Tell me Russia, are you feeling the sanctions yet?

The idea behind economic sanctions is that people affected by them will put pressure on their government to change its policies. Obviously, in order for this strategy to work, it’s necessary that people realize that the sanctions are affecting them. Is this realization happening in Russia? In November 2014, Levada centre surveyed public opinion about the Russian economic situation, including the possible impact of Western sanctions, oil prices, and other factors affecting economic growth. What does this survey tell us?

First, as the chart below shows, most Russians are currently not experiencing problems because of the sanctions. In fact, since September the share of people experiencing serious or somewhat serious problems has not changed.

(Source: Levada Centre, 2014)

Okay, this is now – but what about their future expectations? Here we can see that the share of Russians who think that at some point they will feel the pinch is currently about 20%; this share has actually decreased since September. Also, quite a lot of Russians are not yet ready to answer this question.

(Source: Levada Centre, 2014)

It’s my assumption that many Russians are hoping that President Putin will do something to ensure the sanctions don’t hurt them. And in his own way Putin is indeed trying to persuade the West to cancel the sanctions – quite unsuccessfully. Just today, during his visit to Turkey, Putin expressed his displeasure with the sanctions. He said that they are illegitimate and unproductive. At the same time, as the West is not listening to Putin, he is trying to find allies in the countries that have problematic relations with the EU or US; Turkey may be one of them.

Notably, although most Russians are not ready to admit the sanctions are hurting them, they overwhelmingly agree that the domestic economic situation has deteriorated.

(Source: Levada Centre, 2014)

The question, of course, is “what causes this deterioration?” The chart below shows that Russians blame both external factors (like oil prices or Western sanctions) and domestic factors (like low productivity and corruption) for this situation. “Oil prices” is the most popular factor, which isn’t surprising as Russians hear about declining oil prices in the media all the time. “Crimea” is also a popular factor. “Sanctions” is twice as popular as “countersanctions”. Notably, ruble devaluation is not among the responses.

(Source: Levada Centre, 2014)

Many Russians probably think economic hardships will force improvements in governance, resulting in reduced corruption and increased productivity. In my opinion, this is unlikely to happen as Putin knows that economic liberalization often leads to political liberalization and, ultimately, to lost political control.

Back to the oil prices, how is Russia reacting to OPEC’s decision to not cut output? Both President Putin and Rosneft CEO Sechin have expressed their conviction that the oil prices won’t stay low for long. Putin, who used to hint at the possibility of an international conspiracy to exert downward pressure on the oil price, said that continued oil price decline following OPEC’s decision is “an inevitable reaction of the market”. He added that he’s comfortable with the current price, but many Russians will probably not agree.

Returning to the Levada survey, here is a chart that compares Russians’ views on the best measures to improve food security, as expressed in 2002 and 2014. We can see that most people think it’s best to support domestic producers, and that the share of those who favour limiting imports has decreased since 2002.

(Source: Levada Centre, 2014)

Judging by Putin’s recent speeches, it is unlikely that the proponents of autarky will prevail. This is good; however damaging the sanctions may be, their impact will not be as significant as a decision to cut economic ties with the West altogether.

Finally, what if Russians were experiencing the effects of the sanctions? Would they be able to influence their government’s policy? I think that’s highly unlikely. Russia doesn’t have an independent parliament, major opposition media, or public forums that could hold Putin accountable for the mess he brought upon his country. The only force that has significant influence is Putin himself, his goodwill. While I think he is unlikely to support deep economic reforms at this point, it is quite possible that he will try to rebalance his foreign policy to make it less hawkish. I hope Putin realizes that isolating Russia further would lead to catastrophic consequences for the country’s future, undoing whatever positive impact his rule may have had.

“By Moscow then we die, as have our brethren died before”

Two and a half years ago, on February 23 2012, Vladimir Putin stood before his supporters at a patriotic rally in Moscow. He stood there as a presidential candidate and as someone whose authority seemed to be waning. He was troubled by the recent opposition rallies that had gathered thousands of Muscovites to protest against a rigged parliamentary election. In response, Putin appealed to his people quoting the great Russian poet Mikhail Lermontov: “By Moscow then we die…” Lermontov was referring to the Battle of Borodino, a central event of Russia’s victorious war against Napoleon. Now, 200 years later, Putin invoked Lermontov to remind Russians that the war was not over. As many of us realized later, Putin implied that the West had launched another war against Russia and in order to survive, Russians had to forget about crime, corruption and cronyism and unite around their leader. Many of us were slow to realize this but Russians loyal to Putin had no trouble getting this message. It was by upping the ante that Putin was able to regain lost ground. But the price Russians have to pay for this has been quite high…

Two and a half years ago, Putin’s war rhetoric seemed far-fetched, almost absurd. In the first 10 years under Putin (including the period when Russia was ruled by his protege Medvedev) Russia had been freer than in most other periods in its history. There was no ideology, nobody to tell people what to do. The relationship with the West was not perfect but members of the Russian elite were still welcome to spend their hard-earned dollars in Europe and the US where their families resided. And Putin already thought of China as a strategic ally but the two countries couldn’t seal the deal because for Russia it was more profitable to sell oil and gas to Europe. Anti-Western propaganda existed but it wasn’t as black and white as it is today. Russians consumed Western goods openly and without guilt. In fact, this ability to consume was the cornerstone of the Russian consensus, of the people’s “contract” with Putin – he allowed them to consume whatever they wanted and they, in return, minded their own business when it came to politics. Now this prosperity is a thing of the past. Putin broke out of his contract with Russia unilaterally; his infamous counter-sanctions mean that Russians will retain neither their political freedoms nor their freedom to consume.

Russia is fast becoming a fortress and a very dangerous society. The propaganda machine touts the shameful annexation of Crimea as Russia’s first victory in a long time, and all who think otherwise are advised to get out. I don’t usually like when people compare Putin’s Russia to the Third Reich (in fact, I don’t like to compare anything to the Third Reich), but the level of ressentiment in Russian society is too high to ignore the similarities. November 4 is an appropriate day to think about this.

November 4 is the Day of National Unity. First introduced in 2005, this holiday is dedicated to an event that not many Russians know or care about: a 1612 Moscow uprising against Polish occupants. The holiday was made up in order to prevent Russians from celebrating the Day of the October Revolution on November 7. The trick worked, helping Putin’s political technologists weaken the influence of the Communist Party. But introducing the Day of Unity had a toxic side effect; from the beginning observers have voiced their concern about it turning into a major event for Russian ultra-nationalists. Indeed, media usually concentrates on just one element of the Day of Unity: the so-called Russian March, when young Nazis, monarchists, and members of other fringe nationalistic movements march in the streets of Moscow shouting hateful slogans against illegal immigration. Similar marches are organized in other Russian cities as well. Wishing to keep nationalists under control, the authorities usually allow the Russian Marches to proceed on the condition that they take place away from the city centre. At the same time, the authorities have appropriated many elements of the Russian March to construct a mainstream nationalistic movement. The annexation of Crimea gave this movement a boost, including turning Vladimir Putin into its de-facto leader. Recently Putin called himself “the biggest nationalist in Russia”.

… Two and a half years later, November 4 2014, another patriotic rally called We Are United gathered 75,000 people in Moscow (the Russian March gathered less than 5,000 people). Although the rally was formally a non-political event, for the first time ever it brought together all major parties and political movements, including the Communists, Liberals, Social-Democrats and, of course, Putin’s supporters. Democratic party Yabloko was the only one that refused to participate. Russia Today recorded the event:

The rally’s main message was that Russia is encircled by enemies, and its biggest enemy is the West. Yes, these are tough times but thanks to its army and its strong, hardworking people Russia won’t be pressured into submission. Russia will overcome all the difficulties. Many of the speakers called for solidarity against “fascism” and proclaimed their support for the Donetsk and Lugansk Republics. Actor and Communist Mikhail Nozhkin made a passionate speech, referring to modern dissidents: “Some people don’t like it here. What can we do? Let’s wish that they would go away, go to hell. Let’s buy them tickets – train tickets, plane tickets… one-way tickets.” Surprisingly, few speakers mentioned Putin but those who did praised him as a strong leader. As I was watching the broadcast, I couldn’t help but recall Soviet-era rallies; the similarities were shocking. But there were also differences: this time, people were dressed in brighter clothes, many of them were obviously happy to be there, they were smiling and singing along to cheesy patriotic songs. So what to make of this?

William E. Pomerantz, author of an excellent Reuters article detailing Russia’s challenges, notes, “Putin is the author of this crisis. And the Russian president will ultimately be required to provide some answers.” This is where I think he is wrong: no one can demand those answers from Putin. There is no real opposition in Parliament, there are no major opposition media, and anyone with an interest in history will likely agree that a popular uprising is not a solution in Russia. Unlike in many other countries, the “Russian riot, senseless and merciless” (in the words of the great Alexander Pushkin) is usually just an outburst of energy that doesn’t change much.

We now know that Putin was serious when he called upon his supporters to die by Moscow. Maybe he was able to look into the future? Today, having unleashed the Ukraine crisis, it’s clear he has no way out. Years ago, people used to speculate that when Putin retired, he would go to live incognito in Europe or somewhere else. But it’s becoming increasingly clear that he will live and die in Russia. And I just hope that he doesn’t drag with him thousands of ordinary Russians as a result of another war with a neighbouring state, a conflict with NATO, or a civil war. But to avoid that scenario, he should stop encouraging West-hating. If he has any responsibility left in him, he must realize that the Third Reich is not a suitable model of national unity.

Fear and loathing in Moscow: political art in Putin’s Russia

An article on Gazeta.ru describes an exhibit of propaganda art, organized by the youth faction of the ruling party United Russia, that has just opened in Moscow. The exhibit is taking place at one of the venues frequented by Moscow hipsters, Flacon Design Factory. While the opening was apparently well-attended, I suspect many of the attendees were young people from United Russia.

The exhibit highlights the nature of Russia’s political discourse in the post-Crimea period as it shows how the elite’s disappointment in the West is transformed into direct insults aimed at foreign leaders and their countries. The subjects include Ukraine’s pitiful condition, Russia’s superiority over the US and EU, and Obama’s fear of Putin.

Interestingly, comments to the article on Gazeta.ru are mostly negative; its well-educated audience is stunned by the bluntness of the cartoons. This bluntness, typical of Soviet-era political art, is a trademark of Vitaly Podvitsky, a commercial cartoonist favoured by the state-owned mass media. Although he was born in the Soviet Union, Podvitsky is in many ways a product of the Putin era. He is smart, quick-witted, and superficial. Unlike the Soviet cartoonists whom he is trying to imitate, Podvitsky is not interested in making a lasting impact. Nor does he seem to care for ideology. He just realizes that patriotic art is a relatively unoccupied niche and a profitable one at that. As a result, he churns out one cartoon after another. Podvitsky’s works can be seen everywhere, and his page on Vkontakte, the Russian version of Facebook, is already more popular than that of Sergey Yelkin (an acclaimed poltical cartoonist who tends to portray Putin in an unfavourable light).

Below are some of the exhibits (more on Gazeta.ru). An example of Podvitsky’s work can be seen on photo #5. The rest of the photos display even more blunt propaganda pieces by some ungoogleable “Studio 13”.

1. “Neat Sanctions”

2. Putin as the creator & Obama as the destroyer

3. Various anti-Western and anti-Ukraine cartoons

4. “I wish these were photoshopped!”

5. “Putin I’m sorry”. Western leaders and Europeans apologize for their sanctions.

6. “Is he really behind me?”

7. The Chess Players. This one reflects a popular view according to which only Putin and Obama make decisions in the Ukraine crisis; Ukraine and the EU are merely pawns in their game.

8. “Again without gas”. This one alludes to a famous Soviet painting that shows an inept student who got a bad grade again. This time, PM Yatsenuk is the inept student while other Ukrainian politicians who expected him to get a gas deal from Russia await with scornful looks.

9. Russia is helping Ukraine while the US wants it to drown

10. This one needs no explanation

Who rules Russia: a quick look at Putin’s power collective

Very often Vladimir Putin is portrayed as a ruthless, insidious and irrational Byzantine dictator, but this image is simplistic in so many ways. It’s a shame we still think of Putin in those terms because having observed him for 15 years we really should know better. Yes, he has largely destroyed Russia’s fledgling democratic institutions. But that doesn’t make him irrational. I’d argue that the structures that Putin established as substitutes for those democratic institutions create sufficient conditions for him to exercise rational behaviour.

Analysis by Russian political scientist Evgeniy Minchenko, director of Minchenko Consulting, may help us understand Putin’s decision-making model. In essence, Minchenko describes a model of collective governance, in a way similar to Soviet-era PolitBureau, the difference of course being that it’s not a broadly representative or legitimate framework; this time the PolitBureau doesn’t represent the Party but has been hand-picked by the leader himself. As the core members of the PolitBureau have been with Putin for many years, they (and the groups they represent) remain in his orbit but sometimes he pulls some of them closer and other times, keeps them at a distance.

Minchenko has formulated the following five patterns that describe Putin’s behaviour in a coherent way. A description of these patterns were recently published  by the Rossiyskaya Gazeta meaning the results of Minchenko’s analysis are officially approved. Here they are:

1) Ensuring gains in advance to increase predictability (e.g. election results are generally predetermined);

2) Ensuring that no interest group dominates in decision-making (leveling the field, but only for the insiders);

3) Rotating the elites to cultivate new allies (this includes removing those who ride along or threaten the model’s survival);

4) Creating a “competition of successors” (e.g. in 2007 it wasn’t clear until the last moment if Putin would choose Sergey Ivanov or Dmitry Medvedev as his preferred successor);

5) Consolidating the elites to withstand external threats (e.g. 2013 legal provisions that forced the elites to choose between their loyalty to Putin and their Western assets).

Just last week, Minchenko Consulting published a new report that shows a new, post-Crimea composition of the PolitBureau. According to this analysis, whereas formerly there were too gravitational centres within the PolitBureau, led by Igor Sechin (Conservatives) and Dmitry Medvedev (Liberals), there are now eight such centres that concentrate on ideology, social policy, regional policies, and other areas. Putin himself continues to oversee Russia’s foreign policy, defense, and oil and gas.

The composition of the PolitBureau shows remarkable consistency. Both Sergey Ivanov (head of the Presidential Administration) and Dmitry Medvedev (Prime Minister) are still close to Putin. However, as noted by Minchenko, as the focal point for Ukraine Sergey Ivanov has gained much of the ground he lost several years ago when Putin didn’t choose him as his successor; Dmitry Medvedev, on the contrary, is considerably weaker now. Naturally, the Ukrainian situation contributes to Medvedev’s weakness as in today’s Russia Liberals are highly unpopular and are generally seen as traitors and public enemies. So even though Medvedev remains Prime Minister and Putin’s close friend, his political role is not very significant. Minchenko’s report shows graphically how Medvedev’s influence in almost all important areas has shrunk and how Ivanov’s influence has expanded compared to previous years. Besides Ivanov, another person who has gained from the crisis in Ukraine is Sergey Shoigu (Defense Minister). This summary obviously doesn’t cover the whole PolitBureau because I’ll omit other imp0rtant figures who oversee domestic policies, Russia’s propaganda machine, and so on. I will just mention two more of them – Igor Sechin and Gennady Timchenko.

We can see from Minchenko’s analysis how foreign policy, and Russia’s behaviour in Ukraine in particular, has a major influence on Russian politics overall. But what about the role of economics and finance? It’s easy to see that economic considerations will continue to play a secondary role. Much has been said about Putin’s limited involvement in economic policy-setting, and his interest in economics has even diminished in the wake of the Ukraine crisis. And obviously, there are no prominent economists among the members of the PolitBureau. Traditionally, the Liberals’ role in economic policies was strong but as mentioned above, their political weight has decreased significantly. As Russia’s relationship with the West has deteriorated, the role of Asia (in particular China) has increased. As a result, Minchenko observes the growing importance of Igor Sechin (CEO of Rosneft) and Gennady Timchenko (owner of Volga Group). In 2014, Sechnin has negotiated a deal with China, while Timchenko co-chairs the Russia-China Business Council. There are no Liberals with a comparable political and financial weight among Putin’s elite.

What does Minchenko’s analysis leaves us with? I would offer three observations. First, in 2014 Putin’s elite has survived one of the most significant crises of his presidency. This elite is loyal and although its largest source of legitimacy is Putin himself (importantly, by and large Putin is also loyal to his elite), its strength is in its unity. Second, as the rift between Russia and the West is growing the political situation is becoming more unpredictable, so the importance for Putin to be in control of his machine is more important than ever. Third, economic considerations will continue to play a subordinate role to politics. The people on top are obviously less concerned with creating a competitive entrepreneurial class than with maintaining their political power. Not much hope for those who would like to see a Westernized Russia – so far the traditional collective mentality is winning.

Economic growth, inequality, and national unity: a Russian story

In the past two years, propaganda of national unity has become a distinct feature of Russia’s political landscape. Everyone, from migrant workers to Putin’s oligarch friends, must show their patriotism on every occasion. Propaganda claims that during hard times Russians have always “rallied around the flag”, and refers to historic examples to prove this point. The biggest example is the Great Patriotic War (this is what WW2 is called in Russia). But there are other examples. For instance, when I was in Moscow last winter and visited a municipal service, I saw there a poster of Minin and Pozharsky. Wikipedia tells us that in the 17th century, Prince Dmitry Pozharsky and citizen Kuzma Minin “gathered and all-Russian volunteer army and expelled the forces of the Polish-Lithuanian Commonwealth from Moscow”. So what the author of the poster likely meant (mind you, this was before the Ukraine crisis) was that since Russia was again surrounded by enemies, its citizens had to forget about their disagreements and unite.

As we have seen in the past months, this propaganda campaign is quite successful. Neither the deaths of Russian soldiers in Ukraine, nor the recent passing of the first draft of the “Rotenberg Bill” by Russian Parliament have swayed public opinion in Russia. In fact, Alexey Navalny discovered this a long time ago – while Russians tend to complain about corruption and inequality, they are definitely unwilling to revolt. What are the reasons for this apathy?

Much has been said about the success of Putin’s propaganda machine, but I have always thought about the average Russian’s tolerance of Putin’s escapades as a function of economic growth. Indeed, economic data suggests there might be a connection. Here is an example of such data: a chart showing the annual growth in Russian households’ mean disposable income based on surveys by the Russian Statistics Service. Since I like to compare Russia to other countries, I supplemented that chart with a similar chart for the US, based on US Census Bureau data. Strictly speaking, Russian statistics shouldn’t be compared to US statistics directly because the methods of data collection and analysis are different; however, this is not a research paper so I decided to put these charts side by side. The data are provided for 2004-2013, not adjusted for inflation; they are broken down into quintiles.

Sources: Russian Statistics Service (2004-2013), US Census Bureau (2013)

We can see three important trends in the Russian data. One, in the period between 2004 and 2013 Russian households’ disposable incomes grew at an average rate of 19% per year.  As a result, in 10 years the incomes of the highest 20% went up by 430%  while the incomes of the rest grew by over 330%. These rates are astonishingly high. Two, in the wake of the 2008 crisis this income growth slowed down, but the highest 20% was affected more than for the rest. Three, after 2009 the incomes of the highest 20% grew faster than those of the rest.

As for the US data, there is a clear growth trend but it’s more modest; on average, household incomes grew by only 2% per year (compared to Russia’s 19%). This is not surprising, as the growth in Russia started from a much lower base. We also see that before the 2008 crisis US income growth in the highest 20% was less prominent than in the rest of the population. But the crisis impacted incomes in all categories much more than it did in Russia – the recession was much more prolonged. Then, after 2010 (and similarly to Russia), incomes in the highest 20% grew more than they did in the rest of the population – but the gap seems to be narrowing.

Using the same data, we can observe how the share of each quintile in the mean income in both countries changed during the same period.

Sources: Russian Statistics Service (2004-2013), US Census Bureau (2013)

Between 2004 and 2013 the share of the highest 20% in the Russian households’ mean disposable income growth increased from 45% to 49%, but the shares of the other four quintiles didn’t change as significantly. There were no major fluctuations between the shares of the five quintiles in total income during that period. And, of course, we should assume that social transfers helped those in the lowest quintiles adapt to the effects of inflation. As for the US, year-on-year changes in the share of the highest 20% in the US mean household income were less volatile than in Russia. Also, the share of the two lowest quintiles in overall income was lower in the US than in Russia. But overall, the picture is not that different and the trend is quite similar.

Finally, here’s a chart for the Gini Coefficient growth in both countries. The Gini Coefficient measures inequality from 0 (perfect equality) to 1 (perfect inequality). As a rule, it tends to be lower in the social democracies of Northern Europe and higher in emerging economies such as Russia, China or South Africa.

Sources: OECD (2014), Russian Statistics Service (2014)

In terms of the Gini Coefficient, Both Russia and the US are somewhere in the middle of the global inequality rankings but closer to their “inequal” tail. While in the past 10 years Russia clearly had a higher Gini Coefficient, the US experienced somewhat of a faster growth in inequality compared to Russia. However, more recently the Gini Coefficient continued to increase in Russia as it stabilized in the US.

To sum it up, if the data (and my quick interpretation of it) are accurate, Russia’s recent oil wealth is a tide that has literally lifted all the boats. Sure, it lifted the top ones more than it did the rest – but it did lift all of them. And it lifted many Russians out of poverty. In 2004-2013, economic growth was significantly higher in Russia compared to the US, and in spite of a high level of inequality most Russians likely saw a real improvement in the quality of life. Again, this analysis isn’t robust and there are multiple factors that have contributed to Russians’ perception of their leader. However, I witnessed this amazing growth in prosperity first-hand, so to me it’s clear that even with high inflation rates Russians benefited from a growth in their real incomes. Before 2014, while Russians in the lower quintiles had many reasons to complain about inequality, the net effect of Putin’s economic policies on their lives was positive.

Of course, today the situation is very different. We know that a slowdown in economic growth began even before the Ukraine crisis but the recession has undoubtedly worsened because of that crisis. In any case, it’s interesting to see how the events of 2014 have affected real incomes and inequality in Russia. Given that Putin has pretty much taken full responsibility for supporting the growing class of budgetniki (those employed by the state), today’s adverse economic climate with a near-zero growth, declining ruble rate, and capital flight may potentially result in the Russian state not being able to fulfill its obligations towards those who have hitherto approved of, or tolerated, Putin’s regime. What will then happen to the national unity?

Watching Russia: 3 key events/trends in September

Here is my subjective take on the three most significant events and trends that affected Russia in September.

1. Ukraine ceasefire. Signed on September 5, the ceasefire demonstrated that both Russia (and the pro-Russian rebels) and Ukraine were willing to to get out of a deadlock. The ceasefire was presented to the public in the form of reconciled proposals by Putin and Poroshenko, with OSCE acting as mediator. Many observers were skeptical of the possibility of a long-term ceasefire but it has lasted until now. Both sides are still fighting but with lower intensity, and political solutions are being sought. So the ceasefire was the first step towards peace in Ukraine.

2. Economic troubles. On September 12, the EU announced a new package of sanctions against Russia – the most serious one so far. The sanctions targeted Russia’s economic heavyweights in the energy, banking, and defense sectors as well as 24 representatives of the Russian elite. Russia chose not to impose counter-sanctions. In addition, oil prices continued to drop and are now hovering around $90. This prompted Russia’s MinFin to conclude this may be a long-term trend that will impact Russia’s budget negatively; to cover the deficit the government will have to tap into the reserve funds. Finally, responding to these and other shocks, the ruble continued to fall; budget losses will be partially compensated by revenues from exports but given that Russia imports most of its consumer goods weakened currency will aggravate the inflation problem. All of this has undoubtedly contributed to Russia exibiting a less reckless behaviour in the Ukraine conflict.

3. Khodorkovsky.  In September, Mikhail Khodorkovsky finally emerged as a politician and as someone who has presidential ambitions. I really like how he justified his renewed interest in politics by stating that when Putin’s era is over (which, according to him, may happen at any point – tomorrow or in five years), the country will need to be ready to move on. So he’s leading a progressive movement, Open Russia, that will help ensure a smooth transition. For the first time in years, the Russian opposition movement may obtain a leader with credentials and authority who is not afraid to position himself as an alternative to Putin. And who knows, maybe one day he will become our President.

Sanctions hurting, Putin backing down on Ukraine

Are Western sanctions hurting Russia? According to Lubomir Mitov, Chief Economist at the Institute of International Finance, they are. Here is his Bloomberg video interview. He says the sanctions are hurting much more than expected. Because of the sanctions Russia has completely lost access to foreign capital sources. As a result, investment is down, and banks are under intense pressure.

I guess it’s always difficult to estimate the effect of sanctions correctly in advance because in Russia’s case for example their effect should be seen in combination with a continued capital flight, falling oil prices, and the negative effect of Putin’s own counter-sanctions (yes, according to Mitov Russians now realize that the ban on food imports from Europe has hit them harder than it has the EU). Apropos, Mitov believes that no new sanctions/counter-sanctions will be imposed. But what about the possibility of escalating sanctions if Russia-backed rebels gain in Donbass?

I think that as long as Putin is not pushed into a corner, he’ll be open to a compromise that would let him save face. And while I used to think that he won’t back down on Ukraine, he already has, sort of. Just today, in his speech at the Investment Forum “Russia Calling” Putin said “Ukrainian people have always been and will be our closest brothers.” But his propaganda machine rages on, calling Ukrainians fascists.

In any case, with many Russian backers of the separatist movement gone and ceasefire established, the tension has obviously decreased. But the sanctions are here to stay.

Mikhail Khodorkovsky: the next President of Russia?

Mikhail Khodorkovsky, former CEO of oil and gas company Yukos who has gone from being Russia’s richest man to its best-known prisoner (before we learned about Pussy Riot), and now its most famous émigré, recently announced his presidential ambitions. Given that in a country of 143.5 million there are no viable alternatives to the “national leader”, the thought of having Khodorkovsky as a candidate may appeal to the educated class. But is he really electable?

According to surveys by Levada Centre, most Russians are not ready to vote for Khodorkovsky. This graph shows that in the nine years between 2005 and 2013, only a very small share of respondents answered “yes” to this idea. And while the share of those who say “no” is less than it used to be, these people still qualify as the overwhelming majority.

Why are so many people unwilling to vote for Khodorkovsky? I will describe three factors that potentially make him unelectable and then reflect on why these factors may not be so important, after all:

1. Wealth. This is something that Americans will probably find hard to understand as in the US wealth is respected. In Russia it’s not and won’t be for a long time. As a former oligarch, Khodorkovsky is hard to sympathize with for an average Russian person. We know that Khodorkovsky has learned to live with less but this still may be an issue for many.

2. Criminal record. Khodorkovsky is known in the West as a political prisoner, but for many Russians he is just a criminal. Khodorkovky was sentenced for leading an organized criminal group that committed fraud, tax evasion, and misappropriation of funds. Several of his subordinates and colleagues also received lengthy prison sentences, and one of them, Alexey Pichugin, was given life sentence for murder. Also, according to Russian law, Khodorkovsky can’t take part in an election for at least another 10 years.

3. Ethnicity. This is perhaps the most controversial factor. A popular view voiced by Russian journalist V. Pozner is that since Khodorkovsky is Jewish, Russians are unlikely to vote for him. Indeed, anti-Semitism has traditionally been somewhat of a factor in Russian politics. Although they would not admit this publicly, many Russian politicians today could subscribe to this quote from L. Kaganovich (Stalin’s Commissar for Transportation): “Jews are always stirring up trouble because they are less dependend on a country’s tradition and they maintain bonds with their compatriots abroad.” (as quoted in this book, my translation). In Russia, as in some other post-Soviet states, the ethnic factor is routinely used to harass political opponents. For example, just this year Putin’s chief propagandist D. Kiselyov has reproached Putin’s critics for being ungrateful to Russia, hinting at their Jewish origin, and NTV, another propaganda channel, has claimed that Russian Jewish intellectuals who criticise Putin’s political agenda are “igniting anti-Semitism”. But how does that relate to an average Russian? Surveys by the Public Opinion Foundation (FOM) show that between 2005 and 2013, the share of Russians who didn’t have prejudices against Jews grew from 83% to 87%. In other words, very few Russians would admit explicitly that they have something against Jewish people. Of course, this is a sensitive question that not everybody is willing to answer openly. Also, we should consider that the conflict in Ukraine, tensions between Russia and the West, and the associated campaign against the “fifth column” have contributed to anti-Semitism. Recent monitoring of hate speech reveals that public anti-Semitism is on the rise, and the two examples mentioned above that anti-Semitic hints are becoming a normal part of the political discourse. Sure, this isn’t an official anti-Semitic campaign and hate speech hasn’t yet resulted in pogroms, but there’s always a time gap between speeches and actions. And if need be, Russian propagandists still have enough time to play the ethnic card to convince Russians that Khodorkovsky is to blame for Russia’s troubles.

Now that I’ve listed the three factors that make Khodorkovsky unelectable, I’ll try to explain why these factors may not be so important. To understand this, it makes sense to look at what Russians actually think of Khodorkovsky. I’ve collected here the results of several surveys by VCIOM, Levada Center, and FOM, and I think they show an interesting picture.

In 2008, after a second case against Yukos was opened, the majority of respondents of a Russia Public Opinion Research Center (VCIOM) poll believed that Khodorkovsky should stay in prison (35% of the respondents didn’t respond or were undecided):

Did Russians support Khodorkovsky’s prison sentence because they were not aware of the political factors in his case? Perhaps they are more aware of that now? Well, according to a more recent VCIOM survey, in 2012 only 10% of Russians thought Khodorkovsky was a political prisoner. To see a fuller picture, let’s look at the answers to the question Khodorkovsky’s case is viewed controversially in Russia and other countries. Some think he was punished for the economic crimes that he had actually committed, while others are convinced that he is being persecuted for political reasons. Which position is more appropriate for you? from the same survey. We see that in 2012, twice as many Russians saw Khodorkovsky as a criminal than those who saw him as a political prisoner (again, over 35% didn’t respond or were undecided):

Interestingly, Levada Center tells us quite a different story. Let’s look at their surveys from 2010 until 2013, more specifically at responses to the question Why do you think Khodorkovsky is still in prison? We see that the share of those who thought Khodorkovsky was in prison due to political or personal reasons has grown significantly (although with fluctuations), and the share of those who thought he was in prison because he was a criminal has gone down (here, too, one can see that many didn’t, or couldn’t answer the question):

 

What this may indicate is that with time, Russians became more sympathetic to Khodorkovsky’s situation. Those who were aware of his situation, that is. Answers to another question from the same surveys Is it better for Russia that Khodorkovsky should stay in prison or work for the country’s benefit in business or politics? show that during five years (2009-2013) the share of people who wanted the former oligarch to stay in prison decreased and the share of those who wanted him to work in business or politics increased:

Finally, in December 2013, after Khodorkovsky’s unexpected release, FOM did a survey that included the question Do you see Khodorkovsky’s release as something positive or negative? You can see on this graph that while the share of positive responses was higher than that of negative ones, most respondents were really indifferent to Khodorkovsky’s release (again, many couldn’t answer the question) – and this, I think,  points to something important:

It’s easy to see the contradictions between VCIOM, FOM and Levada results; VCIOM and FOM respondents were more likely to side with the government in Khodorkovky’s case compared to Levada respondents. But what these surveys have in common is this: many Russians are undecided. They don’t think anything of Khodorkovsky’s ethnicity, the reasons for his incarceration, or his wealth: they are a clean slate. Indeed, the share of respondents who are not following the developments in Khodorkovsky’s case is usually between 30% and 50%. Is it that people are not politically active? Is it that they have no access to this information through state-controlled media? Are they not interested? Well, whatever it is, this indicates that it may be possible to convince these undecided Russians that Khodorkovsky can represent their interests. But if these people had to choose, why would they choose Khodorkovsky over Putin?

It’s easy to see that Putin is selective in his responses to the electorate. When he became President, he had a largely pro-market, liberal agenda. Today he is defending government intervention. As a self-proclaimed Russian nationalist, he has appropriated a lot of his opponents’ conservative and nationalist rhetoric. But there is one thing that hasn’t changed much – Putin still lacks a social-democratic agenda. Indeed, as a populist he has contributed to the growth of budgetniki – people who depend on the state budget for their salaries and benefits, for their survival. However, he has all but ignored the gap between the rich and the poor. In 2012, Russia’s Gini index was 42.0 – better than the US but much worse than European countries or Canada. And as someone who strengthened executive power structures and undermined the already weak parliamentary and judicial systems, he is responsible for another gap – the gap between the state and its citizens. In a sense, Putin’s system is typical state capitalism, hostile to any kind of social democracy. Many Russians understand that, and that’s exactly why several years ago Alexey Navalny was able to build a successful public campaign against Putin, even with limited media exposure. Putin is a colossus with feet of clay.

As opposed to Putin, Khodorkovsky understands what most Russians need in the long term. He has admitted the mistakes he and other oligarchs made in the 1990s, during and after the first wave of Russia’s privatization. He has emphasized social equality and the importance of creating opportunities for the majority of Russians, not just for those who support the “national leader”. Importantly, he has been inside the notorious Russian prison system which has changed little since the GULAG years, aside from rapid commercialization. Khodorkovsky has seen, and thought about, things that other wealthy Russians haven’t even considered. In fact, today Khodorkovsky knows a lot more about Russia than Putin does – but also more than do most of his supporters. Judging by his speeches, he understands that Russians want a president who is moderately nationalistic and who is not confrontational but will protect Russia’s interests if necessary. They want a president who will discourage corruption but won’t promote unfettered capitalism. They want a president who will create business opportunities but not at the cost of dismantling the existing safety net. Putin is not that president. Can it be Khodorkovsky? Time will tell but a first, small step has just been made.

Sochi Forum: Gazprom, China, EU and lost opportunities for structural reforms

The  Sochi Investment Forum gathered 9,700 participants (an almost 40% increase from last year) from 47 countries. Some interesting announcements and statements were made at the Summit and I thought I’d share/comment on some of them. First, Gazprom CEO Alexey Miller announced that his company still sees Europe as its main market. Miller noted that the share of Russia in EU gas consumption has increased from 23% to 30% in four years, but its share in EU gas imports has increased even more – from 47% to 64% in the same period. Miller said he believes Gazprom’s role in EU gas imports and consumption will grow further. However, he noted that Europe’s attitude regarding Gazprom is “shortsighted” – undoubtedly referring to the recent sanctions and barriers that Europe is trying to erect in order to weaken Gazprom’s position there. Miller also reflected on the recent announcement of a Russia-China 30-year gas deal, to be signed in November. He said he thinks Europe has “lost the battle for Asian LNG”.

As noted in a recent FP article, the contract that Miller is referring to may make it difficult for gas suppliers from the US, Canada, or Australia to penetrate the Chinese market. And, in spite of this being a buyer’s market, this agreement will help improve Russia’s financial situation in light of the ongoing recession exacerbated by the sanctions. Recently Miller announced that Gazprom would reduce this year’s gas production forecast by 7% to 463 bn m³. In mid-term China may help Gazprom get back to earlier production levels. And, of course, this is already a second gas contract between Russia and China this year. I think China is trying to kill three birds with one stone: it will obtain access to gas supplies at a good price, reduce its air pollution, and drag Russia into its sphere of influence. This contract, and the whole Russian situation, is a boon for China.

But a question remains: can Russia use the money from its fossil fuel exports to improve its long-term economic situation? Former Finance Minister Alexey Kudrin has a pessimistic view. He stated at the Forum that the Russian governance system is not conducive to economic growth. Specifically, he noted a lack of structural reforms in Russia; a limited role of Parliament that has limited opportunities to discuss economic policies; an unbalanced budget with increased defense and government expenditures but reduced social obligations; and low labour productivity coupled with growing wages. Kudrin estimated that structural reforms could add 1.5-2% to annual GDP. If I’m not mistaken, Kudrin has been making this point for years and so far, Putin hasn’t listened. And why would he, given the abundance of money from the oil and gas exports? After all, Gazprom is about to sign another deal with China, and the money will roll right in.

Ukraine: from crisis to uncertainty – 2

Ukraine’s foreign policy reached two milestones in the past weeks. First, NATO’s summit in Wales became a platform to voice the military alliance’s support for Ukraine and its rejection of Russia’s actions. While the total sum pledged for Ukraine, 15 million euros, isn’t significant, NATO has clearly taken a strategic approach to its partnership with Ukraine, announcing a four-pillared approach that will include rehabilitation for injured troops, cyber defence, logistics, and command and control and communications. According to recent information from Ukraine’s defense minister, NATO’s expressions of support may turn out to be more than a token gesture, as some of the bloc’s members are considering delivering weapons to Ukraine. Currently Ukraine’s army is undernourished and undertrained, and there is a shortage of weapons and ammunition. NATO members, however, are denying they are ready to provide weapons, so let’s see. And then, of course, various NATO members and non-members have dispatched small troops to western Ukraine for the planned exercise Rapid Trident. What’s happening has a high degree of symbolism because for the first time in history, there are both NATO and Russian troops stationed in one European country. I hope, of course, this doesn’t symbolize something sinister, like the start of a major pan-European war.

In addition to NATO, Ukraine and the EU have finally ratified the ill-fated Association Agreement (ill-fated because in many ways it was the agreement, and the process of its adoption, that triggered the Russian attack on Ukraine). In any case, both the political and economic components of the agreement were ratified by Ukraine and the EU, but the free-trade component will come into force only as of 2016. This represents something close to a Russian diplomatic victory, as Russia has formally approved the agreement, although some European countries may have backed Russia on this. But this diplomatic victory came at an extremely high cost.

Now here is the saddest part: the EU is partially to blame for Russia’s invasion of Ukraine because  in 2013 EC President Barroso rejected Russia’s attempts to become a third party to the Ukraine-EU negotiations. With its excessive formalism, the EU did not take into account the fact that Russia still considered itself the preeminent power in the former Soviet Union and that Putin believed no important decisions about Ukraine may be made without his approval. The EU had good intentions but the results of its efforts in Ukraine have been devastating. Of course, while Russia’s concerns about the future of the Russia-Ukraine market were perfectly legitimate, one cannot agree with the method Putin chose to address those concerns. As the EU chose to ignore Putin’s demands, he started a war. Now, almost a year later, Russia gets to shape the future of Ukraine’s economic ties with the EU – at least in the near future. If the same result had been achieved at last year’s negotiations between Ukraine and the EU, thousands of people would still be alive.