Russia’s NEW government: Why Vladimir Putin chose to stick with his team

…..the re-nomination of Medvedev is a hugely important symbolicact which says the following: there will NOT be a purge of the Atlantic-Integrationist IMF/WTO/WB type, of the 5th columnist inside the Kremlin and that the (very unpopular) “economic block” of the Russian government will stay in power.  In fact, this re-nomination will only pour more fuel on the fire of rumors saying that Putin/Russia will “cave in” in Syria or the Donbass or that the internal economic course will continue to remain what is politely known as “liberalism”.   The devil is always in the details, but I have to say that seeing Medvedev re-nominated is, at the very least, a PR-disaster.  If that is how Putin begins his term, it scares me to think of what might come next (Kudrin? Chubais?)…

But with this re-nomination of Medvedev Putin himself has given a lot of credence to these rumors!  Why would he do that?  Could it be that he had no other choice?  One thing is sure: he cannot be unaware of the fact that Medvedev is unpopular and that most Russians hoped to see a new face.  Yet Putin ignored this public sentiment.  That is a very worrying sign, in my opinion.

It is important to stress that though The Saker views Medvedev as the leader of the ‘Atlantic Integrationists’ in the government, he is far from being the only one to do so.  On the contrary, as his comments show, this is a common view amongst people on the ‘left/patriotic’ end of the spectrum in Russia.

Is it however true?  Is Medvedev really an ‘Atlantic Integrationist” in the sense of being the Fifth Columnist that The Saker and people who think like him say he is?

Let us just consider a few comments Medvedev has himself made over the last few months.

Back in August, at the time that the US enacted a further all-encompassing sanctions bill on Russia, Medvedev posted on his Facebook page the following comment

The US President’s signing of the package of new sanctions against Russia will have a few consequences. First, it ends hopes for improving our relations with the new US administration. Second, it is a declaration of a full-fledged economic war on Russia. Third, the Trump administration has shown its total weakness by handing over executive power to Congress in the most humiliating way. This changes the power balance in US political circles.

What does it mean for them? The US establishment fully outwitted Trump; the President is not happy about the new sanctions, yet he could not but sign the bill. The issue of new sanctions came about, primarily, as another way to knock Trump down a peg. New steps are to come, and they will ultimately aim to remove him from power. A non-systemic player has to be removed. Meanwhile, the interests of the US business community are all but ignored, with politics chosen over a pragmatic approach. Anti-Russian hysteria has become a key part of both US foreign policy (which has occurred many times) and domestic policy (which is a novelty).

The sanctions regime has been codified and will remain in effect for decades unless a miracle happens. This legislation is going to be harsher than the Jackson-Vanik amendment as it is overarching and cannot be lifted by a special presidential order without Congress’ approval. Thus, relations between Russia and the United States are going to be extremely tense regardless of Congress’ makeup and regardless of who is president. Lengthy arguments in international bodies and courts are ahead, as well as rising international tensions and refusal to settle major international issues.

What does it mean for us? We will steadily continue our work on developing the economy and social sector, take efforts to substitute imports, and solve major national tasks, relying mostly on ourselves. We have learned to do so in the past few years, in conditions of almost closed financial markets as well as foreign investors’ and creditors’ fear of investing in Russia upon penalty of sanctions against third parties and countries. To some extent, this has even been to our advantage, although sanctions are meaningless overall. We will cope.

More recently Medvedev has had more to say on this issue,  In his recent report to the Duma about the Russian government’s performance over the six years of President Putin’s previous term he had this to say

These six years have been an endurance test for the Russian economy. Never before has it been hit by so many hard blows, all at once and over such a short period of time. These include a global financial crisis, a collapse in the commodity market, sanctions and the closure of the financial and technology markets. No economy, even the healthiest, is immune to such shocks. For our economy, with its structural problems, it could have been a disaster. But not only did we survive; we began to grow despite the external obstacles.

These six years have also been a time of parting with illusions, let’s face it, illusions about our partners. Cooperation is always more beneficial than confrontation – in the economy, culture and in the struggle against common threats. This partnership logic seems obvious to everybody. But, unfortunately, it was not valid. Contrary to common sense, America and Europe started to persistently impose the role of an enemy on our country. They have been trying to force us out of global politics and global economic relations. Speaking of which, the latest decisions by the US administration in this area are an attempt to fight us through unfair competition. The goal is to limit our development and create tension in the economy, the currency and the stock market. There is no doubt that we can handle this pressure. We have already learned how to do it. Eventually, we will be able to turn these measures in favour of our own economy and our own economic development. But we will not forget those who continue with an anti-Russian policy and cause damage to our country.

Still more recently, in an interview with the journalist Sergey Brilyov on Vesti v Subbotu, Medvedev said this

In the past six years, the Government has worked in unprecedented conditions, which include unfavourable changes in the global economy and on the hydrocarbons market, as well as sanctions, starting with those imposed on Russia in 2014. All of this taken together formed a group of shocks the kind of which our country has not encountered in its recent history, not even during the 1998 crisis. It was a very deep crisis, but we were not denied access to [international] financial markets. Some countries even tried to help us out at that difficult time. But in 2014 and later on, we were left to our own devices. We have no access to international funding, and sanctions have been slapped on Russian companies and individuals. The situation has been compounded by low prices on hydrocarbons, which are our main export items.  I am referring to oil and gas, of course. It has been a difficult period, but on the other hand, it has helped us mobilise. In light of this, the goals we have attained in that period look very impressive……

As for the latest US sanctions, it is outrageous and obnoxious. This is tantamount to a non-competitive fight against Russian companies. The companies against which the sanctions have been introduced, some of them are very large and others hold first or second place in the world in some sectors, for example, in the aluminium sector. This means that the Americans are protecting their market. This is protectionism. They are fighting against China and Europe, and they are also fighting Russian companies under the pretext that we are misbehaving. They have also introduced personal sanctions against Russian companies. I believe that this is non-competitive behaviour.

By the way, the Americans have always behaved like this. Even when they advanced political conditions, they did so to protect their market and to promote their economic agenda. This has always surprised me. They made political or humanitarian complaints against us, and then they said they have economic interests here or there, including in Russia, and that we must stay away from them. Yes, this is an entirely separate agenda, and purportedly we cannot have anything to do with it. But of course, we will always respond to such actions.

To a large degree, this situation has encouraged us to rethink our views on Russia’s place in the world. First, the policy of containing Russia is a strategic line. Our international partners will continue to pursue it regardless of how our country may be called. They did this with regard to the Russian Empire, and they did this many times with regard to the Soviet Union and Russia. Therefore, we must adjust to it. Import substitution, the development of our economy and the improvement of our social institutions are the only response we can make. There is no alternative to it. This is why we will act from the assumption that sanctions will remain in place for a long time, especially considering the latest sanctions bill. The Americans not only adopted it and had it approved by the Congress. They have also bound their presidents, the incumbent and the future ones, hand and foot. They have paralysed them to prevent them from lifting the anti-Russia sanctions. We must bear this in mind when planning our economic development for decades ahead. Nothing good ever comes of this. This will entail losses for us and for the Europeans. The Americans’ losses will be smaller, because the volume of our trade with them is not large. But they will sustain losses nevertheless. Therefore, sanctions in themselves are a bad thing, and they will influence our development for many years. But the main thing is that we are aware of this and that we have created instruments for responding to this pressure. We have passed the stress test. We have survived. Our economy lives, and our social sphere is improving.

The State Duma is discussing a draft law on our response to the new US sanctions, and the Government is preparing conclusions regarding this law. It is clear that we must take several things into account when preparing and adopting this law – because we do need to respond to the Americans’ actions. First, we must not harm ourselves, because we should act pragmatically. Even when something annoys us – and the Americans are behaving obnoxiously, as I have said, we must not do any harm to ourselves. Second, the reply, whether symmetric or asymmetric, must be painful. Why deal half-hearted blows that will not bring any result? No, we must take painful measures. At the same time, I believe that the draft law we are talking about must include a provision allowing the President or the Government to impose individual sanctions on any person or entity that is a US resident. This would be a symmetrical response. They take decisions against our individuals simply because they do not like them, and we must have the right to do the same. If they do not like some of our companies, we must have the right to act likewise with regard to their companies. This does not mean that we should make decisions on entire sectors right away or take other similar actions. We must stipulate a relevant decision by the President and the Government. Moreover, even if the law includes these provisions, it does not mean that they should be applied automatically. I believe this is very important.

Another thing that looks important to me is that all these sanctions are clearly spearheaded against Russia’s interests. In essence, they aim to destroy our social and political system and to harm our economy as well as individuals. In this case, compliance with these actions by our citizens should be considered an offence. Nobody should comply with these US sanctions, and violators should be liable administratively or criminally.

By the way, under US law, compliance with decisions of a foreign state that are harmful to the United States is considered a crime.

These do not look to me like the words of an “Atlantic Integrationist” or a Fifth Columnist working to undermine the government’s unity from inside in the interests of the US.

On the contrary they speak of someone who has – in his own words – abandoned all hope (or “illusions”) that an accommodation with the US on anything remotely approaching reasonable terms is possible.

Perhaps Medvedev is not saying what he really thinks.  Perhaps these words are intended to conceal his plotting behind the scenes.

However I have seen no evidence of that, and I would point out that these words in their criticisms of the US actually go much further than anything Putin himself has ever said on this issue.

Whenever the subject of Medvedev comes up those I speak to who consider him an “Atlantic Integrationist” invariably bring up his time as Russia’s President and his supposedly accommodating policy towards the US during that period.

Whilst Medvedev was indeed Russia’s President during the period of Barack Obama’s ill-starred ‘reset’, its ultimate failure in fact argues against him being an “Atlantic Integrationist”.

The whole point of the so-called “reset” was that it was an attempt by the Obama administration to create conflict within the Russian government by playing Medvedev and Putin off against each other.

It failed utterly precisely because Medvedev refused to be used in that way.

For the rest, it is true that Medvedev as President made repeated and unsuccessful attempts to reach out to Russia’s ‘non-system’ liberal opposition, and that he also agreed to the two UN Security Council Resolutions which the US and its allies misused in order to give themselves legal cover for their attack on Libya.

However he also ordered the Russian army to come to South Ossetia’s defence when in August 2008 it was attacked by Georgia; he recognised South Ossetia’s and Abkhazia’s independence from Georgia a few weeks later; and he was outspokenly critical of the steps taken by Ukrainian President Yanukovich and Belarus President Lukashenko to distance their countries from Russia.

He also instructed Russia’s team at the UN Security Council in August and October 2011 to veto Chapter VII Resolutions the US proposed, which might have paved the way for a US military intervention in Syria.

Medvedev also controversially endorsed Russia’s military build up, which got properly into its stride during his time as President.

All in all, I cannot see anything in the way of evidence that supports the theory that Medvedev really is an “Atlantic Integrationist” and Fifth Columnist who is intriguing within Russia’s government on behalf of the West.

Russia’s ‘National Liberals’

Those familiar with German history will have come across the phenomenon of “national liberals” who flourished during Bismarck’s Kaiserreich.

These were people who simultaneously supported a strong Germany and a liberal type of economy.

It seems to me that Medvedev, the other economic liberals in the government, and indeed Putin himself, can be described in exactly that way, as the Russian ‘national liberals’ of today.

‘Atlantic Integrationists’ outside the government

Does that mean that there are no “Atlantic Integrationists” in Russia at all?

The short answer is that there most definitely are such people, though their influence within the government is nowhere near as great as it once was.

Specifically there is no one in the government today like former Prime Minister Mikhail Kasyanov or former Foreign Minister Igor Ivanov, both of whom held senior posts in the government in Putin’s first term, who can be properly and accurately called “Atlantic Integrationists”.

However people who can be fairly called “Atlantic Integrationists” do continue to command much influence amongst Russia’s business and financial elite, especially those parts of the elite that made their fortunes in the 1990s.

These people continue to be a powerful constituency demanding accommodation with the West, even to the point of capitulating to the West’s demands, and their influence should not be underestimated.

Proposal to appoint a Vice-President to negotiate lifting of sanctions with the West

Recently the US sanctions against the Russian aluminium magnate Oleg Deripaska, and the US threats to impose sanctions on any and every Russian businessman who the US perceives as too close to the Kremlin, seems to have thrown these people into panic, causing them to redouble their demands for an accommodation at any price with the West.

The proposal for a Vice-President to be appointed to negotiate the lifting of the sanctions with the West through Russia’s total surrender to the West almost certainly came from them.

I say this because John Helmer – who first reported this story – is not only the most experienced Western journalist reporting on Russia.

His record shows that he also has excellent sources within Russia’s political and business establishments, and is very well informed about what is going on there.

That confirms that the story about the proposal to appoint a Vice-President had a basis in fact.

The same is true of the reports about the dismissal of Lavrov and Shoigu, which almost certainly originated from the same sources.

As to who is the person these people want to put in charge of the government – if not as Vice-President then in some other senior post – there is little mystery about that either.

Kudrin fails to return

That person is of course none other than former Finance Minister Alexey Kudrin, who in 2011 delivered a speech to a liberal led ‘non system’ opposition rally on Sakharov Avenue in Moscow, which made clear that his loyalties are not just those of an ‘economic liberal’ but of a political liberal also.

Moreover it was Kudrin who before 2011 as Finance Minister and as First Deputy Prime Minister in overall charge of the economy led the process of Russia’s economic integration with the West.

Whether Kudrin, if he were ever put in overall charge of the government, really would fulfil the expectations of his “Atlantic Integrationist” supporters is another matter.

As I have discussed previously, Kudrin’s actual record as Finance Minister suggests that he might disappoint them

…….Kudrin he is not quite the doctrinaire liberal or Atlanticist he is sometimes made out to be. He supported Putin’s action against Khodorkovsky and Yukos in 2004. As Deputy Prime Minister and Finance Minister he supported investment in Russia’s infrastructure. He also voiced support for the government’s policy of creating national champions in specific sectors of the economy.

Though a supporter of privatisation he never made this a fetish of his policy. Kudrin has also been careful not to challenge openly Putin’s foreign policy. Whatever his private thoughts on the matter he has never spoken out publicly against Crimea’s reunification with Russia. He surely knows that both for Putin and for the Russian public this question has become the touchstone of loyalty to the country.

Against that, Kudrin has on occasion made coded statements that suggest that he might indeed be up to fulfilling an “Atlantic Integrationist” role if he was offered one.

Probably, as a highly ambitious man, Kudrin is prepared to give the impression that that is the role he is prepared to fulfil in order to maximise his support from the Western oriented sections of the Russian business elite for the senior job in the government for which he all too obviously craves.

I have discussed Kudrin’s not so discrete campaign to get himself reappointed to a senior position in the government previously

The story of Kudrin’s career since [the Sakharov Avenue rally] has been one of constant lobbying both by himself and by his supporters to bring him back into the government. Though during this period he regularly made coded criticisms of the government he always stopped short of direct attacks on it. The impression he gave was of someone who wanted the government to succeed but thought it was not being reformist enough. As is often the case with those in Russia who call for more reform he was vague about what was the reform he wanted but he tended to give the impression that he wanted to cut budget spending even more and wanted to raise the pension age.

However mobilising support amongst the pro-Western sections of the business elite, though providing Kudrin with a powerful and vocal lobby calling for his return, simultaneously all but guarantees strong opposition to Kudrin on the part of other influential members of Russia’s political establishment.

Over and beyond that  Kurdin is already unpopular with some of the existing members of the government.

In particular the events surrounding Kudrin’s dismissal from the government in 2011 show that he and Prime Minister Medvedev detest each other, a fact which incidentally further argues against Medvedev being an “Atlantic Integrationist”

…..[Kudrin’s] row with Medvedev which led to his dismissal was carried out in the most public way imaginable on national television for everyone to see. Kudrin started it all by saying on US television that he would not be able to stay in the government if Medvedev was appointed Prime Minister. There was then a public row between Medvedev and Kudrin in Russia shown in full view on national television during which an ashen-faced Kudrin asked for time to speak to Putin only to be sacked by Medvedev on the spot…..

The true reason for Kudrin’s row with Medvedev is in fact obvious to anyone who watches the television film of their row: the two men detest each other. Quite why they do is unknown. Possibly it was rivalry for Putin’s favour and resentment by Kudrin that Medvedev – whom he obviously considers his inferior – was stealing a march on him.

Kudrin’s and Medvedev’s mutual dislike does however show one thing. This is that there is no united liberal Atlanticist bloc inside the government. At the time of their row Medvedev and Kudrin were widely credited with being the two most prominent liberal Atlanticists in the government.

This dislike of Kudrin on the part of some members of the government and of Prime Minister Medvedev in particular, and the suspicion of Kudrin caused by the lobbying which has been taking place on his behalf, appears in the end to have worked against him.

Though the post of head of the Audit Chamber to which he is being appointed is an important and coveted post, it does not put Kudrin centre state, where he wants to be.  Indeed there are some who see his nomination to the post as a personal humiliation.

No capitulation to the West

In summary, the dismay of those who fear a sell out of Russia’s positions or the entrenchment of an “Atlantic Integrationist” Fifth Column at the heart of Russia’s government is overdone.  The actual line up of the government suggests on the contrary no change in Russia’s foreign policy.

No need for ‘structural reform’

What of the disappointment of those who support – or say they support – the radical ‘structural reform’ of Russia’s society and economy, supposedly to escape stagnation and increase Russia’s growth rate?  Is their dismay at the line up of the new government possibly more appropriate than that of those who fear a sell out to the West or the entrenchment of a pro-Western Fifth Column inside the government?

Before discussing this question I must repeat a longstanding complaint I have about this seemingly never-ending call for “radical structural reform”.  This is that those who demand it are typically very vague about what precisely they mean by it.

Russia today has a floating exchange rate, prices determined by supply and demand, a flexible labour force, a flat rate tax and private property rights.

The great majority of businesses in Russia are in private ownership.  The state does have a significant role in the economy, but claims that it accounts for more than 70% or more of the economy are wildly overdone.  A more realistic figure is 40-45%, which is not out of line with that of other European mixed economies.

There is some evidence that the share of the state in the Russian economy has increased over the last decade.  However that too is not untypical of what has happened to the so called advanced economies over the same period, as they have struggled to cope with the fallout from the 2007-2008 financial crisis.

In Russia’s case one reason for the apparent increase in the state’s share of the economy is almost certainly the increasing process of consolidation in the banking system.

That has been actively managed by the Central Bank as it seeks to strengthen Russia’s banking system by closing down Russia’s many unsound and insolvent banks.

That has left the banking system increasingly concentrated in a small number of big state owned banks.

This programme – expertly handled by the arch-liberal head of the Central Bank Elvira Nabiullina and her team – is universally considered a necessity and a great success.

There is always much talk of Russia’s supposedly difficult business climate, and the supposedly poor protection provided in Russia to private property rights.

However Russia’s World Bank Ease of Doing Business rating has improved from 120th in the world in 2010 to 35th in the world now.  Russia’s ranking for protecting minority shareholders is now 51st in the world (better than Finland’s, Germany’s, Japan’s and Switzerland’s), whilst its ranking for enforcing contracts is now 18th in the world (better than Britain’s, Canada’s, the Netherlands’, Germany’s, Sweden’s, Finland’s and Japan’s).

There has been some skepticism about the extent of this reported improvement in the business climate – skepticism which I personally consider unwarranted – but clearly something is being done and is being done right.

Moreover the World Bank’s survey of Russia’s business climate tends to bear out the anecdotal evidence.  The days of brutal corporate raiding and gangster capitalism complete with hitmen are well and truly over in Russia.

There is also often criticism that the pension age in Russia is too low, and that this is a burden on the budget and is artificially reducing the size of the workforce.

However I predicted a year and a half ago that the government would raise the pension age as soon as the Presidential election was out of the way, and so it has proved.  Prime Minister Medvedev has just announced that the raising of the pension age will now take place.

Occasionally one comes across suggestions that funding in the budget is being misdirected, and that the government needs to spend less on the military and more on education and healthcare to increase economic growth.

However if that is ‘structural reform’ – and I personally do not call a shifting of budget funds ‘structural reform’ – then President Putin’s May Decrees confirm that it is precisely what is happening.

In summary, what are these ‘structural reforms’ which are being continuously talked about and which the government is supposedly not implementing?

Frankly, I have come increasingly round to the view that some people use the word ‘structural reform’ as code for ‘surrender to the West’.

If so, then it is not going to happen, and there is no objective economic need for it.

As to those others who insist that when they use the words ‘structural reform’ they mean something else, I invite them (again) to explain to me precisely what that something else is.

The real constraints on Russian economic growth: tight monetary policy and fiscal consolidation

As I have discussed very often now, the major constraints on Russian economic growth over the last few years are the very high real interest rates imposed by the Central Bank as it has pursued its counter inflation policy.

At a time when Russian companies have been cut off from Western credit and have been paying off debt because of the sanctions, and at a time when the government has been cutting the budget to bring it into balance, inevitably that has constrained growth.

It is basic macroeconomics, and it continues to bewilder me that so few people see it.

Now that inflation has fallen below the Central Bank’s target and the budget is moving back into surplus, the rate of economic growth is certain to rise as monetary conditions loosen as real interest rates finally start to fall.  This is especially so as the process of deleveraging debt by Russian companies has come to an end.

In the meantime it is the Central Bank’s caution – or over-caution in my opinion – in bringing down real interest rates which continues to hold back growth.

Reappointing a successful government

Which brings me back to the reason why Medvedev and most of the members of the previous government have just been reappointed to their old posts.

Quite simply it is because – as they have shown during the difficult period of the previous six years – they are good at doing their jobs.

Medvedev says it, and he is right

I have every reason to say this, as the Prime Minister of the longest serving Government in the history of modern Russia. The Government and members of the State Duma’s sixth and seventh convocations have handled the most complicated tasks concerning the country’s development, and have found the best possible solutions to the most challenging situations. And there have been so many challenges…..

These six years have been an endurance test for the Russian economy. Never before has it been hit by so many hard blows, all at once and over such a short period of time. These include a global financial crisis, a collapse in the commodity market, sanctions and the closure of the financial and technology markets. No economy, even the healthiest, is immune to such shocks. For our economy, with its structural problems, it could have been a disaster. But not only did we survive; we began to grow despite the external obstacles.

If anyone had suggested a decade ago that Russia would come through a prolonged period of international sanctions and low oil prices (to just a third of their previous value) with only a brief and shallow recession, no significant rise in unemployment, a fall in debt levels, a decline in inflation to an annual rate of just 2-3%, a budget back in surplus and most of the reserves – including the international reserves – preserved, it would not have been believed.

Yet that is exactly what has happened, and it again bewilders me that the government which successfully accomplished it gets so little credit for it.

When it comes to Russia there really is no satisfying some people.

it is completely understandable that the government which successfully piloted Russia through such a crisis is being kept on, so that it can continue to do its job, which its record shows it is doing well.

That is the reason the government is being kept on, and there is no other reason for it.