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Friday, October 31, 2003

Putin's Moves: Weakness or Strength?

I've been trying to keep away from what's been happening in Russia but I think I'm going to have to give up on trying. It's a bit like Iraq really as far as I am concerned: it's turning into an impossible mess, but I'm not sure I have anything useful, or especially interesting, to say about it. On the topics I normally go for, I may get things wrong, but if I do get them wrong, I hope I do it with dignity, based on having some knowledge and understanding of what I am talking about. Now when it comes to Russia, I have to admit I am lost from the start. Apart from the obvious detail that we should all now be able to see very clearly - that it is easier to undo than to remake - I'm not sure where to start. My population thesis perhaps: I can see no good future in front of a country about to lose approximately one third of its population. This means, I am afraid decline and decadence. Then there is the whole of Russian history, and the absence of any important democratic tradition. Then there is the growth of organised crime and corruption which certainly seems to have blossomed from at least the sixtees onwards. The corrupting effect of many years of having an official ideology that everyone professed publicly, and no one believed in privately, seems certainly to have left its mark. The problem is, having something so manifestly unstable running all along our European borders isn't exactly funny. Political - and military - instability seems guaranteed. And Russia may be becoming poor, but the presence of so many natural resources means that, for some, there can be money like never before, and, as we've seen already in other parts of the planet, this combination is not exactly a desireable one.

The Guardian has a fairly reasonable take on the political side, while the Financial Times attempts to offer a more or less 'orderly' interpretation: the principal problem is one of concern about the future of property rights:

Russian financial markets reacted with alarm on Thursday to news that the government had impounded 44 per cent of shares in Yukos. The Russian stock market fell 8.1 per cent, bringing losses since the arrest of Mikhail Khodorkovsky, Yukos' major shareholder, last weekend to 16.5 per cent. Shares in Yukos have fallen 25.8 per cent this week. The slide in share and bond prices comes just weeks after Moscow's stock market bettered the highs recorded before Russia's 1998 financial crisis. It also follows a move this month by Moody's Investors Service to raise the government's credit rating to investment grade, a development that opened Russian financial markets to a new class of international investors. Moody's said the conflict between the authorities and Russia's biggest company did not constitute grounds for a change in its Baa3 credit rating or stable outlook for the sovereign debt. The agency, instead, emphasised Russia's robust public finances.

Jonathan Schiffer, lead analyst for Russia, said: "To service the government's traded debt - about $40bn - in the next three to four years will take no more than 3-6 per cent of the central government's revenues. We consider this to be an investment grade risk."The seizure of Mr Khodorkovsky's shares yesterday, pending criminal investigations, raised fears over property rights and the potential for revisions in the privatisations of state assets in the 1990s.

Philip Poole, head of emerging market research at ING Financial Markets, said: "The question is whether this will become a general redistribution by the Kremlin. The key point is that so far this hasn't been extended beyond Yukos and Khodorkovsky." Yukos is the biggest Russian company by market capitalisation and trading in its shares regularly accounts for about one third of the market's trading volume. Trading in the international bonds of Russian companies was reduced to a trickle as uncertainty about property rights prompted investors to withdraw from the market.

Prices for the government's international bonds also fell, albeit less severely, given Russia's strong public finances and a widespread perception that the conflict between the authorities and Yukos would be contained. The rouble, however, hardly moved - because of intervention by the central bank to support it. Thursday's developments took the markets by surprise, considering that equity prices had recovered some of the losses sustained immediately following Mr Khodorkovsky's arrest. Dominique Audin, senior investment manager at Pictet, Swiss fund manager, said: "It appears to be a lot worse than people were expecting."
Source: Financial Times

Pushing the boat a little further out: according to a press commentary roundup by Radio Free Europe

Writing in "The Times" of London, Anatole Kaletsky asks: "Is Russia moving back towards some form of Stalinist dictatorship? Or is the transition from communism to capitalism now irreversible?" Kaletsky says both options may very well be true. Russia "probably is reverting to an authoritarian society," in which the president and his supporters "keep a tight rein on political activity, as well as maintaining a monopoly on power."

While some observers have expressed concern this trend might frighten away foreign investment and undermine Russia's economic growth, Kaletsky says it probably will not cause major problems for the Russian economy. The "idealistic linkage [between] free markets and 'free peoples' was never more than a rhetorical device," employed by Cold War-era Western leaders like former British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan.

"To judge by recent events, Russia may well turn its back on the experiment with democracy initiated by [former Soviet Premier] Mikhail Gorbachev." But Kaletsky says, "even if this happens, there is no reason that its economy should suffer or Western investors take fright." The real concern is not Russia's economy "but its political development and its pro-Western orientation." Putin "may want to make Russia an orderly one-party state by taking control of the media and making sure that concentrations of wealth are not transformed into rival centers of power." Moreover, his former KGB cronies, the "siloviki," have been nudging him away from his Westward path. "In the end," writes Kaletsky, "it comes down [to] whether the Russian state can tolerate political independence."

while a rather interesting point of view is expressed in the Moscow Times by Dmitrii Furman of the Institute of Europe and the Russian Academy of Sciences

In a contribution to "The Moscow Times," Dmitrii Furman of the Institute of Europe and the Russian Academy of Sciences says recent strong-arm moves by Russian President Vladimir Putin actually betray the weakness of the presidency and not its growing strength.

The continuing territorial dispute with Ukraine over the island of Tuzla in the Kerch Strait, which connects the Aral and Black seas, may have begun based on a unilateral decision by a provincial governor. Krasnodar Krai Governor Aleksandr Tkachev claims it was his decision to begin building the dam to reconnect the island, which is Ukrainian territory, to the Russian mainland. Furman says, "One thing is clear: A major foreign policy decision, which nearly brought Russia to the brink of war with a neighboring country, was made not by the president but by a provincial governor." Tkachev "obviously isn't worried. And Vladimir Putin is staying mum." After the Khodorkovskii arrest, the public looked to Putin to take a stand. But aside from vague murmurings about everyone being "equal before the law," Putin did not have much to offer. "This is not how a leader behaves when he possesses real power," Furman says. He writes: "Putin's actions in the last week cannot be explained away as confusion or the result of his conflicting ambitions. His behavior reveals weakness, pure and simple." Putin is now an "extremely cautious leader who depends excessively on his supporters."

So what actually is going on. Well take your pick, I'm sure your guess is as good as mine. But one thing certainly does continue to puzzle me: why is it that our central bankers, like Duisenberg and Greenspan, have formed the opinion that global political conditions are somehow much more stable than they were last April?

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