KB
07-03-2007, 05:42 PM
WHO WILL BE RUSSIA’S NEXT PRESIDENT?
By Patrick Fearon
Currency and Debt Futures Analyst
(A note to readers: Patrick Fearon, currency and debt futures analyst in the Global Investment Strategy Department, is the guest author of this week’s Weekly Geopolitical Report. Prior to joining A.G. Edwards, Patrick was an analyst with the Central Intelligence Agency, specializing in the Soviet Union and Russia.)
In late summer 1991, days after the coup that toppled Soviet President Mikhail Gorbachev, I found myself shivering in a cold Baltic breeze in the middle of St. Petersburg, Russia. The wind blew in from the West, from the Baltic Sea and Finland beyond. Just as Peter the Great had intended when he founded the city some 288 years earlier, Petersburg’s openness to the West was palpable – in its lack of defense against the Baltic wind, in the Italian Baroque architecture of the Winter Palace, in the Finnish and Swedish businessmen milling in the streets. The excitement of reform, liberalism and democracy was in the air, and I chuckled to myself as some new friends insisted that because the city had just been renamed from the Soviet-era Leningrad, they should now be known as Petersburgers. In 1991, I was on my first visit to Russia as an analyst with the Central Intelligence Agency and paid close attention to Petersburg’s enlightened attitudes. Now, as Russia prepares for its next presidential election in March 2008, the great paradox is that Petersburg is the common link between the country’s current authoritarian president and each of the two men angling to succeed him. This article looks at each of these men and examines whether they retain any of the openness and liberalism that marked St. Petersburg in 1991.
The political backdrop
To understand the upcoming transfer of power in Russia, it is critical to know the personal journey taken by current President Vladimir Putin. President Putin was born in Petersburg in 1952 and lived most of his life there. While a law student at Leningrad State University in the 1970s, Putin studied under Anatoly Sobchak, who was destined to become one of Russia’s most famous democrats of the 1980s and 1990s. After graduating in 1975, Putin joined the KGB (the Soviet Union’s clandestine intelligence service), where he served in both domestic and foreign postings until 1991. When I arrived on my first visit to Petersburg, Sobchak had recently become mayor, and in my conversations with residents of all ranks, he seemed quite popular for his open and liberalizing policies. Sobchak had also just hired Putin to head the mayor’s Committee for External Relations, an agency handling contacts with foreign businesses. Putin remained a key advisor to Sobchak until 1996, when Sobchak’s fall from grace prompted Putin to move to Moscow, where he gained the attention of President Boris Yeltsin. Yeltsin named Putin head of the foreign intelligence service, then prime minister and finally, on the last day of December 1999, acting president. Putin won the presidential mandate in his own right in the election of March 2000.
Russia’s constitution prohibits the president from serving more than two consecutive terms, and Putin has denied any desire to change that provision. There is some question whether Putin will actually give up power in 2008 in spite of these constraints, but in the meantime Putin has anointed two key aides as his likely successors. Putin has said he will eventually throw his support to one candidate, and considering Putin’s great popularity and control over the political process, his approval would almost guarantee the candidate’s win in the March elections. Putin has given each of these men a well-defined portfolio of responsibilities. Each is trying to highlight his success in tackling them as a way to show that he deserves to be president. A close look at these candidates highlights their connection to St. Petersburg but also the risk they would be contrary to its traditional liberalism:
Dmitri A. Medvedev. Putin named Dmitri Medvedev as first deputy premier in November 2005. Medvedev received a Ph.D. in law from Leningrad State University in 1990, after which he went to work for the municipal government. Until 1996, he served as a legal expert under Putin at the Committee for External Relations. Throughout the 1990s, Medvedev also worked for at least two local paper mills. When Putin became acting president at the end of 1999, he named Medvedev as deputy head of the presidential staff. Putin also appointed Medvedev chairman of the board of state-owned natural gas monopoly Gazprom, and in 2003, he named Medvedev as his chief of staff.
Since being named first deputy premier, Medvedev has been given responsibility for Putin’s “national priorities” program. These initiatives aim to improve various aspects of Russia’s domestic economic and social situation in agriculture, housing, education, health care and demographics. The press widely views Medvedev as a moderate liberal and good administrator, though it is important to note that Putin’s national priorities are tough problems, and even an able administrator such as Medvedev may have trouble making progress on them.
Sergei B. Ivanov. Putin named Sergei Ivanov as first deputy premier in February 2007. Ivanov graduated from the foreign language department of Leningrad State University in 1975, the same year that Putin graduated from that institution. Like Putin, Ivanov joined the KGB, and the two served as colleagues. When Putin became head of the intelligence service in 1998, he named Ivanov as his deputy. When Putin became prime minister in 1999, he named Ivanov as his national security advisor. Putin named Ivanov as defense minister in 2001, and Ivanov served in that role until being promoted to first deputy premier this year.
Ivanov has been given responsibility primarily for defense and industrial issues. These responsibilities include overseeing and coordinating Russia’s defense industry and arms exports. Ivanov is widely seen as more hard-line and aggressive than Medvedev, especially when it comes to national security issues. In October 2003, for example, Ivanov warned that Russia would not rule out a pre-emptive military strike anywhere in the world if Russian interests demanded it.
Handicapping the candidates
For some time, Medvedev was seen as having the inside track to Putin’s endorsement. Medvedev’s position as chairman of Gazprom is particularly telling, given that this company is perhaps the largest and most powerful of Russia’s state-owned firms and one of Putin’s key foreign policy instruments. For example, Medvedev and Gazprom were at the center of Russia’s cutoff of natural gas to Ukraine in the winter of 2006.
Nevertheless, Medvedev’s star seems to have fallen more recently.
Medvedev has been largely absent from the media in early summer 2007, and in a sign that he may not be making enough progress on his “national priorities” portfolio, the Russian parliament in mid-June was working on a bill to “reanimate” the reform of the housing sector.
In contrast, Ivanov currently looks to be ascendant. The Russian government has sharply ratcheted up its protests against U.S. plans to base missile-interceptor equipment in Eastern Europe, and Ivanov has often been Putin’s key point man on this issue. Ivanov has taken a particularly hard line, to the point of issuing veiled threats that the U.S. plans could lead to a new cold war or other serious problems. While visiting Moscow in May, U.S. Secretary of State Condoleezza Rice met with Putin and Ivanov, but not with Medvedev.
Putin aide Igor Shuvalov warned in mid-June that a dark-horse candidate for the presidency could still emerge. Nevertheless, because of the increasing importance that President Putin is putting on national security, the government’s explicit linkage between military and economic development, and Putin and Ivanov’s past history together at the KGB, we think Ivanov is currently the most likely to get Putin’s endorsement and become the next president of Russia. Of course, there is still a chance Putin will find a politically palatable way to stay in office or that he will still pull the government’s strings from behind the scenes after he has formally retired. Nevertheless, at this moment, Ivanov looks most likely to be the next official leader of Russia.
Ramifications
All this begs some important questions: How will Russia behave following the upcoming elections? What policies will the new leadership pursue? How will the new political leadership affect investors, whether they are investing in Russia itself or in other regions that can be affected by Russia’s actions? Some of the answers are relatively simple. Because of President Putin’s popularity and the population’s strong approval of his current policies, the new president – probably Ivanov – is likely to continue along a similar path of aggressive foreign policy and tight control over domestic politics. Ivanov’s career in the KGB and his handling of defense issues to date suggest he will probably be at least as aggressive against the West and domestic political opponents as Putin is now.
In the economic sphere, Russia’s new leadership will probably keep cultivating large, powerful, state-owned monopolies and oligopolies as the basis of Russia’s economy. These “national champion” companies will probably have access to preferential financing and enjoy a benign regulatory framework, though they will also be subject to interference from the Kremlin when the political leadership decides it is in the national interest. Smaller firms outside the government’s high-priority sectors will probably have considerable freedom of action, but they will be at a disadvantage in terms of credit, political influence, and protection from the bureaucracy.
Still, it is important to keep in mind the fine nuances of policy, and this is where the leadership’s connection to St. Petersburg comes in. Putin, Medvedev and Ivanov have all had formative experiences in the relative freedom and openness of Petersburg, and those experiences have probably been a key reason why they have not sought to reimpose Communism in Russia. They have seen for themselves the political and economic benefits of a looser economic policy. Working with Anatoly Sobchak, they have seen that the political space needs more freedom than had existed in the Soviet system. Nevertheless, Putin, Medvedev and Ivanov also experienced Russia’s political and economic chaos in the 1990s, including the painful drop in Russia’s global stature. These leaders’ tough policies now are aimed at preventing a repeat of such an occurrence.
In a word, Russia’s current and future leadership is trying to strike a balance between freedom and control. They are putting control at a much higher priority than the West would like, but they are also likely to maintain much more freedom in Russia than was the case under Communism. Putin and the new Russian leadership will likely take a relatively hands-off approach to the economy and foreign investors to the extent that they believe it is compatible with maintaining stability and control. For that, we should thank their exposure to St. Petersburg. Nevertheless, the new leadership will put its first priority on strengthening Russia – diplomatically, politically, and economically – and that priority will be much higher than economic flexibility and the interests of investors. This means that in any given crisis, Russia could take a sufficiently hard-line tack to disrupt not only the domestic Russian markets but also markets worldwide. And although they will probably continue to allow private investors to have minority stakes in important firms, they will have few qualms about using those firms as instruments of state policy when circumstances warrant. In other words, investors will probably see somewhat limited threats from Russia much of the time in the coming years, but at other times, they could easily find themselves at the mercy of the Kremlin.
By Patrick Fearon
Currency and Debt Futures Analyst
(A note to readers: Patrick Fearon, currency and debt futures analyst in the Global Investment Strategy Department, is the guest author of this week’s Weekly Geopolitical Report. Prior to joining A.G. Edwards, Patrick was an analyst with the Central Intelligence Agency, specializing in the Soviet Union and Russia.)
In late summer 1991, days after the coup that toppled Soviet President Mikhail Gorbachev, I found myself shivering in a cold Baltic breeze in the middle of St. Petersburg, Russia. The wind blew in from the West, from the Baltic Sea and Finland beyond. Just as Peter the Great had intended when he founded the city some 288 years earlier, Petersburg’s openness to the West was palpable – in its lack of defense against the Baltic wind, in the Italian Baroque architecture of the Winter Palace, in the Finnish and Swedish businessmen milling in the streets. The excitement of reform, liberalism and democracy was in the air, and I chuckled to myself as some new friends insisted that because the city had just been renamed from the Soviet-era Leningrad, they should now be known as Petersburgers. In 1991, I was on my first visit to Russia as an analyst with the Central Intelligence Agency and paid close attention to Petersburg’s enlightened attitudes. Now, as Russia prepares for its next presidential election in March 2008, the great paradox is that Petersburg is the common link between the country’s current authoritarian president and each of the two men angling to succeed him. This article looks at each of these men and examines whether they retain any of the openness and liberalism that marked St. Petersburg in 1991.
The political backdrop
To understand the upcoming transfer of power in Russia, it is critical to know the personal journey taken by current President Vladimir Putin. President Putin was born in Petersburg in 1952 and lived most of his life there. While a law student at Leningrad State University in the 1970s, Putin studied under Anatoly Sobchak, who was destined to become one of Russia’s most famous democrats of the 1980s and 1990s. After graduating in 1975, Putin joined the KGB (the Soviet Union’s clandestine intelligence service), where he served in both domestic and foreign postings until 1991. When I arrived on my first visit to Petersburg, Sobchak had recently become mayor, and in my conversations with residents of all ranks, he seemed quite popular for his open and liberalizing policies. Sobchak had also just hired Putin to head the mayor’s Committee for External Relations, an agency handling contacts with foreign businesses. Putin remained a key advisor to Sobchak until 1996, when Sobchak’s fall from grace prompted Putin to move to Moscow, where he gained the attention of President Boris Yeltsin. Yeltsin named Putin head of the foreign intelligence service, then prime minister and finally, on the last day of December 1999, acting president. Putin won the presidential mandate in his own right in the election of March 2000.
Russia’s constitution prohibits the president from serving more than two consecutive terms, and Putin has denied any desire to change that provision. There is some question whether Putin will actually give up power in 2008 in spite of these constraints, but in the meantime Putin has anointed two key aides as his likely successors. Putin has said he will eventually throw his support to one candidate, and considering Putin’s great popularity and control over the political process, his approval would almost guarantee the candidate’s win in the March elections. Putin has given each of these men a well-defined portfolio of responsibilities. Each is trying to highlight his success in tackling them as a way to show that he deserves to be president. A close look at these candidates highlights their connection to St. Petersburg but also the risk they would be contrary to its traditional liberalism:
Dmitri A. Medvedev. Putin named Dmitri Medvedev as first deputy premier in November 2005. Medvedev received a Ph.D. in law from Leningrad State University in 1990, after which he went to work for the municipal government. Until 1996, he served as a legal expert under Putin at the Committee for External Relations. Throughout the 1990s, Medvedev also worked for at least two local paper mills. When Putin became acting president at the end of 1999, he named Medvedev as deputy head of the presidential staff. Putin also appointed Medvedev chairman of the board of state-owned natural gas monopoly Gazprom, and in 2003, he named Medvedev as his chief of staff.
Since being named first deputy premier, Medvedev has been given responsibility for Putin’s “national priorities” program. These initiatives aim to improve various aspects of Russia’s domestic economic and social situation in agriculture, housing, education, health care and demographics. The press widely views Medvedev as a moderate liberal and good administrator, though it is important to note that Putin’s national priorities are tough problems, and even an able administrator such as Medvedev may have trouble making progress on them.
Sergei B. Ivanov. Putin named Sergei Ivanov as first deputy premier in February 2007. Ivanov graduated from the foreign language department of Leningrad State University in 1975, the same year that Putin graduated from that institution. Like Putin, Ivanov joined the KGB, and the two served as colleagues. When Putin became head of the intelligence service in 1998, he named Ivanov as his deputy. When Putin became prime minister in 1999, he named Ivanov as his national security advisor. Putin named Ivanov as defense minister in 2001, and Ivanov served in that role until being promoted to first deputy premier this year.
Ivanov has been given responsibility primarily for defense and industrial issues. These responsibilities include overseeing and coordinating Russia’s defense industry and arms exports. Ivanov is widely seen as more hard-line and aggressive than Medvedev, especially when it comes to national security issues. In October 2003, for example, Ivanov warned that Russia would not rule out a pre-emptive military strike anywhere in the world if Russian interests demanded it.
Handicapping the candidates
For some time, Medvedev was seen as having the inside track to Putin’s endorsement. Medvedev’s position as chairman of Gazprom is particularly telling, given that this company is perhaps the largest and most powerful of Russia’s state-owned firms and one of Putin’s key foreign policy instruments. For example, Medvedev and Gazprom were at the center of Russia’s cutoff of natural gas to Ukraine in the winter of 2006.
Nevertheless, Medvedev’s star seems to have fallen more recently.
Medvedev has been largely absent from the media in early summer 2007, and in a sign that he may not be making enough progress on his “national priorities” portfolio, the Russian parliament in mid-June was working on a bill to “reanimate” the reform of the housing sector.
In contrast, Ivanov currently looks to be ascendant. The Russian government has sharply ratcheted up its protests against U.S. plans to base missile-interceptor equipment in Eastern Europe, and Ivanov has often been Putin’s key point man on this issue. Ivanov has taken a particularly hard line, to the point of issuing veiled threats that the U.S. plans could lead to a new cold war or other serious problems. While visiting Moscow in May, U.S. Secretary of State Condoleezza Rice met with Putin and Ivanov, but not with Medvedev.
Putin aide Igor Shuvalov warned in mid-June that a dark-horse candidate for the presidency could still emerge. Nevertheless, because of the increasing importance that President Putin is putting on national security, the government’s explicit linkage between military and economic development, and Putin and Ivanov’s past history together at the KGB, we think Ivanov is currently the most likely to get Putin’s endorsement and become the next president of Russia. Of course, there is still a chance Putin will find a politically palatable way to stay in office or that he will still pull the government’s strings from behind the scenes after he has formally retired. Nevertheless, at this moment, Ivanov looks most likely to be the next official leader of Russia.
Ramifications
All this begs some important questions: How will Russia behave following the upcoming elections? What policies will the new leadership pursue? How will the new political leadership affect investors, whether they are investing in Russia itself or in other regions that can be affected by Russia’s actions? Some of the answers are relatively simple. Because of President Putin’s popularity and the population’s strong approval of his current policies, the new president – probably Ivanov – is likely to continue along a similar path of aggressive foreign policy and tight control over domestic politics. Ivanov’s career in the KGB and his handling of defense issues to date suggest he will probably be at least as aggressive against the West and domestic political opponents as Putin is now.
In the economic sphere, Russia’s new leadership will probably keep cultivating large, powerful, state-owned monopolies and oligopolies as the basis of Russia’s economy. These “national champion” companies will probably have access to preferential financing and enjoy a benign regulatory framework, though they will also be subject to interference from the Kremlin when the political leadership decides it is in the national interest. Smaller firms outside the government’s high-priority sectors will probably have considerable freedom of action, but they will be at a disadvantage in terms of credit, political influence, and protection from the bureaucracy.
Still, it is important to keep in mind the fine nuances of policy, and this is where the leadership’s connection to St. Petersburg comes in. Putin, Medvedev and Ivanov have all had formative experiences in the relative freedom and openness of Petersburg, and those experiences have probably been a key reason why they have not sought to reimpose Communism in Russia. They have seen for themselves the political and economic benefits of a looser economic policy. Working with Anatoly Sobchak, they have seen that the political space needs more freedom than had existed in the Soviet system. Nevertheless, Putin, Medvedev and Ivanov also experienced Russia’s political and economic chaos in the 1990s, including the painful drop in Russia’s global stature. These leaders’ tough policies now are aimed at preventing a repeat of such an occurrence.
In a word, Russia’s current and future leadership is trying to strike a balance between freedom and control. They are putting control at a much higher priority than the West would like, but they are also likely to maintain much more freedom in Russia than was the case under Communism. Putin and the new Russian leadership will likely take a relatively hands-off approach to the economy and foreign investors to the extent that they believe it is compatible with maintaining stability and control. For that, we should thank their exposure to St. Petersburg. Nevertheless, the new leadership will put its first priority on strengthening Russia – diplomatically, politically, and economically – and that priority will be much higher than economic flexibility and the interests of investors. This means that in any given crisis, Russia could take a sufficiently hard-line tack to disrupt not only the domestic Russian markets but also markets worldwide. And although they will probably continue to allow private investors to have minority stakes in important firms, they will have few qualms about using those firms as instruments of state policy when circumstances warrant. In other words, investors will probably see somewhat limited threats from Russia much of the time in the coming years, but at other times, they could easily find themselves at the mercy of the Kremlin.