- A new economic and social deal for Russia
- Hesitant forward movement on Ukraine
- US Sanctions target NordStream2
Russia promised a new economic and social deal
President Putin’s annual address (January 15) to the joint houses of the Russian parliament got global attention, because of a few sentences that were seen as providing clues about post-Putin Russia. In fact, the bulk of his speech dealt with Russia’s economic, social and technology problems, the government’s handling of which has attracted public criticism – on the streets and in the social media – and severely dented President Putin’s popularity.
The issues are not new. On his re-election in 2018, President Putin had issued an executive order, defining national social and economic goals, to be achieved through twelve national projects (at an estimated cost of US$ 400 billion). In his January address, he acknowledged inadequate progress in their implementation and called for a “a new quality of state governance” to achieve it. In addition, he addressed Russia’s demographic crisis, rising income inequalities, falling real incomes, degradation of public services and bureaucratic corruption, as well as structural reform of the economy and technological advancement.
President Putin correlated Russia’s long-term population decline to financial difficulties of low-income families. To reverse this trend, he announced measures to incentivize people in the low-income bracket to have larger families: income supplements, lump sum payments towards house purchases and concessional interest rates on loans. Free lunches will be provided to all children in primary schools. A “social contract” scheme was announced, by which low-income families would get financial support for skill development for re-employment or to start a small business. The promise of online application channels for these benefits, without elaborate bureaucratic procedures or corruption was an added sweetener.
Other promises included building more and better equipped schools and primary healthcare centres in remote areas; ensuring matching strengths of trained teachers, doctors and paramedics; promoting high quality research in universities; providing broader access to university education and scholarships in various disciplines, in tune with the skills requirement of industry and government.
On the economy, President Putin stipulated that Russia’s GDP growth in 2021 should be higher than the global average (about 3.5%, as per IMF projections). Given that the IMF estimates Russia’s GDP growth at 1.1% in 2019 and 1.9% in 2020, this is an ambitious goal. Equally ambitious is the target of an annual investment growth rate of 5 percent across industry, agriculture and services. The Russian Parliament was urged to enact legislation to promote investment through transparent treatment, tax incentives and a predictable regulatory environment. The laws, he said, should remove “vague” provisions that encourage criminal prosecution for even minor economic offences. He said that the legislative and administrative structures should be in place soon, so that businesses could see improvements in their operating environment in 2020 itself.
Technology and innovation got extensive mention, with the exhortation that Russia should create its own technologies and standards in critical areas like artificial intelligence, genetics, new materials and digital technology, with suitable incentives for researchers and entrepreneurs to pursue innovation.
The promises of extensive welfare measures, legislative reform and governance overhaul were followed by the resignation of the entire Russian cabinet, the appointment of a new Prime Minister (who was hitherto the head of the national tax department) and a new Cabinet in which most Ministers of economic and social sector departments were replaced. The Foreign, Defence and other Ministers in charge of security-related departments retained their portfolios, as also a few others, whose departments were credited with dynamic achievements.
This shake-up has been a long time in the making. There has been growing public discontent at the government’s inept handling of the economic and social malaise in the country. Increases in VAT rates, other new taxes and raising of the retirement age were unpopular decisions, but – unlike on earlier such occasions – people’s ire was not directed only at the government, but also at President Putin himself, whose approval rating fell from the heady 90+ percent in 2014 (immediately after the annexation/accession of Crimea) to below 40 percent after a series of public protests. The feeling grew that the President’s grip on governance was slackening, amid indications of tussles between rival power centres, which the Kremlin seemed either unwilling or unable to control. A review by the national Accounts Chamber of the implementation of the national projects (which was carried on the Kremlin website) showed a shockingly lackadaisical approach to their planning and execution. Formulation of some project proposals did not accord fully with the stipulated goals. In others, federal and local plans were not harmonized. Most of the projects were hampered by lengthy bureaucratic procedures and inadequate financial outlays.
It remains to be seen if the new energy, signalled by the government shake-up and the new initiatives will result in more effective outcomes. Russian leaders (including President Putin himself) have, in the past, promised economic reform and favourable conditions for domestic and foreign investment, but have been unable to make the system deliver. This time, there has at least been a flurry of immediate activity in reviewing the status of the national projects and formulation of plans to implement the new welfare measures. A bill on protection and promotion of investment has already passed the first reading stage in Parliament; its proponents claim that it could result in attracting investment of at least 33 trillion roubles (about $500 billion).
If implemented efficiently, it is estimated that the proposed welfare measures would mean an additional cost to the national exchequer of about $7.5 billion. The financing should not be an issue. An IMF review of the Russian economy in November 2019 has in fact pointed out that recent Russian fiscal policy has been too tight, with under-spending by the government and “over performance” of revenues contributing to a slowdown in demand. It has called for more “growth-friendly” fiscal measures. Moreover, oil revenues in recent years have exceeded Russian budget calculations, and the government has been depositing the excess revenues into a National Welfare Fund. The amount in this fund (in liquid foreign assets) will soon exceed 7 percent of Russia’s GDP and (again as indicated by the IMF) could be used for domestic projects, provided a strong governance framework guides project selection.
The challenge for structural economic reform in Russia is not so much from a shortage of fiscal resources, as from the difficulty of sustaining political will and policy clarity, while trying to extract efficient implementation from an inert bureaucracy.
In the segment of his speech that attracted the most attention, President Putin proposed some amendments to the Constitution that he projected as giving the Parliament, regions and people of Russia greater say in the governance of the country. As of now, the State Duma (lower house of Parliament) approves the Prime Minister, on the recommendation of the President. After the constitutional amendments, the entire Cabinet will need the endorsement of the Duma, on the recommendation of the Prime Minister. The President would then then be bound to appoint the Ministers. The State Council, an advisory body of representatives of the country’s regions (states), which is convened by the President whenever he wants to hear regional perspectives, will now have its status and role incorporated in the Constitution. There was also the promise that the powers of local governments, as bodies closest to the people, will be expanded and strengthened. Finally, the Russian people would have the opportunity to vote on the package of constitutional amendments, and the final decision would be based on the results of the vote. In addition to the amendments proposed in the Presidential address, a new post of Deputy Chairman of the Russian National Security Council was created, and the ousted Prime Minister Medvedev was appointed to it. President Putin chairs the National Security Council.
A widespread view, particularly outside Russia, is that these Constitutional amendments may indicate a possible role for Mr Putin in Russia after he finishes his final term (as per the current constitution) in 2024. Specifically, it has been speculated that the constitutional status for the State Council may mean Mr Putin would head that Council after 2024. The other possibility being aired is that he may remain Chairman of the National Security Council.
It is too premature to make such assumptions. The Russian system, especially as developed by Mr Putin since 2000, is built on the total control of the President, directly or indirectly, over every branch of the polity, and particularly over every organ of the national security and defence apparatus. It is difficult to envisage Mr Putin occupying a comparatively peripheral advisory position under his successor. Comparisons have been made with the role taken by former Kazakh President Nazarbayev. But Russia is not Kazakhstan and there is a vast difference in the extent and nature of power wielded by the two leaders.
We may, therefore, need to wait awhile to get a better idea of how the post-2024 situation will develop. President Putin’s comments on the constitutional cap of two terms for a President were somewhat ambiguous: noting that people are discussing it, he said he does not regard it “as a matter of principle”, though he supports and shares this view.
It needs to be noted that, even while arguing for a greater say for local authorities in their governance, some oversight role for Parliament and a constitutional status for the State Council, Mr Putin reiterated that Russia must remain a strong presidential republic. The President will determine the Government’s priorities, he will retain the right to dismiss the prime minister or any of his ministers for incompetence or loss of trust and he will exercise direct command over the Armed Forces and the entire law enforcement system (though, in another sop to parliament, he said the heads of security agencies would be appointed in consultation with the upper house).
The President will also acquire new constitutional powers that will give him greater control over the federal and regional judicial system. The President will henceforth appoint both federal and regional prosecutors, in consultation with the Federation Council (the upper house of Parliament). He can also ask the Federation Council to dismiss judges for misconduct or actions inconsistent with their status. The Constitutional Court is being given the additional responsibility to vet, on behalf of the President, laws and regulations of federal or regional authorities, for their compliance with the Constitution. These changes address problems that have recently arisen, when regional prosecutors or judges have pursued local agendas in defiance of the federal authorities. Other new constitutional provisions may dilute the exclusive control of regions over education and healthcare services, by introducing federal oversight mechanisms, aimed at ensuring uniform implementation of national policies.
Another set of issues covered by Mr Putin has gone virtually unreported. They flow from Russia’s perception of external threat to its sovereignty and territorial integrity, including through penetration of its system. Experiences during the Yeltsin era sowed the seeds of this paranoia, which has again been revived by the acrimonious standoff with the West since 2014, and what is seen from Russia as persistent Western efforts to encourage anti-Russian sentiments in its neighbouring countries and to dilute the solidarity of even staunch Russian allies like Belarus. The fear that Russia itself could become a target for regime change is never very far from the consciousness of the ruling establishment.
Mr Putin stressed the need to preserve the sovereignty and independence of Russia. He noted that the five nuclear powers bear a special responsibility to ensure that the many regional conflicts around the world do not engulf the entire international community. Drawing attention to the sophisticated military weaponry that Russia has recently unveiled (including hypersonic glide vehicles), he said it was the first time in history (including even the Soviet period) that Russia was actually ahead of potential adversaries in military capability. The message was that Russia can join the other major powers on an equal footing to work on issues of global peace and security.
In accordance with Mr Putin’s suggestions, the Russian constitution will now incorporate a provision that international laws and treaties or decisions of international bodies would be valid in Russia only if they do not restrict the rights and liberties of the Russian people, and are in accordance with the Russian constitution. This suggestion flows from the Russian perception that Western countries, led by the US, are increasingly trying to use international organizations outside the UN Security Council (where Russia has a veto) to pressurize Russia. Moves in the OPCW to hold Russia complicit in alleged chemical weapons use in Syria and the UN Secretary General’s decision to launch a UN “investigation” of human rights violations during military strikes in Syria’s Idlib region are examples of West-inspired initiatives that aggravate Russian paranoia.
Another new Russian constitutional provision is that candidates for high office in Russia – President, PM, ministers, parliamentarians, judges, heads of federal agencies – should not have any foreign citizenship or residence permits. For Presidential candidates, the rules would be even more stringent – that he/she should have been permanently resident in Russia for at least 25 years and should not have had foreign citizenship or residence permit at any time in his/her life.
In addition to the economic initiatives now underway, there is a less publicized move to streamline the functioning of the large state-owned enterprises, many of which have evaded scrutiny because of their economic clout. President Putin has tasked the National Accounts Chamber (headed by former Deputy PM Alexei Kudrin) to evaluate their performance in terms of corporate governance, fiscal prudence and contribution to national strategic goals. Public sector giants like Rosatom (which controls the civilian and military nuclear industry) are under this scanner. The Kremlin website quotes Kudrin as telling President Putin that Rostec (the holding company of the Russian military-industrial complex) would be covered soon. If such enterprises can be brought under scrutiny and held accountable to objective performance standards, Russia’s structural reform would go well beyond the tinkering that has long been the norm. The jury is still out on whether the political system can achieve this.
Hesitant progress on Minsk Agreements implementation
On December 9 2019, President Macron hosted a summit meeting of the Normandy Four (France, Germany, Russia and Ukraine), which sponsored the Minsk Agreements of 2014 & 2015, seeking to halt the military conflict in eastern Ukraine. A new President in Ukraine, mutual concessions by Russia and Ukraine, strong efforts by the French and German leaders, and preoccupations of the Trump Administration with another Ukraine-related controversy, all contributed to making the summit possible (see RR, September 2019 & November 2019).
The summit adopted a document, which reconfirmed the Minsk agreements as the basis for further discussions. The four leaders agreed to support full implementation of a ceasefire, disengagement of forces, a swap of prisoners, formalizing the special status of Donbas and creating conditions for holding elections in the region. They agreed to reconvene in four months to take the process further, after these preparatory steps are completed.
There has been reasonably satisfactory progress on these elements, though the Ukrainian President continues to face strong pressures within his country to protect the red lines that Ukraine’s previous government had defended until 2019 – no direct talks with representatives of Donetsk-Luhansk, no elections until Ukrainian troops take control of the Ukraine-Russia border, etc. As a result, the disengagement process has dragged on beyond the deadlines and various senior Ukrainian officials have made contradictory statements, including even calls for renegotiation of the Minsk agreements (which, of course, is a Russian red line). However, the Ukrainian parliament did pass legislation providing for a special status for the region – an essential condition for holding elections there. A critical issue, still to be resolved, is whether Ukrainian troops would be allowed back into Donbas and upto the Russian border before elections are held in that region. This Ukrainian demand would reverse the sequence agreed in the Minsk documents; Russia (and the Donbas separatists) remain opposed to it. The summit in April would have to find a solution to this impasse.
Meanwhile, Ukraine’s President signalled continued commitment to the course agreed in Paris: Ukraine’s new National Security Strategy (January 18) reiterates the desire to defuse tensions with Russia.
US Secretary of State Pompeo’s visit to Kyiv in end-January marked a re-engagement of the US in current Ukrainian developments (as distinct from the issues dominating the impeachment hearings). In his public statements, he confirmed that the US would “work with Allies and partners to press Russia to implement its security commitments under the Minsk agreements”. The future of the Normandy process will inevitably depend on the extent and nature of US re-engagement in it (see RR, October 2019).
US slaps sanctions on companies implementing NordStream2
President Trump signed (December 20) US legislation for sanctions against companies providing or operating shipping vessels engaged in implementing the Nord Stream 2 (NS2) project of a gas pipeline from Russia to Germany under the Baltic Sea. This follows months of public US fulmination against the project. The geopolitics and economics of this issue, its importance for Ukraine and divisive impact in Europe have been covered in detail in earlier Reviews (see, in particular, RR February 2019).
Germany has doggedly withstood this pressure and its economic clout has ensured that the relevant EU structures have resisted pressures from the US and European opponents of the project. The German Finance Minister criticized the US decision as an intervention in internal German and European affairs. An EU spokesman criticized the targeting of “EU companies conducting legitimate business”. Chancellor Merkel declared, while alongside President Putin, that NS2 will be completed (albeit with some delay) despite the sanctions. In fact, in anticipation of the sanctions, work on the project had accelerated in recent months; the sanctions, therefore, are too late to make much impact.
While appreciating German steadfastness on NS2, Russian media and officialdom did not hide their schadenfreude over the fact that Germany, which had faithfully supported the US’s Russia sanctions at great economic cost to itself, is now being publicly humiliated by its ally, while it seeks to promote its own economic interests.