Friday, October 24, 2014

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 />

The Power Vertical Feed

In this space, I will regularly comment on events in Russia, repost content and tweets I find interesting and informative, and shamelessly promote myself (and others, whose work I like). The traditional Power Vertical Blog remains for larger and more developed items. The Podcast, of course, will continue to appear every Friday. I hope you find the new Power Vertical Feed to be a useful resource and welcome your feedback. More



From RFE/RL's News Desk:


Russian President Vladimir Putin has accused the United States of escalating conflicts around the world by imposing what he called a "unilateral diktat."

Putin made the remarks in a combative speech to political experts at the Valdai International Discussion Club, in Russia's Black Sea resort of Sochi.

Putin said the United States has been "fighting against the results of its own policy" in Iraq, Libya and Syria.

He said risks of serious conflicts involving major countries have risen, as well as risks of arms treaties being violated.

He also dismissed international sanctions over Russia's actions in Ukraine as a "mistake," saying they aimed at pushing Russia into isolation and would end up "hurting everyone."

We did not start this," he added, referring to rising tensions between Russia and the West.

(Based on reporting by Reuters, AP, Interfax, TASS)


German Chancellor Angela Merkel has urged Russian President Vladimir Putin in a telephone call to push for a quick resolution of the ongoing gas dispute with Ukraine as winter looms.

The call by Merkel to Putin on October 24 comes as representatives of the EU, Russia, and Ukraine are due to meet again next week in EU brokered talks aimed at solving the gas dispute between Kyiv and Moscow.

Merkel also underlined that upcoming elections in areas of eastern Ukraine controlled by Russian-backed separatists must respect Ukrainian national law.

Pro-Russian insurgent leaders are boycotting a parliamentary snap poll on October 26 in Ukraine and are holding their own election in the Lugansk and Donetsk regions, home to nearly three million people, on the same day instead.

(Based on reporting by AFP and Reuters)



The United Nations says the conflict in Ukraine has forced more than 800,000 people from their homes.

Around 95 percent of displaced people come from eastern Ukraine, where government troops have been battling pro-Russian separatists.

UNHCR, the UN refugee agency, told a briefing in Geneva that an estimated 430,000 people were currently displaced within Ukraine -- 170,000 more than at the start of September.

It said at least 387,000 other people have asked for refugee status, temporary asylum, or other forms of residency permits in Russia.

Another 6,600 have applied for asylum in the European Union and 581 in Belarus.

The agency said it was "racing to help some of the most vulnerable displaced people" as winter approaches.

It also said the number of displaced people is expected to rise further due to ongoing fighting in eastern Ukraine.


Three alleged militants have been killed by security forces in Russia's volatile North Caucasus region.

Russia's National Antiterrorism Committee says that two suspects were killed in the village of Charoda in Daghestan on October 24 after they refused to leave an apartment and opened fire at police and security troops.

One police officer was wounded.

Also on October 24, police in another North Caucasus region, Kabardino-Balkaria, killed a suspected militant after he refused to identify himself, threw a grenade towards police, and opened fire with a pistol.

A police officer was wounded in that incident.

Violence is common in Russia's North Caucasus region, which includes the restive republics of Daghestan, Kabardino-Balkaria, Ingushetia, and Chechnya.

Islamic militants and criminal groups routinely target Russian military personnel and local officials.

(Based on reporting by Interfax and TASS)


A lawyer, who represented an alleged victim of the notorious Orekhovo criminal group in Moscow, has been assassinated.

Police in the Russian capital say that Vitaly Moiseyev and his wife were found dead with gunshot wounds in a car near Moscow on October 24.

Moiseyev was representing Sergei Zhurba, an alleged victim of the Orekhovo gang and a key witness in a case against one of the gang's leaders Dmitry Belkin.

Belkin was sentenced to life in prison on October 23 for multiple murders and extortion.

Last month, another of Zhurba's lawyers, Tatyana Akimtseva (eds: a woman), was shot dead by unknown individuals.

The Orekhovo group was one of the most powerful crime gangs of the Moscow region and in Russia in the 1990s. Its members are believed to be responsible for dozens of murders.

(Based on reporting by TASS and Interfax)







From RFE/RL's News Desk:


Ukrainian Prime Minister Arseniy Yatsenyuk is warning that Russia could attempt to disrupt Ukraine's parliamentary elections scheduled for October 26.

Yatsenyuk told a meeting of top security officials and election monitors on October 23 that "It is absolutely clear that attempts to destabilize the situation will continue and will be provoked by Russia."

Yatsenyuk said "we are in a state of Russian aggression and we have before us one more challenge -- to hold parliamentary elections."

The prime minister said Ukraine needs the "full mobilization of the entire law-enforcement system to prevent violations of the election process and attempts at terrorist acts during the elections."

Interior Minister Arsen Avakov said authorities have ordered some 82,000 policemen on duty for election day.

He said 4,000 members of a special reaction force would be among those maintaining order during polling hours and would be concentrated in "those precincts where there is a risk of some terrorist acts or aggressive actions by some...candidates."

The warning by Yatsenyuk comes on the heels of three violent attacks on parliamentary candidates in the past week.

The latest, against Volodymyr Borysenko, a member of Yatsenyuk's People's Front Party, occurred on October 20 when Borysenko was shot at and had an explosive thrown at him.

He allegedly survived the attack only because he was wearing body armor due to numerous death threats he had recently received.

Elections to the Verkhovna Rada, the parliament, will be held despite continued fighting in the eastern part of the country between Ukrainian government forces and pro-Russian separatists.

Voting will not take place in 14 districts of eastern Ukraine currently under the control of the separatists.

Those separatist-held areas -- in the Donetsk and Luhansk regions -- are planning on holding their own elections in November.

Additionally, Russia's illegal annexation of Crimea in March means the loss of 12 seats from the 450-seat parliament.

Polls show President Petro Poroshenko's party leading with some 30 percent of respondents saying they would cast their vote for the Petro Poroshenko Bloc.

It that percentage holds on election day it would mean Poroshenko's bloc would have to form a coalition government, likely with nationalist groups who oppose conducting peace talks over fighting in the east.

(Based on reporting by Reuters and Interfax)



Moscow has denied claims of an incursion by a Russian military plane into Estonia's airspace.

A Russian Defense Ministry spokesman told Interfax news agency on October 23 that the Ilyushin-20 took off from Khrabrovo airfield in the Russian enclave of Kaliningrad on October 21.

The spokesman said the reconnaissance plane flew "over neutral waters of the Baltic Sea" while on a training flight.

On October 22, Estonia’s Foreign Ministry summoned the Russian ambassador in Tallinn, Yury Merzlakov, after the Estonian military said the Russian plane had entered its air space.

In a statement, NATO said the Ilyushin-20 was first intercepted by Danish jets when it approached Denmark, before flying toward non-NATO member Sweden.

Intercepted by Swedish planes, the alliance said the Ilyushin entered Estonian airspace for “less than one minute” and was escorted out by Portuguese jets.

NATO has stepped up its Baltic air patrols and Moscow has been accused of several recent border violations in the region amid heightened tensions between Russia and the West over the Ukraine conflict.

Last month, Estonia accused Russia of abducting one of its police officers on the border.

Russia claims Eston Kohver was seized inside Russia on September 5, while Estonian officials say he was captured at gunpoint in Estonia near the border and taken to Russia.

The European Union and United States have called for the immediate release of the Estonian security official, who is facing espionage charges in Russia.

Meanwhile, the Swedish Navy has been searching for a suspected submarine sighted six days ago some 50 kilometers from the capital, Stockholm, although it said on October 22 it was pulling back some of its ships.

Swedish officials have not linked any particular country to the suspected intrusion and Moscow has denied involvement.

(With reporting by Interfax, TASS, and the BBC)


A Moscow court postponed to next week a ruling on a move to take control of Bashneft, an oil company from tycoon Vladimir Yevtushenkov.

The judge said on October 23 that the next hearing will take place on October 30 after the prosecution requested more time to prepare its case.

Prosecutors filed the suit in September to regain state ownership of Bashneft, citing alleged violations in the privatization and subsequent sale of the company to AFK Sistema investment group.

Yevtushenkov, the main shareholder of the conglomerate, is under house arrest on suspicion of money laundering during the firm's acquisition in 2009.

Yevtushenkov, 66, was arrested on September 16.

He is ranked Russia's 15th richest man by U.S. magazine Forbes, with an estimated fortune of $9 billion.

(Based on reporting by Reuters and TASS)

11:11 October 23, 2014


According to a report in the pro-Kremlin daily "Izvestia," deputy Kremlin chief of staff Vyacheslav Volodin told a meeting of the Valdai Discussion Club in Sochi that Western politicians "do not understand the essence of Russia."

"Volodin stated the key thesis about the current state of our country: As long as there is Putin there is Russia. If there is no Putin, there is no Russia," Konstantin Kostin, head of the Foundation for the Development of Civil Society, told "Izvestia."

Latest Podcasts

About This Blog

The Power Vertical is a blog written especially for Russia wonks and obsessive Kremlin watchers by Brian Whitmore. It covers 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