moscow, Russia
December 29, 2008 17:12
Brian, as usual, you do not disappoint. I agree with you on many points, but for very different reasons. <br /><br />I will dispense with commenting on your hyperbole and over-stated and over-opinionated case. But there is something we agree on. Russia's authorities are feeling the heat - which I am very pleased to witness. I will be proven right and you wrong. <br /><br />The easy years are over and they won't be back for a while (if ever). Now comes the hard work - the hard work of governance. You and everyone else at RFE/RL peddle the mantra that Russia's governing elite is nothing more than a house of cards. This is not true. The Russian state prepared itself well for the eventuality of a huge external shock. And now it has happened. To date there is no panic in Russia – just hard policy making decisions. Yes, there are social protests and there will be plenty more. Russia’s political elite has already realized that you just can’t throw money at a problem. Now it knows it must manage social expectations. Said differently, it must manage the expectation that itself created. <br /><br />Don’t get too excited about the demise of Russia. No one is chanting Kasparov’s name in the streets. But the people do expect the Medvedev-Putin elite to perform. <br /><br />It is good when the people put pressure on their leaders. <br /><br />I am big fan and always read your blog,<br /><br />Best, <br /><br />Peter Lavelle<br />&quot;Russia Today&quot; (RT)<br />Moscow, Russia<br />

by: Anton from: Auckland
December 30, 2008 12:46
Peter, I can see you are &quot;on site&quot; there... Is my impression correct or not - that the present day &quot;social contract&quot; in Russia is pretty much very loose? I mean the elite and population exist to some degree by themselves and lack 2-way communications, and the number of areas, where the population can rely on government support, is minimized? I can not figure this out statistically from the media, I follow.<br /><br />What is a percentage of people, whose income does not immediately depend on the state? Because those, receiving the incomes from the state sources, would surely be taken care of, one way or another, so the crisis would be most noticeable in private sector - the case with Far East and Japanese imports seem to support this, they say 150,000 people would lose the incomes...<br /><br />It seems to me now, that there is low chances for any wide protest movement, precisely because the population is not expecting too much assistance anyway.

by: La Russophobe from: USA
December 30, 2008 20:07
So let me see if I understand: Peter LaVelle, an employee of the Kremlin, thinks the Kremlin is doing a really good job managing its troubles, for which it was well prepared. And he believes that his views are reasonable and unbiased, while those who critize the Kremlin are carried away with prejudice.<br /><br />Uh, OK. We've heard that silly song and dance before, all through the collapse of the USSR. We heard how well the USSR was doing right up until the moment it was slam-dunked into the ashcan of history. And now, the likes of Mr. LaVelle wants to do it all over again. What mind-bogglingly inane drivel!<br /><br />Meanwhile, Putin is alreading laying the table to scapegoat and depose Mr. Medvedev, likely the precurser to a Stalinesque purge.<br /><br />

by: David Edick Jr from: San Diego, CA
January 03, 2009 07:03
I agree with Mr. LaVelle that Russian authorities prepared themselves well for a potential external shock (ie, a decline in oil prices). However, they were not prepared for a global credit crisis that has shut the credit markets and which has hamstrung the Russian banking sector - which somehow was allowed to finance its' growth by gorging on foreign currency borrowing (huh?). <br /><br />What suprised me is the degree which Russian oligarchs hocked their shares/corporate empires as collateral for foreign currency loans in a casino-like game of Monopoly. Greed (what's new) and arrogance clearly infected the highest levels of Russia's economic and political elite. <br /><br />It turns out that the vast pile of reserves Russia stashed away to bridge a period of tough economic times will substantially evaporate via oligarch bailouts, a banking sector rescue, various stimulus packages, and a defense of the ruble - all to little effect for most Russians.<br /><br />For the idea that Putin could successfully blame Medvedev for the crisis: no chance. Most Russians would see this as a cheap, cynical - even unmanly - manuever. Russia's 'power vertical' is dangerously brittle and now faces an epic test as another economic storm pounds a vulnerable populace. Mr. Putin's seat is the hottest of all.<br />

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The Power Vertical is a blog written especially for Russia wonks and obsessive Kremlin watchers by Brian Whitmore. It offers Brian's personal take on emerging and developing trends in Russian politics, shining a spotlight on the high-stakes power struggles, machinations, and clashing interests that shape Kremlin policy today. Check out The Power Vertical Facebook page or