April 2007 - Programs for the President

A recent economic conference, held at the Higher School of Economics on April 3-5, is, apparently, the closest Russian analog of annual American Economic Association meetings. However, unlike US academic gatherings that are normally visited at most by mid-rank government officials, the list of participants at the Moscow meeting included such dignitaries as Deputy Prime-Minister Alexandr Zhukov, Finance Minister Alexei Kudrin and Economic Development and Trade Minister German Gref. The attention that top state officials pay to what social scholars say is not limited to this conference. For example, First Deputy Prime Minister Dmitry Medvedev attended a similar meeting on the role that human capital plays in Russian development on March 13.

Why state officials express keen interest in seemingly academic debates is puzzling if not for one observation: the country prepares for the next electoral cycle. While many foreign observers and ordinary Russians resign to the idea that democracy ever takes roots in this country, the Kremlin knows better: it cannot assure what course Russia assumes after President Putin steps down in 2008.

The last proposition appears to be ludicrous. The state dominates almost all spheres of public activity, which seems to guarantee that no cardinal changes are allowed. The Kremlin controls Duma and state apparatus. Non-systemic opposition is disorganized and squeezed out of public space by parties that simulate competition within the boundaries set in the Kremlin. The bulk of media is run by state monopolies or government-friendly magnates. Voters are tired of changes and apolitical. So what is the problem that bothers the Kremlin so much that it turns to academics for help?

The trouble is that for all classic power attributes that the Kremlin has amassed in its hands, it cannot continue along the path of repression. Moscow understands that the change of leadership in 2007-8 is a qualitatively different exercise than what Russia experienced in 1999-2000. Then, the country was reeling from the mess created in 1990s and exacerbated by the sovereign default of 1998. People longed for stability. The image of a leader who was sober, energetic, spoke right words about peace and order was sufficient to lead voters at the poll. Meanwhile, if the projection of positive image failed to deliver victory to the “right” candidate, time-honored methods of electoral fraud were kept - and occasionally used - as the last resort.

There was no need to bias the voting results in 2000 and in 2004 but this time the Kremlin needs more than the victory of “right” candidate propped by force if necessary. Putin realizes that he cannot control his chosen candidate after he or she is elected. Thus, any promise that such candidate gives him today should be insured against the possibility of reneging. First, such insurance comes in the form of limits imposed on the next president administratively. This consideration explains why, for example, budgetary horizon has been recently extended to three years instead of one year. Second, Putin may require his successor to comply with voters’ dominant preferences.

The last point explains why Dmitry Medvedev, the frontrunner for the position, and his economic associates in the government are so interested in new ideas. They shop for programs, with which the presidential hopeful can appeal to the median voter. Second, this voter, in spite of her publicly professed political apathy, is smarter today than in 2000. She will not be swayed by the right words alone. The modern Russian voter appreciates practical ideas that will work. Moreover, she sets high standards that cannot be circumvented easily.

To find the right key to increasingly demanding voters is difficult not only for aspiring presidential candidates. The results of the conference, where the cream of Russian academic community assembled, showed increasing strain of expert community to come up with new thoughts. However, some of the expressed ideas can be incorporated into potential strategies and others may be worked out. But, first, a note on current electoral preferences is in order.

According to surveys, Russian voters focus on two objectives. On one hand, they want political and economic stability, the main achievement of Putin’s presidency, to continue. On the other hand, the voters become increasingly concerned with relatively low standards of living. Given that the stability of 2000-7 has coincided with growing average income, the median voter asks to preserve stability but, paradoxically, to replace its foundation allowing for faster economic growth. Moreover, this growth is expected to be reversed towards benefiting predominantly the poor.

To combine the objectives of pro-poor growth and stability is a challenging task because they contradict one another. This combination indicates a potential rift within the Russian collective soul that one can loosely associate with the conflict between two main groups of voters. The first group comprises people who have adjusted to existing situation. Not necessarily rich but mostly well-to-be, they are individualistic and rely on themselves exploiting newly found opportunities to organize their lives. These people are mistrustful of the state, which they see as a bunch of inept bureaucrats, but even more of self-professed “reformers” who, they suspect, bring nothing but disorder if they come to power. Needless to say, the members of this group vote predominantly for the main “party of power” or United Russia.

The second group combines those who believe that the situation in the country is far from being perfect and demand changes. Many of them want the state to take the lead and improve their well-being. Some others are concerned with perceived “injustice” and expect the state to punish those “egoists” who they think are guilty of public “wrongdoing”. In addition, a relatively small and wealthy minority demands the state to take the back seat and let private initiative to play a greater role in public affairs. All three sub-groups align with opposition parties - social-democratic, nationalistic or progressively liberal - with their specific choice depending on secondary characteristics.

Given that the United Russia is supported by 40-45 percent of voters, the chosen Kremlin candidate cannot win in free and fair election unless he or she attracts a part of oppositional electorate. Thus, the presidential hopeful should both assure United Russia voters that the state will respect their autonomy and, simultaneously, to come up with a program of pro-poor growth or restoration of “justice” liked by opposition voters. In practical terms, it means that the candidate should obtain his or her acceptance by the three pillars of political stability - federal bureaucracy, regional elites, and business owners - and indicate broadly but pointedly how he or she increases the return on existing national strengths or currently dormant but potentially productive factors.

The first part of the problem is more pressing because the current status quo is, possibly, unsustainable. To see this, consider an example. Business owners associate stability with commercial expansion including inter-regional trade. However, when they move to new regions they upset, inadvertently, the local balance of power. Regional leaders are considered by voters to be responsible for “law and order” but often lack necessary fiscal base. To compensate for missing funds, they demand companies to contribute “voluntarily” to the maintenance of public infrastructure. Instead of conflicting with the “boss”, local businesses prefer to add extra costs to their budgets charging, essentially, the consumer. New entrants whose main base stays outside of the region incur lesser costs because they refuse to pay and undercut local suppliers in prices. Unsurprisingly, local authorities rush to defend their clients while “invaders” appeal to their federal patrons.

Another potential conflict of interests involves top bureaucrats and owners of large businesses or “oligarchs”. Many voters believe that large enterprises have been privatized illegally, consider their owners to be illegitimate and, hence, demand “justice” to be served. Sensing this attitude, officials threaten to reverse the results of privatization and to bring formerly state-owned companies, such as YuKOS, back under their control. To minimize the risk of nationalization, oligarchs invite state officials to share in their projects. Such attitude corrupts bureaucracy from the top to bottom of the Kremlin “vertical of power” triggering another problem. Public opinion does not hold smaller businesses to be owned “illegitimately”, which allows their owners to resist what they see as bureaucratic meddling in their private affairs. Thus, while being supporters of United Russia in general, business owners may switch sides if the next president does not protect them from corrupt bureaucrats.

Expert community appears to reach consensus on two possible approaches on how to maintain stability. First, they recommend oligarchs to recognize their “original sin” of illegal privatization adding that their reputation can be eventually redeemed through active involvement in public works. The latter may benefit them directly because public interests can be integrated in their business projects. Second, because arbitrariness of state officials is indicative of legal uncertainty, stabilization of legal environment will help. The more repetitive public functions become; the less creative bureaucrats can be interpreting the law. In addition, the next president scores points within the business community if he or she ride on the promise of lower state control and greater reliance on joint state and private regulation of business affairs. The last pledge is likely to be welcomed by regional administrations as well as they are wary of growing Moscow control of local affairs.

The dearness of new economic ideas is more profound. The obvious suggestion is to employ Russian advantages in energy resources. Essentially, this is what the Putin Administration is already doing as it lobbies intensively on the behalf of Russian oil and gas interests internationally. But, as one of the participants observed, if energy companies employ not more than 5 percent of the labor force, what other 95 percent are going to do? The question went unanswered. Yet, some potentialities are apparent. If Russia decides to become a global champion in energy technologies, its expansion abroad will increase domestic employment in energy sectors beyond 5 percent. Abundance of cheap energy is a necessary condition for the development of energy-intensive sectors such as iron and steel, non-ferrous metals or chemicals that can also absorb additional labor. Growing internal demand for transportation, banking, real estate, retail and other services is another source of both employment and sustainable growth.

In general, the conference materials have left ambivalent impression. On one hand, it is refreshing that top Russian policy-makers show growing interest in the advice given by expert community. On the other hand, not many experts were up to the task. The current political demand is centered on turnkey economic or sociological projects and not on abstract theorizing. For Russia to progress, this demand must be met.