Tuesday, August 18, 2015

The "Power Vertical" shifts in Russia

One way analysts have chosen to examine the dysfunctional political system of Russia is as a "power vertical" where closely linked economic and political interests share out the spoils of the economy. Like all models it is a simplification, but it has sometimes explained events that make no other sense. As the Russian forces in Ukraine have increased their hostile activity- the latest being a renewed offensive against Mariupol- there is now increasing evidence that the power vertical is less united than it has been for sometime.

As I noted a few days ago, the campaigning season in Ukraine is getting short, and with only a few weeks left there is great pressure on the Kremlin to break the deadlock before further help can get to the Ukrainian armed forces and the balance of power turns more strongly against the invaders. What is true for the military may also be true for Russia's internal politics. The announcement that Yakunin may be running for the Federation Council seems to be yet another attempt to force the chairman of the Russian Railways from his critical position. Yakunin seems always to have been weaker than his nominal equals, such as Sechin, and this is not the first time that he has faced seemingly irresistible pressure to move. Neither can we be certain that his move is- yet- a demotion. However if the rumours are true, then there is clearly a significant reshuffle in the offing in the next few weeks.

The policies of late Putinism are in ruins: as China adjusts to a new economic situation, the decision by the Kremlin to hitch their political and economic policies to Beijing and to defy the West looks ever less credible. The devaluation of the Renminbi reflects necessary adjustments as China at least pauses for breath, but can hardly have been less welcome to Moscow. Russo-Chinese trade has been devastated by Moscow's own currency troubles, and, for example, the $400 billion Gazprom deal signed only last year in Shanghai now looks like a dead letter. Facing boycott from the West, Russia is having trouble selling gas even at the new highly discounted prices that it must accept from China. In short the malaise that began to grip Russia as the oil price crashed last year is now set for something a lot more painful.

In the face of prolonged weakness in the oil price, Russia is also in the midst of an investment collapse. Not only is new investment not happening, but the exit of capital is now accelerating. Neither can Russia return to the capital market: the country is all but shut out from both credit and investment supply: the limited US financial sanctions have stopped any other country filling the gap, and the result is a near meltdown. Russian reserves are bleeding, and yet the country continues to spend at least 25% of its budget on its armed forces.

The attempt to promote import substitution that might have justified the Kremlin's ban on Western food imports is also not going well. Endemic corruption allowed much produce into the country while simply increasing inflation. The well publicized destruction of over 300 tonnes of food was a PR catastrophe and raised the level of dissenting grumbles to something approaching anger. The sight of Peskov -who nominally earns about $100,000 a year- wearing a 600,000 watch was yet another example of the power elite demonstrating open contempt for the feelings of the Russian people. No one believes the opinion polls showing Putin at new highs in popularity- indeed the higher the level, the more the polls are ridiculed. Anecdotal evidence suggests that support for Putin in such cities as St. Petersburg is in fact almost gone. Certainly overseas, Russian propaganda has utterly failed, and with the exception of three countries, the global reputation of Russia is not merely negative, but is in fact at a new low. Far from rallying support for a resurgent Russia, the regime is now almost totally isolated.

So the problems mount: the Russian economy is shrinking and with Iran returning to the global oil market, and the LNG and Shale markets expanding it may be many years before the price of oil ever recovers. As the price of solar power continues to fall rapidly, there may in fact never be a recovery to the levels that can rescue Russia.

So Putin's renewed attack on Ukraine feels like a last gasp attempt to ride the Russian nationalist tiger. Yet the the Ukrainian army is putting up fierce resistance. The units facing the Russians are largely Russian speaking themselves and as problems mount in the Russian puppet states in eastern Ukraine, the fears of a blow-back of violence into Russia itself grow more concerning. What Illarionov called the Russian civil war in Ukraine may yet still become a civil war inside Russia itself. 

Thus the rumours swirl about a serious attempt to replace Putin and to try to patch up relations with the West. Paul Goble's thoughts on the comments by Piontkovksy have been widely reported. Certainly in many places the power vertical is privately very critical of Putin. However, with the Chechens still on Putin's leash, there is a serious fear that removing Putin might be as dangerous as retaining him. So the regime is caught in a dreadful bind and with no other plan, they still seek military victory in Ukraine.

A military defeat would leave Putin no option but to go by his own will safely or be removed very dangerously.  The Power Vertical is entering a new and different phase.

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