Montrose Journal Spring 05

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PUTIN’S RUSSIA: A RULES-BASED SOCIETY? -

CHRISTOPHER GRANVILLE, STRATEGIST, UNITED FINANCIAL GROUP

In the international arena, Russia is a conservative power, anxious to uphold a rules-based order. This stance reflects the country's chastened post-Soviet condition, especially as the rules still nominally in force – first and foremost, the UN Security Council veto – were made at the apogee of Soviet power. The contrast with the United States – now, of course, anything but a status quo power, as it projects its values abroad in good Leninist style –must go down as one of the richer post-cold war ironies. Seen from Moscow, today's 'world without rules' began in 1999 when NATO attacked Yugoslavia because of actions taken by the Belgrade government within its own borders, and did so without a UN Security Council mandate which, had it been sought, Russia would have blocked.

Turning to Russia's domestic affairs, the situation might seem the reverse. President Putin may have little international clout compared to his predecessors in the Kremlin, but his power is unchallenged at home, so it should come as no surprise to find him less inclined to be bound by rules. Three actions in particular during 2004 have created the impression that the rule of law is a low priority. First came a change to the way regional governors are chosen (they will now effectively be appointed by the President instead of being directly elected as hitherto). This reform sits uncomfortably, to say the least, with the federalist spirit of the Russian constitution. Secondly, 2004 saw the destruction of the shareholders' equity in Yukos by means of tax liabilities arising from repeat audits of the company's accounts for past tax years which previously had been closed by the tax authorities themselves, and regardless also of the statute of limitations in the Russian tax code. Meanwhile, Putin's ill-advised intervention in the Ukrainian presidential election suggested that he too is not averse to a little 'Leninism' by trying to export his brand of authoritarianism to the near abroad.

In the aftermath of his Ukrainian fiasco, Putin tried to cushion his pragmatic climbdown by scoring a few debating points against western critics. In particular, he has highlighted how US support for democracy in the FSU appears to be driven by expediency rather than principle. Pro-western opposition leaders like Ukraine's Viktor Yushchenko and Georgia's Mikhail Saakashvili have been backed by the US, which has not objected to the lack of democracy in other FSU states where hard authoritarian regimes support US economic (Azerbaijan) or security (Uzbekistan) interests. It would be hard to argue with this implied equivalence as regards the way that Russia and the US pursue their respective national interests in the FSU. But even despite the poor credentials of the US as a respecter of external rules, the US (and EU) are right to be concerned about the Putin administration's respect for the rule of law within Russia. Such concern tends to be focused on the active threat to western interests from a hardline, Belarussian-style dictatorship emerging in Russia itself. But the threat from any such scenario is more likely to be the opposite; a passive threat of Russia becoming chronically destabilised, with the elite (and a good part of the population) resisting regression to autocracy and isolation.

Fortunately, and contrary to recent impressions of the Putin administration as power-hungry and rent-seeking, Putin's rule does not look likely to end in such disaster. His early career in the KGB is endlessly recalled, but his legal training deserves to be given equal weight in attempts to understand and predict his actions. His declared commitment to the rule of law is unwavering. Especially notable was his formulation in a newspaper interview early in his presidency that given the situation where citizens justified non-compliance with the law (especially tax evasion) on the grounds of the obvious lawlessness of the state itself, the only way forward for the country was for the state and citizens to become law-abiding in parallel.1 The central reform goal here has been to make legality possible by producing laws which are consistent and reasonable. The best progress on this score has come in tax reform. A useful start has also been made in de-regulation, which is at the heart of the fight against corruption. A World Bank-financed study in ten regions has shown that laws enacted in 2002 to simplify new business registration and reduce companies' vulnerability to official extortion has started to bear fruit.2 It should go without saying that the Putin administration still has many mountains to climb in this crucial area. More fundamentally still, Putin tirelessly denies plans to amend the Constitution itself to keep himself in power after his second and final term ends in 2008. The succession to Putin in 2008 is now the central test of Russia's progress and status as a law-based democracy.

The credibility of Putin's commitment to respect the Basic Law – in other words, to renounce destabilising adventurism – has suffered most of all from the Yukos affair. But on close inspection, the original impulse was, paradoxically, a stabilising one. There is a mass of evidence that the attack on Yukos and its controlling shareholders (Mikhail Khodorkosvky and partners) was triggered by a perception that they were buying control of the state – in particular via votes in the State Duma blocking government policies (especially on oil taxation) of which they disapproved. Any such behaviour would violate the original state-oligarch deal – unwritten, but very clearly spoken, notably in a meeting in the Kremlin in July 2000 – whereby the privatisations were amnestied de facto in return for an understanding that the oligarchs would not use their controversially acquired wealth to privatise the state itself.

Seen in this perspective, the underlying goal in the Yukos affair was to uphold the rules of the game in this sensitive area of relations between the state and the massive concentrations of private wealth stemming from the notorious privatisations of the 1990s. The oligarch regime which emerged in Russia in President Yeltsin's second term seems mild in comparison with Kuchma's Ukraine, which is the most extreme example yet seen in the FSU of a state being captured by business ('oligarch') clans. These established controlling ownership of every part of the media, bureaucracy and (crucially) law enforcement: the judiciary was in the pay of one or other of the inside groups.

An important lesson of Putin's presidency – and the incoming Yushchenko administration in Ukraine will most likely bear this out as well – is that in post-Soviet conditions of a weak civil society, a strong central state seems to be the only practical alternative to a hollowed-out state captured by business 'oligarchs'. The 'strong state' model can produce even more corruption than an oligarch system. A good micro-example is the City of Moscow under the ever-popular mayor Yuri Luzhkov, whose paternalist largesse accounts for Muscovites' apparent indifference to what even by Russian standards are high levels of graft in the city administration. This most corrupt corporatist version of the 'strong state' model must eventually lead to economic stagnation and failure, and were this to be the outcome in Russia as a whole by, say, the end of this decade, then the risk of destabilisation would rise. If the ruling group was no longer legitimised by strong economic growth, it could try to maintain itself in power without popular consent. The democratic legitimacy of Russia's political system is well entrenched. That legitimacy is based on one institution – the presidency –which makes sense to people given the country's political history and tradition of centralisation. All opinion polls show solid majorities in favour of the election of a new President at the end of Putin's second and final term in 2008. Russians like having the right to choose their Tsar, and good numbers would struggle to defend that right if necessary.

"The 'strong state' model can produce even more corruption than an oligarch system"

The temptation to remove that right looks unlikely to arise. Putin has already signalled his plan to "recommend" to the voters a person whom he believes should succeed him. This recommended successor will be given a very fair wind by the state-controlled television: but the lesson of all post-Soviet elections is that propaganda alone does not work if it flies in the face of what people really think. The heavy media bias in favour of re-electing Yeltsin in 1996 and Kuchma in 2000 worked because voters in any case saw them as the lesser evil compared to the only available alternative of unreconstructed Soviet communists (respectively, Gennady Zyuganov and Petro Simonenko). The opposite was true in the cases of Viktor Kebich (the nomenklatura incumbent in Belarus defeated by Lukashenko in 1994) and now Viktor Yanukovich in Ukraine, who were rejected both as individuals and mainly as representatives of a system which had lost its legitimacy. The latest demonstration in Russia came in the presidential election of March 2004, which returned Putin to the Kremlin with 71% of the vote. Contrary to the assumption in most commentary about Putin's Russia, elections now are fairer than they were in the 1990s. There are much improved rules on free airtime for all parties and candidates, comprising both advertising and debates, and these rules are strictly observed. If there was a genuine majority protest vote to be tapped, then that vote would have been mobilised without any need for heroic samizdat. Liberal and Communist politicians blame their own failure on the system. But their predecessors did better in the elections of 1991 and 1996 with far less media access than today. While life is not easy for opposition politicians in Russia, the main reason for their marginalisation is not the repressive system, but the lack of a protest vote for them to tap.

This is due in turn to Russia's strong economic growth and rising living standards. The credit for this which naturally (and in part deservedly) rubs off on Putin is reinforced by his active policies such as controlling the oligarchs, and restoring Russian influence abroad. The most serious blow to Putin's high public approval rating in 2004 was the Beslan tragedy, which left a horrified public feeling defenceless. Now Putin is notoriously focused on his rating as the basis of his power. There was a kind of paradoxical accountability in his authoritarian response to that setback of Beslan, which was to end the direct election of regional governors. Since the Tsar in the Kremlin is held to be responsible for everything that happens in Russia, Putin seems to have decided to reduce his vulnerability by strengthening his control over regional bosses and thereby improve the implementation of anti-terrorism and other key policies.

For now, then, the risk of the Putin version of the 'strong state' approach appears at least equalled by its potential reward, which is that it provides a better platform for successful modernisation – including the evolution of a properly liberal democracy – than the 'oligarch' alternative. Although some of Putin's critics seem tempted by nostalgia for the oligarchs, seen as supplying a kind of rudimentary pluralism, an oligarch-captured state will have an inherent illegitimacy. This would disqualify it from implementing necessary reforms, many of them necessarily painful, even on the heroic assumption that the ruling oligarchs had the inclination for serious reform in the first place as opposed to continuing to feather their own nests.

The Putin formula would be much improved in an environment of greater political competition, including freer television (which is not the same as a return to the unscrupulous oligarch-controlled networks of the 1990s). This is clearly not to Putin's taste. So the most likely outcome is that the succession of 2008 takes the form of another plebiscite for the 'official' candidate which is at once a free vote (as opposed to a Yanukovich-style stolen election), but one where – as, say, in the post-war decades of LDP dominance in Japan – the outcome is never in doubt. Yegor Gaidar (the liberal economist and Russia's first post-Soviet prime minister) has labelled this a 'closed democracy'. The model entails high levels of corruption and mediocre policymaking due to the lack of political competition and accountability. It also encourages the brain drain. But it looks like offering the most realistic, and by no means hopeless, prospect for an environment of stability, legitimacy, reform and economic growth in which Russia's society and polity might gradually mature.

Prospects would be even brighter if Putin follows through on his commitment to promote political parties performing their textbook role of representing real social and economic interests as the best antidote to the unprincipled and unstable patron-client relationships of the oligarch system. Until now, half the Duma has been elected in party lists, and the other half in UK-style first-past-the-post districts. In the next Duma due to be elected in December 2007, those constituency members (most of whom are creatures of intertwined local bureaucratic and business clans) will disappear, and the whole chamber will be filled from party lists. Had this new system been in force in the last Duma election, Putin's 'United Russia' party would have 20% fewer seats than it does today.

While this change will help improve conditions for democracy, Putin seems predictably reluctant to activate this competitive system in practice. For example, the logic of this construct is that presidential candidates should be party leaders (or at least nominees); but Putin has already said that this is premature. But he could still do one thing before the next election cycle which would promote political competition while maintaining the control he prizes. This would be to split the present ruling party ('United Russia') into two. The resulting centre-right (more economically liberal) and centre-left (more collectivist and nationalist) parties would merge with existing smaller parties and then genuinely compete against each other in the Duma election. Both parties would be Kremlin-approved, with all the media and financial support that entails. This very reliability would reduce the political risks for Putin, allowing him to tolerate the limited uncertainty and perhaps even leading him to signal that his successor would have to form a government with whichever of those two parties had performed best in the Duma election. A procedure on these lines would edge Russia gently and stably away from the present version of closed democracy, with its managed presidential successions and political competition confined to faction struggles within a single ruling party.

1 Izvestiya, 17 July 2000
2 For details, see www.cefir.ru
Christopher Granville is Chief Strategist at United Financial Group, a leading Russian investment bank and the joint venture partner of Deutsche Bank in Russia. The views expressed in this article are the author's own.

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