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Wednesday, February 4, 2009

Putin Is In Deep Trouble

Just as Putin imperiously dismissed his own prime ministers who “failed the country,” he may soon find himself without a job. If so, his undoing will be of his own making. The anticipated passage of the constitutional amendment to raise the presidential term shows that Putin easily could have continued as president. Instead he installed a young protégé in the presidency and decided to run the country as prime minister. Putin is still the most powerful figure in Russia, but his mandate rests on his popularity. Currently Putin’s “rating” is four or five percentage points above Medvedev, but Medvedev’s three quarters approval is more than sufficient. Constitutionally, Medevedev is Putin’s clear superior. He can dismiss Putin at any time, even if the Putin-dominated Duma objects.

Putin has staked his popularity on restoring Russia’s international prestige and guaranteeing a strong economy. He has publicly promised to protect citizens from the chaos of the Yeltsin years. His invasion of Georgia left Russia in international isolation, although his rating for international affairs rose. Putin appears safe on this count, even though his only international supporters are rogue states. On the other hand, Putin could easily fall victim of the international financial crisis and his almost panicked actions tell us he understands this point well.

When the financial crisis broke, Putin’s first declared that Russia would not be affected. Its economy was too strong. The state media was instructed to avoid terms like “panic” or “collapse.” The United States was to blame anyway. If Russia’s stock markets were falling, so were they falling elsewhere. Putin did not say, however, that the downturn of the Russian stock market proceeded both Georgia and the drop in oil prices. International investors were simply fed up with Putin’s arbitrary manipulation of tax, legal, and environmental regulations, visa technicalities, and threatened investigations that served to destroy their investments. Even the most rock solid companies, such as Gazprom, were shown as houses of cards that serve the state not shareholders. Russians knew this and invested in apartments, furniture, and cars. Sophisticated foreign investors did not know what Russians knew.

After the international financial crisis broke, Putin was pushed to a begrudging admission that the financial crisis would also affect Russia, but he would keep it under control. Putin blamed falling oil prices, but Russia and Indonesia are similarly dependent on oil, and the Jakarta index fell fifty percent; the Russian RTS index almost 80 percent. There is a reason why Russia’s stock markets were hit harder than any other major country.

Putin’s major pillar of popularity – the strong economy -- has been damaged. With falling energy taxes, Russia’s once-proud military cannot be rebuilt. The goal of making Gazprom the world’s largest company is now a mockery; it has fallen from third to thirty seventh place – a huge “Putin discount”. Russia’s vaunted “stabilization fund” is not being used as intended to rebuild fraying infrastructure but it is being drained at alarming rates to prop up favored oligarchs and a shaky ruble. The declining ruble means that ordinary citizens cannot vacation in Greece or Turkey like last year.

Putin’s rating as prime minister continues to defy gravity at 80 percent. Russians are still giving him the benefit of the doubt. Medvedev’s rating has increased slightly (from 72 to 74 percent). But in the last two months, the percent of Russians expecting to “live better in the future” has fallen from 30-32 percent to 25 percent. As things get worse, this figure will plummet. Russia’s growth in the final quarter is expected to be flat and may be negative in 2009.
Putin’s disaster scenario is a sharp fall in the ruble, reminiscent of the summer 1998 collapse and default under Yeltsin. Putin has promised this will not happen, but his options are limited. The justified distrust of foreign investors means no more currency inflows; Russian citizen discard rubles as they fear further devaluations. The falling price of oil means lower dollar earnings. Barring some fortuitous event, the ruble must fall not by a point or two but by a significant amount. When this happens, Putin’s rating can no longer defy gravity, and he will have lost his claim to legitimacy.

The irony is that a sharp ruble devaluation is the medicine that is required to restore economic growth, as it did after the Yeltsin devaluation, but it could mean the political end of Putin.
Putin’s most likely exit would be to declare victory – to retire because his protégé can handle the job alone. A number of influential people are probably rooting for this scenario. Medvedev is not without personal ambition, and his (overlooked) presidential remark “an all-powerful bureaucracy is a mortal danger for civil society” cannot but be regarded as an attack on Putin’s governing methods. Oligarchs faced with margin calls would want a change if they are not given limited bailout funds. Putin, who himself betrayed the oligarchs who put him in charge, surely understands Stalin’s adage of Russian politics: “Loyalty is a malady that affects dogs.”

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