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Russia 2007. Report on Transformation

Russia 2007. Report on Transformation


Collective work edited by Konstantin Simonov,

Director General of the National Energy Security Fund andPresident of the Center for Current Politics in Russia, (Moscow)

Rome, May 14–16, 2008


ISBN 83-60172-41-2

Foreword 4
Introduction 5
Part 1. The Political System - Changes during the Election Campaigns (PDF 435 KB) 10
Part 2. The Economy (PDF 285 KB) 79
Part 3. Government Finances (PDF 87 KB) 126
Part 4. Foreign Policy (PDF 185 KB) 138
Part 5. Science. Culture. Education (PDF 289 KB) 160
Part 6. The Regions and Regional Development (PDF 80 KB) 202
Part 7. The Armed Forces and the Defense Industry (PDF 225 KB) 217
Conclusion 230


I have a great pleasure to present the fourth edition of the report “Russia 2007. Report on Transformation” prepared by the Economic Forum’s experts and edited by Konstantin Simonov, President of the Centre for Current Politics in Moscow.

The Centre for Current Politics was established in 1992 as an initiative of a group of scholars from the Russian Academy of Science and Russian-American University in Moscow as an independent think tank. Its mission is to provide precise and accurate information and expertise.

The report is the fourth Europe-Russia Economic Forum’s publication. Except for the publications on Russia the Economic Forum also publishes reports on Central Asia and Ukraine. However, the “New Europe – Report on Transformation,” prepared for the September’s Economic Forum in Krynica, is the best outline of changes taking place in the former socialist countries. This publication is an analysis of the economic, political and social situation in 27 countries of Central, Eastern, Southern Europe and CIS.

The Europe-Russia Economic Forum is a part of the Economic Forum’s agenda. The Economic Forum has been held in Krynica for the last 16 years. In order to continue the debates initiated during the meetings in Krynica, the Eastern Institute organizes conferences on selected topics in which the internationally acclaimed politicians and experts participate. The aim of the Forum is to create a conductive atmosphere for the development of political and economic cooperation between the EU countries and their neighbours. The Forum is independent and impartial in fulfilling its mission.

I would like to thank the editorial team, Centre for Current Politics and all those who supported the preparatory works of the hereby report.

Zygmunt Berdychowski. Chairman of the Economic Forum Program Council.


2007 was an especially important year for the Russian leadership since the “smooth sailing” of operation “Successor” and also the presidential and parliamentary elections depended on picking the right strategy in reformatting the government.

At the same time, a host of political and socio-economic problems crept up that needed to be adequately solved taking into account the transformations that were coming in 2008.

Vital aspects of the internal political situation:

  • It was necessary to choose the “successor” while maintaining the “continuity” of authority, and at the same time provide for a post-presidential “job-placement” for Vladimir Putin while preserving his status as the “ultimate arbitrator”.

  • At the same time, taking into account that there were more than ten “first” and “second” echelon candidates for the role of “successor”, (many of whom had the backing of different groups within the influential federal nomenclatura) it was important to take preemptive measures with the aim of averting a “war within the higher establishment” in case a decision was made which favored one of the groups within the elites.

  • Of no small importance was the institutional factor: The realization of the process of reformatting the government required the consolidated effort of all government institutions and branches. In this respect, it was necessary to maintain the constitutional majority of United Russia in the parliament, which would allow, without any particular problems, to legitimize the results of operation “Successor”.

  • For the realization of the scenario of total victory for the “ruling party”, it was necessary to squash the activity of the “irreconcilable” opposition, to provoke its marginalization, and to bring about a split within its ranks. This especially applied to the “dissenters” from “Other Russia” and the PDU of Mikhail Kasyanov, and to a lesser extent, to the liberals from SPS and Yabloka.

  • In addition to attaining good results for the “ruling party” in the parliamentary elections of the fifth convocation, it was necessary to achieve a high turnout among the voters, so that the parliamentary majority would come to power on the votes of a wide ranging and diversified electorate. This was needed to solve the problem of the legitimacy of the new deputy corps, and also to “warm up” the voters on the eve of the presidential campaign. Moreover, it was important to “fine-tune” the administrative machine and to “tryout” the administrative resource.

  • A tough decision had to be made when mobilizing the electorate: on what values should United Russia’s campaign be based – patriotic or social ones? On the one hand, who but the “ruling party” should play the role of “great power nationalist”? But on the other, the left-leaning inclinations of the electorate had to be taken into account in order to achieve a more “dependable” result. Also on the agenda was the “technical” approach, which foresaw a minimal ideological mobilization and instead placed the bet on a heavy use of the administrative resource.

Internal political questions are intimately intertwined with personnel policy:

  • Under the conditions of the pre-election environment, the ruling party was practically “forced” to conduct a personnel rotation, especially in the government of the Russian Federation. This was because that during its relatively long period in office, its activities (or at least the activities of its ministers, for example, German Gref or Mikhail Zurabov) aroused significant gripe among the populace. The problem was whether to do a “pin-point” or “wide-ranging” “purge” of administrative personnel. The first scenario could give a “populist” effect, but contained risks of disorganizing the executive chain of command. The second scenario was “merciful”, had a “technical” character, and was more realistic (especially since the population wasn’t that politically active and tended to gravitate towards the opinion of the “authorities”).

  • Not less important was selecting the “personas” and “teams” for this or that administrative or business project initiated by the government. The “pendulum-like” character of Vladimir Putin’s policies and his tendency to diversify to the utmost his administrative, personnel, and ideological preferences has lead to the need to keep “on the ready”, a diversified and varied “personnel reserve”, especially since the “Petersburg reserve” has been practically exhausted.

  • Closely connected with the previous point is the question of maintaining “personnel uncertainty”. With the aim of avoiding a massive reorientation of the bureaucracy towards the “successor”, it was important for Vladimir Putin to keep “secret” both the name of the “heir” and also the prospects of current high-ranking officials.

  • Another personnel problem was the question of integrating a new generation and “new faces” into the government structure. It became necessary to inject “new blood” into the Russian elites while maintaining current administrative practices and procedures and moreover to alleviate the conflict between generations which is gathering steam in the Russia. Nevertheless, it was decided that the inclusion of “new faces” into big-time politics should be “dosed in”.

Vital aspects of socio-economic development in 2007:

  • Supporting economic and social stability in society, and the minimization of the costs of higher prices and inflation due to “electoral” expenditures became important. In this context, it became necessary to renounce the liberal course in favor of paternalism and government intervention into the economy. In particular, the question of how to “freeze” prices on staple goods and fuel arose; or at least of how to transfer their negative effects until the period after December 2, 2007.

  • At the same time, discussion was stirred up around the money in the Stabilization fund. It was clear that this financial “reserve” was a reliable “insurance-policy” from socio-economic upheavals and crises, if they were to arise in the pre-election year. Nevertheless, the curator of the Stabilization fund, the Finance Minister, Aleksey Kudrin, though not objecting to “needed” electoral spending, sharply came forward against any wide ranging “handing-out” of money from the fund.

  • The problem of transferring unpopular reforms that could trigger protest votes from the populace (even more so, because the mass protests in connection with the ineffective realization of the policy of monetizing certain benefits was still fresh in people’s minds) was examined from the same point of view. That is why, those who called for transferring these “risky reforms” (energy, pension, housing and public utilities) to a later date, sounded quite reasonable.

  • Of no small importance was achieving a “consensus” between business (primarily big business) and government. This is from where the search for a “medium” line in economic policy came from. On the one hand, it was necessary to maintain control over strategic industries (energy, arms, atomic and others) – to this effect, state corporations began to actively spring up, on the other – it was necessary to establish cooperation and coordination with private businesses, the interests of whom were taken into account when the government put together its economic policy.

    Under the conditions of globalization, and the intimate connection between the different political and economic processes in the world, it became important for the Russian leadership to “eliminate” foreign policy risks in the process of “transferring power”. This is where the inclination to constructively develop relations with the USA and especially the European Union, as well as not being too politically active in protecting “national interests” in the “far” or “near” abroad, and the desire to not get directly involved in any international conflicts, came from. At the same time, the “visible” foreign policy rhetoric was, on the contrary, very harsh. This was done for “domestic consumption” – under the conditions of an electoral campaign, it was necessary to “turn up the heat” on the patriotic front. At the same time, the decision was made in favor of developing economic cooperation with the West (the main bet was placed on “bilateral” energy partnerships with European countries). Moreover, in order to leave room for maneuver, attempts were made to neutralize alternative energy routes that bypassed Russia. This also allowed them to avoid risks in the course of the electoral campaign.


The political and socio-economical results of 2007 in many ways predetermined or at least defined the tendencies of the following year.

Tendencies of internal politics

  1. Vladimir Putin’s choice of Dmitri Medvedev as the “successor” gives the latter almost a sure chance to become the next president of the Russian Federation. And the full support of his “heir” by the current leader of Russia will most probably guarantee Medvedev a victory in the first round though not by an overwhelming margin. Such a “mediocre” result will be determined by the small amount of promotion that Medvedev received in Russian society as well as the difficulty of a “total mobilization” of the administrative resource for the second time in the last 6 months.

  2. After securing a victory for his “successor”, Vladimir Putin quite probably will decline the post of the head of the Russian government and will find another niche for himself (perhaps as a “national leader” in the form of a formal or informal curator of Gazprom or United Russia). His return to the post of Russian president might happen in two circumstances: first of all, if the leadership qualities of Dmitri Medvedev happen to be falling short of expectations and he won’t be able to prevent an “inner circle power struggle”, and secondly, if the socio-economic stability in the country were threatened because of the attempt to implement some unpopular reforms.

  3. In 2008, the “balance of power” in Russian elite won’t change much. So, it is unlikely that the positions of the nomenclatura group “Russia” or of the representatives of the political wing of presidential administration, Sergey Chemezov or Vladimir Yakunin, will suffer. However, the “siloviki” who are connected with Igor Sechin, as well as the “personnel” faction, which is grouped around Victor Ivanov, will be in peril. Never the less, even the “purge” of these groups won’t be “total” – it will be important for Dmitri Medvedev to maintain the appearance of the continuity of Putin’s course and not to antagonize the Russian bureaucracy with a “staff revolution”. More over, we might expect that some of his relatively “acquiescent” opponents and rivals (for example, Sergey Ivanov) will get status positions in the new Russian leadership. Those personally promoted by Vladimir Putin who assure his influence at the upper chambers of power, will also get suitable employment guaranties.

  4. Nevertheless, Dmitri Medvedev will gradually shape his own “team” with reliance on the “moderately liberal” circles of the Russian political establishment. That will lead to the “mild” revision of the ideology in the country, in which liberal values will play a bigger and bigger role. However, we shouldn’t expect the return of the democratic norms and practices of the “pre-putin” era – Medvedev and the administrative and business circles that are behind him are interested in the preservation of the stability and the competitiveness of the Russian Federation based on the existing vertical chain of command.

  5. The social and economic “delayed risks” will be a serious trial for the authorities. For example, by initiating unpopular reforms in the energy (especially the rise of domestic energy prices), and HPU sectors, and also in the retirement system Dmitri Medvedev risks irreversibly damaging his own reputation as a liberal pro-social programs statesman as well as the standing of Putin who proposed his candidacy for the head of state. The risks of a price rise in staple goods and gas and also the increase in the rate of inflation will be significant, but not insurmountable (especially with the current favorable financial situation in Russia). In the case of the increase of social tensions, the government has enough financial resources to make “compensatory payments” to the population.

  6. United Russia will continue to dominate on the political scene, though the formation of new ideological factions within it cannot be not ruled out. At the same time, there is a chance of United Russia’s playing a role in the checks and balances system of the “post-Putin” era as a counterweight to the “excessive” energy of Putin’s successor, especially because its parliamentary majority may, if necessary, initiate an impeachment in case Dmitri Medvedev “could not be trusted” any more.

  7. There shouldn’t be any significant changes in regional politics, may be except for the implementation of more strict control over the local spending of federal funds. In addition, the federal center will little by little move away from “egalitarianism” in its distribution of funds between the constituent entities of the Russian Federation. On the contrary, there will be attempts to give an incentive to those regional administrations that demonstrate business activity and carry out big political and economical projects, for example, such as SEZs. The process of regional integration will be slow and it’s unlikely that the map of the Russian Federation will be significantly reshaped in 2008. The personnel policy in relation to the regional governors will be balanced and we don’t expect any significant reshuffling, but some sort of punishment to make an example might be administered towards individual local leaders (especially those who will fail to garner enough votes for Dmitri Medvedev).

Tendencies in foreign policy

  1. It ca be forecasted that, as a whole, current foreign policy will remain intact in spite of Medvedev’s pro-western image. As a matter of fact, the harsh “rules of the game” of international political and economic competition simply compel one to protect their own interests. That is why one should expect the new Russian authorities to implement a policy of “balanced toughness” especially concerning the problems of energy security.

  2. The relationship with the West will be relatively quiet, though it’s possible that some of Medvedev’s political opponents might try to set him up by provoking him into a conflict with the elites of the Old and the New Worlds. The Russian Federation will “give up” those positions it could not protect any way (for example, it will de-facto accept the American anti missile defense system in Europe, de facto recognize the independence of Kosovo, etc.). In other edgy situations, the confrontation with the West will be of a mild character.

  3. Concerning the relationship with the “nonwestern” countries (such as India, China, Iran), the Russian Federation will foster mutually beneficial relations, and will move away from positioning itself as leader of the Third World.

  4. The political hostilities in the former soviet republics will subside, especially after the Caspian gas pipeline project starts up in 2007 and after the successful struggle for Turkmeni gas. After long negotiations with the transit countries, a compromise will be reached. In that way, Byelorussia will receive substantial financial aid, and an agreement with the government of Yulia Timoshenko concerning gas supply through a “new” intermediary scheme was already made. Nevertheless, the further loss of political influence in the former Soviet republics will continue, particularly in Ukraine and Moldova. Little by little, Russia will loose control over the Central Asian Republics (Kazakhstan, Tajikistan, Uzbekistan), and also Armenia.

Tendencies in the economy

  1. As before, the emphasis will be made on the core industry of the Russian economy – energy. And the initiative might move from the oil industry to the gas companies, which will actively use their political connections with Dmitri Medvedev, the former head of Gazprom, to lobby their interests in obtaining lucrative projects. In addition, the natural resource companies, with the support of the Russian government, will be more active in their further expansion, particularly in Europe – with the goal of getting direct access to the end-consumer. At the same time, the construction of the North and South European gas pipelines, with the mission to lower the political risks in the relationship between the Russian Federation and the transit countries will speed up.

  2. On the whole, the existing power parity in the business community will stay in place, but the businessmen and business structures close to Dmitri Medvedev will get the most preferential treatment. In particular, Anatoly Chubais will maintain his influence (probably in a new important position); Roman Abramovich will also gain some advantages. Nevertheless, it’s unlikely that the members of the Russian business elite will restore their former influence in the elite hierarchy; as before, they will have to constructively cooperate with the Russian authorities.

  3. To all appearances, with the persistence of high energy prices, the period of relative socio-economic stability in the country will remain in place; though the above mentioned risks will from time to time worry the leadership of the country and force them to take some “extraordinary measures”.

  4. The policy of creating state corporations will continue. However, to take it for the policy of state capitalism and êtatism would too simplistic. There is reason to believe that in the future, state corporations will be auctioned and de-facto or de-jure privatized, which is fully in course with liberal economic principals.

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