By Jason Simpkins
With Russia's economy in shambles, President Dmitry Medvedev has been distancing himself from his predecessor and friend of 20 years, Prime Minister Vladimir Putin. In doing so, Medvedev has fueled speculation that the former-KGB agent's days in Moscow may be numbered.
Russia has been hit with a triple-whammy since the beginning of the global financial crisis: Falling oil prices, a lack of demand for exports, and a pandemic of capital flight.
Even before the crisis reached its zenith, rattled investors were pulling their money out of Russia. Capital outflows totaled $21 billion in the two weeks ended Aug. 22 – the two weeks following Russia's Aug. 8 invasion of Georgia – according to Goldman Sachs Group Inc. (GS).
Of course, even more money found legs out of the country late last year as the financial crisis intensified. Deputy Prime Minister and Finance Minister Alexei Kudrin told a meeting at the Federal Tax Service that net capital flight stood at around $130 billion in 2008. Addressing the service earlier Kudrin said that some $200 billion had been taken out of Russia from October 2008 through to late January 2009.
An additional $80 billion in capital could flee the country this year, said Russia's Economy Minister Elvira Nabiullina. The external debt of Russian companies widened drastically from $175 billion to $500 billion in 2008, and interest would have to be paid this year, according to Nabiullina.
Meanwhile, a drastic decline in oil prices has put a kink in the country's most vital economic lifeline. After hitting a record high of more than $147 a barrel last year, Russia watched the value of its lifeblood dip below $40 a barrel. At one point, crude had lost an astonishing 80% of its value, forcing the government to rethink last year's budget outlays.
The new 2009 budget estimates that oil will average $41 a barrel, versus $95 a barrel in the original. Government revenue will tumble 39% to $195 billion (6.7 trillion rubles), while spending will rise 7% to $282 billion (9.7 trillion rubles).
However, Minister Kudrin estimates that Russia's budget deficit may exceed 8% in 2009.
Kudrin indicated that the government would be forced to "make a number of tough decisions regarding budget spending," as the revenue of the federal budget for 2010-2011 would be 33% lower than in 2009, according to his estimation.
And even if the price of oil holds on to the gains it has made in recent weeks, Russia's gross domestic product is set for a significant contraction.
"GDP will fall, even if oil prices climb not to $41 per barrel, but $44, $50, or $55," Kudrin said.
In light of the challenges facing the economy, even the 6.6% GDP growth forecast for 2020 is "too optimistic," he added.
Russia's economy shrank 7.3% year-over-year in February, a slight improvement from January's 8.8% decline.
Russia's MICEX stock index and the ruble have taken their lumps as a result of the economy's downward trend. But while both the Russia's currency and stocks have shown some signs of life, unemployment continues to soar and shows no sign of abating.
Russia's total number of unemployed jumped 20.6% year-over-year in February to over 6.4 million people, or 8.5% of the economically active population, according to the Federal State Statistics Service. That represents a 4.9% increase from January 2009.
The rising level unemployment and bleak outlook for Russia's economy have stirred rumors of social unrest that have grown increasingly audible, even in the nation's repressed mainstream media. And some analysts and officials believe the former president and current prime minister Putin could be the scapegoat for Russian oligarchs eager to maintain their influence, as well as Putin's handpicked successor Dmitry Medvedev
The Growing Putin-Medvedev Rift
Gleb Pavlovsky, a pro-Kremlin political scientist and adviser, said earlier this month that the economic crisis poses a growing threat to both Putin and Medvedev, whom he suggested could also be swept away in an uprising financed by Russia's oligarchs. Pavlovsky warned of a "remake" of the 1991 street protests that helped bring down the Soviet Union, and the 2004 Orange Revolution in Ukraine.
"The transition of the [economic] crisis into the political arena has already begun happening," Pavlovsky wrote in Russia's Moskovski Komsomolets. "The sources of social protest should be sought in the corridors of power."
With so much at stake, tensions at the Kremlin are beginning to rise and even the 20-year relationship between Putin and Medvedev, his 43-year-old protégé might crumble.
Over the past few months, Medvedev has struck a far less aggressive, less nationalistic tone than the ex-KGB agent. Medvedev has scaled back a bill to expand the definition of treason and resurrected a dormant human rights council. He's also taken a more lenient stance towards protests and free speech.
On March 15, Russian protestors held a sanctioned, peaceful march in Vladivostok, the very same city where just months earlier they had been beaten and arrested for similar actions. And in his monthly television addresses, Medvedev has also acknowledged that unemployment in Russia is actually closer to 6 million than the 2 million officially reported.
Medevedev is also building his own political powerbase, which consists of mainly of economic liberals – the archrivals of the siloviki, the military security officials grouped around Putin.
The Kremlin announced in February that it was establishing an advisory group to address the current financial crisis. The group, called the "Golden 100" will eventually grow to 1,000 and ultimately supplant many holdovers from Putin's administration.
"Medvedev is building his own power base, up to a certain point," Alexander Khramchikhin, a senior researcher at the Institute for Political and Military Analysis told TIME.
What's more is that both Medvedev and his team of liberal economists have both in recent weeks ramped up their rhetoric against Putin and his old guard.
Igor Yurgens, director of the Institute of Contemporary Development, a new thinktank created by Medvedev, has criticized Putin for restricting freedom of the press and stressed that "the most honest and independent opinions on Russia's problems are coming from the liberal wing, rather than from the so-called statist patriots."
Even Medvedev himself has taken some thinly veiled shots at Putin, saying at a recent meeting with economic officials that criticized Putin's response to the financial crisis as "unacceptably slow" and said that instead of action on promised reforms there had been only "talking and talking."
"Medvedev has got the whiff of power in his nose and he likes it," Mikhail Delyagin, an analyst and former government adviser on economic policy, told the The Guardian. "He's given tacit approval for his administration to engage in an information war with Putin's apparatus."
Critics continue to allege that Medvedev still has nowhere near enough political muscle to take on Russia's iron politician, but there is also evidence that Medvedev's popularity is growing and that Putin is past his political peak.
According to a February 2009 national survey, 73% of those polled said they trust Medvedev, a substantial increase from 56% in 2006. Putin continues to enjoy popularity among the public as well, but his political capital seems to be deteriorating along with the economy.
"Putin used to act as an arbiter standing above the two main clans – the siloviki and the rational economists," Dmitry Oreshkin, a leading political analyst, told the The Guardian. "Now he's been dragged down into the fight and he's under fire from both sides. The siloviki say he's a weakling incapable of imposing his will and showing the economists their place, while the economists in turn are consolidating around Medvedev."
Putin is also falling out of favor with Russia's powerful aristocracy. Russia's top 10 billionaires alone lost an estimated $150 billion last year, according to the The Guardian.
"It is very conspiratorial," Vladimir Milov, former deputy energy minister and a leader of the Russia's Solidarnost political group, told the Financial Times. "But, for the first time, they are putting the question that perhaps Putin should go, to prevent him from pulling everyone else to the bottom."
How Might Medvedev Pull the Trigger?
If Putin does go, many believe Medvedev will be the one to show him to the door. One of the many policy changes arranged by Medvedev in recent months has been an orchestrated crackdown on political corruption that dates back to May 2008.
Medvedev's new anti-corruption measures prohibit conflicts of interest, require government officials to report income and property, and further mandate coworkers to report any noncompliance.
Now, analysts are beginning to wonder whether some of these new laws, shepherded through parliament last December by Medvedev himself, will be his weapon of choice in ousting Putin.
According to Foreign Policy, Stanislav Belkovsky, a Russian political analyst and insider, gave sensational interviews in November 2007 to Die Welt and The Guardian, stating that Putin was worth approximately $40 billion. Belkovsky said Putin was the beneficial owner of 37% of Surgutneftegaz OAO ($18 billion), 4.5% of Gazprom OAO (OTC: OGZPY) ($13 billion), and half of a Swiss-based oil-trading company Gunvor ($10 billion), run by a former St. Petersburg KGB agent. If true, Putin would not only be one of the richest people in the world, but one of the most corrupt.
As Foreign Policy points out, it was Putin who, after being transferred temporary presidential responsibilities a decade ago, sealed his fate as a modern-day tsar by granting former-President Boris Yeltsin and his family lifelong immunity from criminal prosecution, administrative sanction, arrest, detention, and interrogation.
Should the economy continue to falter, it's possible that Medvedev could end up offering Putin the same deal.
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