Russia's economic crisis – no cue for ‘Perestroika 2.0’

Andrew Wilson
4 September 2009

Russia is one of those countries for which the economic crisis ought to be a blessing in disguise. Over the last boom decade, high energy prices have excused a multitude of pathologies: corruption got worse because there was more to steal; Putin brokered the creation of giant inefficient ‘national champions' that are a deadweight on the more productive parts of the economy; even Russia's one copper-bottomed asset, oil and gas, will decline in the future, as its giant energy companies like Gazprom and Rosneft have simply failed to invest enough to meet supply commitments. Recession and lower energy prices, on the other hand, it is often argued, ought to prompt protest and/or reform. But, Russia is currently a land where all the predicted dogs are failing to bark. The idea of a new perestroika - in itself an indication of how far Russia has moved backwards over the last twenty years - is a myth. Social unrest has been isolated and parochial. ‘Protest' has the flavour of the Khrushchev era: people petition local bosses, who then save factory jobs or build new roads because of the fear of retribution from the top. Putin is starting to behave like Yeltsin when he was Mayor of Moscow in the mid 1980s, making unannounced visits to city supermarkets to bemoan the price of pork. Nor, on the other hand, has there been any real crackdown to prevent protest - the regime seems capable of enduring without it. According to one of those who built the current system, the political fixer Gleb Pavlovsky, therefore, ‘the system has survived this crash-test - though there is no guarantee it will survive the next one'.[1]

Lord of the Rings

One of Pavlovsky's mantras is that ‘Russia is an old country, but a new state'. [2] Despite Russia's long history as an empire, the thinking of both elites and masses is over-determined by the experience of its traumatic birth as a state in 1991. The ‘twenty year crisis' under first Gorbachev and then Yeltsin has been overcome, but only just. According to Pavlovsky, ‘despite the mythology positing absolute control in Russia's politics', Russia ‘is in fact rather weakly  governed, barely balancing on the very verge of stability - if not survival'.[3] Whereas the West tends to compare the current economic crisis with 1929 and the social crisis that followed, Russians think more naturally in terms of their own most recent crash, in 1998. Social breakdown had already happened in the early 1990s; the Putin regime has successfully mythologised 1998 as a crisis of statehood and therefore argues that preserving hard-won stability is the only way to prevent a reversal through 1998 back to the social chaos of the 1990s.

The first threat to stability comes from the ‘oligarchs'. Putin originally came to power chillingly promising to ‘destroy the oligarchs as a class' - the same phrase that Stalin used in 1929 against the ‘kulaks'. But Putin's real job is what he calls maintaining the ‘political configuration', which is code for keeping a lid on, and a balance between, the Hobbesian struggle between a whole universe of, in the Russian phrase, krugovaya poruka (‘circles of interest' - every so often the Russian press depicts as an actual universe, drawing a map of the pre-Copernican complex of planets and satellites in interlocking orbit around ‘planet Putin'). Even the infamous siloviki  (‘men of force', current and former KGB), are divided into rival clans. But there is a balance between those who play by the Kremlin rules. Those who don't, like the former king-maker Boris Berezovsky, or Russia's former richest man, the jailed Yukos boss Mikhail Khodorkovsky, are crushed.

The choice of Dmitry Medvedev as Putin's superficial successor was part of this balancing act. ‘Project Medvedev' was originally a ‘prosperity project' with two aims. First was continuity in the guise of competition. Russia's traditionally top-heavy political system is not good at successions. The departure of the old leader tends to upset a highly personalised system of patrimony and privilege; there then tends to be a war of all against all until a new system of personalised authority is in place. On the eve of the last elections, the Russian elite was gripped by the fear of a form of oligarchic Trotskyism - not ‘permanent revolution', but the ‘permanent redistribution' of control of Russia's hard-won cash cows. Medvedev's second job was to sell the idea of Russia moving towards a rule of law, and legitimise the established distribution of assets. Plan A was extraordinarily successful. Plan B might have been. But the world economic crisis intervened. Ironically, it wasn't the expected succession crisis that threatened property, as many had feared, but the unexpected economic crisis.

But Putin has kept the balance of the system remarkably well. There has been no feeding frenzy during the current crisis, unlike after 1991 or 1998. The idea of a ‘rescue list' for oligarchs mooted in the autumn of 2008 was quietly abandoned when it threatened to lead in that direction. Some have gained a little, but no one individual or group has grown strong enough to upset the balance or change the system's logic. Genady Timchenko of the Swiss-registered oil trader Gunvor has expanded his stake in Novatek, Russia's second largest gas producer after Gazprom. Deputy Prime Minister Igor Sechin, the head of Rosneft, has expanded his empire to include the state shipbuilding corporation OPK and consolidated control over the electricity industry. And Sechin and Timchenko have SUPPOSEDLY been linking up to increase their share of Russia's oil export trade. Individual oligarchs have received handsome subsidies: Sergey Chemezov's Russian Technologies has received $7 billion, Oleg Deripaska won a $4.5 billion loan to keep his 25% stake in Norilsk Nickel, Rosneft got $4.6 billion, and Roman Abramovich's Evraz $1.8 billion. But given the size of the ‘Stabilisation Fund' built up during the boom years and now coveted by the troubled oligarchs - still $94.5 billion on 1 July 2009, down from a peak of $142.6 billion - this is relatively small beer.

‘Lord of the rings' is Putin's personal role - and he knows if he is too generous even to his own inner circle the system will collapse. He cannot transfer this role. Medvedev cannot do it, so Putin cannot retire. According to Masha Lipman of the Moscow Carnegie Centre, ‘Putin's power as ring-master keeps him number one and keeps Medvedev number two'. [4] Significantly, the number of Russians thinking that Medvedev runs the country has actually declined during his first year as president, from 25% to 12% in May/April 2009.


A recent spate of articles - the first by the liberal economist Yevgeny Gontmakher - have addressed a second potential threat.[5] Russia has hundreds of single employer ‘monocities', where there is a risk of unrest similar to that in the southern Russian town of Novocherkassk in June 1962, when panicky local authorities opened fire on crowds demonstrating against simultaneous increases in food prices and wage cuts. Twenty two were killed and another seven subsequently executed.

But Russia in 2009 is a much more sophisticated regime than the USSR in 1962. The regime does not yet need repression. According to Dmitry Trenin of the Carnegie Centre, ‘It has managed to manipulate people in a post-modern environment, without powerful political institutions or real political parties'. [6] ‘Political technology' has been an alternative to traditional authoritarianism. Unlike China with its ‘great wall' of censorship, Russia regulates the internet with a lighter touch and enlists sympathetic bloggers rather than censors. Opposition parties were neutered long ago, but still exist to provide an outlet for protest. The Kremlin is adept at manipulating mini-crises to win popularity, with both internal and external enemies, though this is one reason why it is short of friends abroad.

Cruder methods are of course used. Khodorkovsky is in jail. Contract killings of journalists and NGO activists are depressingly frequent. The youth movement Nashi was set up to show anyone tempted to copy the tactics of the Orange Revolution in Russia that they would basically be beaten up. But, as Lipman points out, ‘people under fifty have no memory of a repressive state'. [7] And as unpleasant as the dark side of Putinism may be, it is designed to be a lower-risk and lower-cost alternative to the nationalist authoritarianism advocated by many. If such voices grew louder, it is unclear whether Putin would swim with the tide or whether he would have the strength to pre-empt them.

The longer term significance of the original Novocherkassk incident is also often missed. It was not just that people dared to demonstrate, or that the demonstrations were brutally suppressed. The Kremlin took fright at working class rebellion. Retrospectively, Novocherkassk marked the moment when the Soviet system moved from the rigid labour discipline of the Stalin era to the relatively comfortable, and ultimately unaffordable, ‘welfare state authoritarianism' of the Brezhnev years.

Instead of a new Novocherkassk, Russia had the ‘Pikalyovo incident' in early June, when Putin publically humiliated Oleg Deripaska, one of the ultimate symbols of Russia's ‘wild capitalism' of the 1990s, during a lighting visit to his cement factory to force him to pay wages and reopen the plant (after Deripaska signed the agreement, Putin demanded the pen back in case he stole it). But Pikalyovo does not mark the start of a populist spending spree, at least not yet. After Pikalyovo, according to Fyodor Lukyanov, editor of Russia in Global Affairs , ‘liberals expected Putin to be everywhere, like Batman, solving all sorts of problems. But Putin understands better. It's only necessary to do it once. Like with the Khodorkovsky trial, people soon learn the new rules'. [8] Pikalyovo was a signal to governors to deliver on ‘social responsibility' and to oligarchs not to rock the boat. According to Trenin, ‘populism is a strategy to preserve power'. [9] And often fake - only days after Pikalyovo, Vneshtorgbank agreed another credit line for Deripaska.

Nor did Pikalyovo mark the upsurge of anti-regime rebellion that the Kremlin's opponents have long hoped for. Recent protests have been a call to official action. They have not been revolutionary or nihilistic. There is as yet no threat of what Russians call bunt (atavistic rebellion). The aim of most protestors has not been to replace the authorities, but to get them to turn up and deliver resources. According to Lipman, ‘it's like the Soviet era, when people would threaten not to vote until the Party got their roof mended'. [10]

But Pikalyovo did show that Russia is not responding to the economic crisis by joining some Western club - either the fiscal retrenchers or the new Keynesians. Russia is responding to its own recent history. In 1998, to put it crudely, the people got screwed by the sudden devaluation of the rouble, while the oligarchs were forewarned and colluded with the state to defraud their creditors, including the IMF who had just lent Russia $4.8 billion. In 2008-9 the state has allowed its reserves to dwindle by over $200 billion (from a pre-crisis peak of $598 billion to a low of $376 billion) to ensure a ‘soft landing'. This was a huge investment in social stability. The Russian system works on messages, and the message was that this time the state would look after the people, unlike in 1998 or with earlier confiscatory ‘redenominations' in 1991, 1961, 1947 and in the 1920s. (Though the step-by-step devaluation also meant big profits for the well-connected. With sufficient notice, the big banks and oligarchs simply used their bail-out cash to buy dollars or euros and then buy back the cheaper roubles a few days later - thereby also ensuring that few of the state's crisis subsidies actually reached the real economy).

‘Reverse Connection'

Pikalyovo was also an attempt to address the inefficiencies in Putin's authoritarian project by creating what Russians call obratnaya sviaz' (‘reverse connection'). The system works, but only just. Russia still needs a modernisation project, albeit not the ‘prosperity project', backed by good finances and sound macroeconomics, which the Putin-Medvedev tandem was originally supposed to implement. Not only will Russia have to proceed with fewer resources, it will have to tackle the flip-side of a stronger state, what even Pavlovsky calls ‘severe monopolism in all social spheres', [11] not just in government and the economy, but in the mass media and in society at large. The intermediary structures he helped set up are passive and inert - particularly ‘the party', now normally referred to in the singular as in the days of the CPSU, i.e. United Russia, which, unlike the CPSU, is mainly a vehicle for governors and lower bureaucrats to advertise their loyalty. Hardly anybody in the Kremlin belongs to it. Moreover, the stasis extends to society as a whole. After the ‘twenty year crisis' of the 1980s and 1990s, ‘all social spheres are static. There is a conservative mood, even in business. There are no risk takers. The atmosphere is against innovation'. [12]

Pikalyovo was supposed to spark an inert bureaucracy into life. The search for ‘reverse connection' has also led to some outreach to civil society, but one that will be very different to the kind of liberalisation advocated by Russia's surviving liberals, men like Gontmakher and Igor Yurgens, the head of the Institute of Contemporary Development, the think-tank currently favoured by Medvedev. Gontmakher has recently argued that the system needs ‘Khrushchev-isation' - like Khrushchev after Stalin, Medvedev (or Putin) needs to break with the system he helped create.[13] In his first year in office, Medvedev has managed to maintain the impression that he is all-things-to-all-liberals, and that he might be willing to create a bigger tent, bringing in some survivors from the 1990s. In fact, Medvedev's job is to promote a ‘soft form of cooptation'. The new Kremlin-sponsored ‘liberal party' Right Cause and the new Civil Society Forum are designed to prevent liberals reaching out and making common cause with protestors. Medvedev's job is to persuade civil society to play along, or it will be subject to re-control by real hardliners. The regime needs NGOs to improve the upward information flow, but the chief Kremlin ideologist Vladislav Surkov, who was responsible for the original law restricting the operation of NGOs in 2006, made the terms of the bargain crystal clear at the last meeting of the Civil Society Forum in June. Civil society leaders are requested to provide concrete proposals on specific policy areas, but should not think of getting involved in politics and should not speculate about the system as a whole.


There is, as yet, no real sign of any second summer of perestroika. Medvedev has yet to prove that he is some kind of chrysalis liberal. The Institute of Contemporary Development, which has become the first port of call for Western visitors seeking to spot the first green shoots of reform, is in fact complaining it is starved of money, resources and influence. Russia's gamble is to keep with the system it has for now. It has run down its reserves, but kept most of its money in the bank, and is banking on oil price recovery to lift it off the rocks. The one thing Russia is not doing is using the crisis writ large as a new form of shock-therapy. Russia had had too many shocks recently.

Senior Policy Fellow at the European Council on Foreign Relations

[1] Author's interview

[2] Author's interview

[3] http://www.kreml.org/opinions/217126459

[4] Author's interview

[5] http://www.vedomosti.ru/newspaper/article.shtml?2008/11/06/167542,

translated into English at


[6] Author's interview

[7] Author's interview

[8] Author's interview

[9] Author's interview

[10] Author's interview

[11] Author's interview

[12] Author's interview

[13] http://www.specletter.com/obcshestvo/2009-08-25/revoljutsii-ne-budet-budet-bunt.html


Andrew Wilson is Senior Policy Fellow at the European Council on Foreign Relations

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