A different Russia

As Russia’s new president Dmitry Medvedev settles into his new office in the Kremlin, Matt Jones considers the work that lies ahead of him


It’s not every day Russia gets a new president. In fact it is eight years since the last one, Vladimir Putin, the former KGB operative who turned out to be highly provocative in the usual tradition of the old Soviet Union’s heads of state. After all, Boris Yeltsin was hardly non-controversial with his quixotic foreign policy and unpredictable style of politics.  And before him there was Mikhail Gorbachev who ushered in nothing less than a revolution.

Could it be that Dmitry Medvedev, who took over on May 7, will be the first Russian president not to fascinate and alarm the west in equal measure? Certainly, Poland’s foreign minister Radoslaw Sikorski thinks the 42 year-old former lawyer could herald a new era. As he told journalists in late April, Medvedev was “an interesting person because he is the first Russian leader in my memory who doesn’t come from the Communist party or the security services. It is a hopeful development.”

At last, a boring Russian President?
While not exactly boring, Russia is not the country it was eight years ago. Medvedev assumes control of a vastly stronger economy than the almost lawless one that Putin inherited. By dint of the out-going president’s “authoritarian capitalism”, the economy has been knocked into a semblance of western-style shape that is regarded as incomparably better than the one prevailing in the first few years after the disintegration of the Soviet Union. That was a period when even Soviet economists openly deplored the activities of the oligarchs who practically looted state assets in what was dubbed the “wild east”. As a (legitimate) businessman mourned at the time: “What we need is for Russia to become boring.”

Most observers give the Putin regime high marks for saving the economy from ruin. He has presided over average annual economic growth of nearly seven percent following the collapse of the rouble in 1988, a crisis that left Russia almost bankrupt. In nominal dollar terms, gross domestic product has exploded by six times in the last eight years. And while the public finances of several European economies are in deficit, Russia’s are almost a model of fiscal rectitude with $500bn of reserves locked away in the form of gold and foreign exchange.

Gains are shared
More importantly, the average Russian has enjoyed the benefits of the economy’s recovery with average monthly wages multiplying by eight times to $640 since 2000. The citizens’ new-found spending power – up by 11 percent a year in terms of real disposable income – is reflected in the phenomenal surge in the retail industry, and especially in luxury brands for which Russia has overnight become the world’s fastest-growing market. Western retail chains from Zara to Monsoon, Starbucks to Costa’s, have moved quickly to service a consumer market that will at the current rate of development become Europe’s biggest within seven short years. Indeed it was the headlong growth rates in brewer Scottish & Newcastle’s Russian and neighbouring markets – up 30 percent-plus for brands such as Baltika – that attracted the successful bid from Heineken.

Home-grown retailers have rapidly adopted western-style, customer-pleasing techniques that were infamously absent in the Soviet era. One of the fastest-growing is the Magnit discount supermarket – Russia’s Tesco – which has built up a 2000-outlet chain from almost a standing start ten years ago. Opening a new store every single day on average for the past three years, Magnit has introduced to Russians a wide range of affordable products for the first time.

However Medvedev certainly has work to do. Remarkable as it is, the Putin-engineered turnaround has come at a price. Inflation ran at nearly 12 percent last year and looks to be accelerating so far this year, partly because of the soaring, worldwide price of commodities that is affecting every corner of the economy. According to research by Russia-based investment funds, the cost of construction materials has risen by 150 percent in just 18 months, a phenomenal increase that could put in jeopardy the Kremlin’s plans to spend $1,000bn on a vast update of the nation’s infrastructure that would include everything from bridges to railways.

Additionally, a savage spike in food prices must be quickly reined in. According to finance minister Alexei Kudrin, the retail price of some food items shot up by 40 percent in a wild bout of commodity inflation late last year. These are events that Russians do not readily understand, as Kudrin observed in a recent interview. This is because most of them grew up in a totalitarian environment of brutal solutions, even if they only served to paper over the cracks. “Russia’s economy emerged from the Communist command economy, so some people lack an understanding of market mechanisms,” he said. “They think if the state has money it can solve any problems.”

$160bn to invest
Additionally, it is a measure of the abyss to which the economy sank before Putin’s election that in real terms gross domestic product has only just been restored to the level of 18 years ago. A steady hand on the helm who gets much of the credit for guiding Russia through this turbulent time, Kudrin reportedly had to fight all the way against the old-school, economically illiterate and xenophobic hard-liners known as the siloviki.  One of the finance minister’s hardest jobs has been to protect a cushion of reserves from the clutches of those who have all too quickly forgotten the cataclysmic event that triggered the crash of the rouble. He is sitting on a mountain of petrodollars – nearly $160bn in total invested in the Stabilisation Fund – that less prudent parties such as the oligarchs argue should be released into the general economy.

Instead, in late April it emerged that some $25bn will be converted into a sovereign wealth fund for investment in a wide range of global companies along the same lines as Norway’s long-established and much-admired fund.

“We would take holdings of no more than 3-4 percent,” explains deputy finance minister Dmitry Pankin in a remark that will relieve those countries, especially in western Europe, that feared the fund would be much more aggressive. “There would be no controlling shareholdings.” At least, not for a few years.

A well-intentioned sovereign wealth fund may go a long way to allaying some of the fears raised by Putin’s increasingly aggressive attitude towards the west. Certainly, he alarmed Germany’s Angela Merkel who is nervous about the out-going president’s use of Gazprom, the giant gas monopoly, almost as a geopolitical weapon. Headed by Alexei Miller, a long-time ally of Putin, Gazprom has declared its intentions of reaching a market value of $1,000bn, or more than four times its present value. As Merkel knows, such growth cannot come solely from within Russia. Gazprom has its eye on western energy assets.

Distrust of the west
As a former KGB man operating in East Germany’s Leipzig, Putin seems never to have shaken off an instinctive distrust of the west. Although president Bush greeted his (almost simultaneous) accession to power with the encouraging observation that Putin “is a man we can do business with”, relations with the United States and the west in general have deteriorated markedly since, notably because of Russian support for anti-independence rebels in the old satellite nations.

For instance in Georgia, a nation eager to do business with the west, its multi-lingual, France and US-educated young president Mikheil Saakashvili complains that Russian-backed separatists have fired missiles at his helicopter from the region of South Ossetia within his own country’s borders. And Putin has frequently resorted to bullying to try and crush what he regards as dangerously pro-western activities; in 2006 he banned the import of Georgian wine as a gesture of his displeasure among numerous other similar trade-based retaliations.

Meantime the dominant role of Putin-made appointments in Russia’s biggest companies ensures that he will continue to exercise an enormous sway over the commercial world inside and outside the country long after he steps down from his new role of prime minister. As well as Gazprom’s Alexei Miller, other Putin friends occupy the top jobs at defence-industry giant manufacturer Russian Technologies and Russian Railways.

Good relations with the Kremlin have proved the essential prerequisite for doing business in Russia. Without them, oligarchs have found some of their prize assets being plundered by what are effectively state-authorised actions. For instance Mikhail Fridman, who heads an oil to grocery conglomerate, may soon lose control of a 50 per cent stake in the Anglo-Russian TNK-BP oil company to Gazprom after a concerted bout of pressure from the government.

A baby-sat president?
The big question for Russia-watchers is the degree to which the new president will be his own man. According to Igor Yurgens, a former executive secretary of Russia’s peak business lobby group, the handover of power will come slowly as Putin fills the baby-sitting role of prime minister.  However he credits Medvedev with the ambition of modernising Russia through the introduction of younger, outward-looking professionals. “The extent to which he will be allowed to do this is not clear but he wants reformers, pro-west people and not xenophobic patriots”, summarises Yurgens, now the head of the Institute of Contemporary Development.

The new president’s background gives cause for optimism. For a start, he is not from the KGB. Medvedev is a lawyer, the son of university professors, and a fan of rock music who treasures his collection of Deep Purple albums. Within the Kremlin he is seen as the leader of a liberal-minded group of technocrats anxious to complete the process of converting Russia into a modern and rational economy. According to one informed analysis, the new president’s style will be a “controlled liberalism”.

Encouragingly, after his anointment for the top job, Medvedev had no reservations about arguing the case for reform, especially of the judicial system and the legislative process. If nothing else, this is a position that puts him firmly outside the ranks of the siloviki.

Meantime the new president will have a lot to discuss with his opposite numbers at the EU-Russia summit in June, and they with him.