Russia after the Presidential Election

On March 30, 2004, Boris Fedorov, former Deputy Prime Minister and Minister of Finance of Russia, presented his views on the political and economic situation in Russia after the Presidential Election. Anders Åslund, Director of the Russian and Eurasian Program at the Carnegie Endowment, chaired the discussion.

Politics

With this year’s elections Russia “clearly entered a new phase of a slow and painful transition period and ‘the jury is out’ for the next presidential term,” began Fedorov. The dismissal of the government just before the election was a surprise, as was the appointment of Mikhail Fradkov as the new Prime Minister. By appointing a new government headed by Fradkov, President Putin further distanced himself from the “Yeltsin family.” In Putin’s view, Fradkov’s experience as the head of the Tax Police and the ambassador to the European Union prepared him well to take the new post in the government. But, Russia is yet to find out the Prime Minister’s position on many concrete issues.

Fedorov described the March election as “another vote of confidence in Putin,” who pledged to continue fighting corruption and bureaucracy, strengthening the education and health systems, and building a strong middle class. Putin has tried to reduce bureaucracy through an administrative reform. For example, there are only two deputy ministers in each ministry of the new government compared to about 15 in the previous cabinet. Considering Putin’s background, Fedorov regards the presence of certain former security staff in the government as natural. Most of Putin’s former colleagues, now appointed to the government, were just junior officers in the Russian security forces in the 1990s and one should neither exaggerate nor underestimate their role in Russia’s future. Far more important for the continuation of the economic growth of the country is the presence of experienced market-oriented economists in the government.

On the one hand, liberals in the new government, including German Gref and Alexander Zhukov, and the “President’s peace with the one party parliament” will ease the process of economic and social reforms. On the other hand, the parliament’s domination by one party eliminates a system of checks and balances and also limits the independence of thought. Fedorov does not think that the situation will change in the next two years, but he expects the revival of liberal democratic parties by 2008.

As for Putin’s successor in 2008, Fedorov offered two scenarios. It is possible that after serving his second term, Putin would become a speaker of the parliament or would head the United Russia party. In this case, the Prime Minister would be the natural presidential candidate who could serve one term and then Putin could run again. A second option would be for the parliament to propose a constitutional change extending the presidential term to five years or more. Putin has publicly stated that he does not want to change the constitution. However, some analysts argue that he cannot “afford to leave presidency because he has created many enemies,” especially among the oligarchs.

Yukos

Fedorov noted that Mikhail Khodorkovsky’s arrest last October increased Putin’s popularity among the Russians, who are sure that Khodorkovsky and other oligarchs are guilty and deserve punishment. When asked to comment on Khodorkovsky’s article “The Crisis of Russian Liberalism” published in Vedomosti on March 29, 2004, Fedorov said it was surprising that former Yukos’s CEO described Putin as the biggest liberal in Russia. Fedorov saw this anti-reformists article as Khodorkovsky’s attempt to get closer to the state, but Putin is not interested in creating new oligarchs or forgiving the old ones.

The future of Yukos, however, will have a much stronger impact on the financial markets than the result of Khodorkovsky’s trial. Fedorov reminded the audience that Yukos has many foreign shareholders who are worried about the state taking over the company or canceling the licenses.

Economics

President Putin has recently surprised the public by taking greater interest in the economic development of Russia, contrary to his relative silence on the subject in his first term. The President’s main goal is to double the gross domestic product (GDP), and he wants Russia to join the World Trade Organization. Fedorov noted that it was more important to double the budget first, which is only about $85 billion a year, and then double the GDP. The government recognizes the heavy dependence on oil and gas revenues, but has not created a plan to diversify Russia’s economy. Fedorov stressed the importance of developing a well-formulated macroeconomic policy to achieve a sustained economic growth, increasing efficiency and productivity.

Another sensitive issue on the economic agenda is the restructuring of the three monopolies: Gazprom, Sberbank, and United System (UES). The government would most likely not change Gazprom or Sberbank’s structure. In fact, the state slowly wants to increase its share in Gazprom from current 38 to 51 percent. Fedorov added that in the last few months the capitalization of Gazprom has increased after Gref promised that the government will allow the liberalization of the share structure. Currently, foreign investors are only allowed to buy Gazprom’s American Depository Shares (ADRs) but are restricted from buying domestic stock.

Sberbank represents 60 percent of all deposits in the country and 90 percent of the voters keep savings there. The government would not want to upset the voters by breaking Sberbank into several banks. As for UES, attempts have been made to break it up in the last five years, but little progress has been achieved. Fedorov said that Putin is waiting to see how the UES reform develops before restructuring Gazprom.

The speaker suggested a gradual process to restructure the natural monopolies rather than abruptly breaking them up. For example, he stressed the need for a domestic gas market that would allow independent producers, foreign investors, and higher domestic gas prices. Fedorov also said that the gas pipelines should eventually be separated from Gazprom. A state company controlling the pipelines, Transgaz, could be set up and the government could sell its Gazprom shares. If such restructuring were to take place, it would involve negotiations between shareholders, the company, and the state. Fedorov added that Gazprom has to increase investments and develop new projects that would be possible with higher capitalization.

Boris Fedorov concluded that while Russia has many challenges ahead, its economic system is much more sophisticated and he is more optimistic about its future than fourteen years ago.

Summary prepared by Kate Vlachtchenko, Junior Fellow with the Russian and Eurasian program at the Carnegie Endowment.