beyondbrics

Russia’s financial markets shrugged off the ruling United Russia Party’s setback in Sunday’s elections, with investors more concerned about the global effects of the euro crisis than a little local politics.

In the short-term that’s the right call. But in the long-term, the big loss of support for United Russia bodes ill for prime minister Vladimir Putin’s soft authoritarianism. He has ruled for a decade through carrot and stick combined with populist showmanship.  Can this go on?

With almost all the ballot papers counted, Putin’s United Russia had won 49.5 percent of the votes, down from 64 per cent four years ago, giving it 238 of the 450 seats in the lower house of the Duma.

The other three parties to reach the Duma boosted their support substantially but all remain far behind United Russia:  the Communists will have 92 seats (up from 57), the left-leaning Just Russia 64 (38)  and Vladimir Zhirinovsky’s nationalist LDPR 56 (40).

But a working majority doesn’t amount to a victory for United Russia.  What really matters is that the party’s support plunged by a third compared to the last election in 2007. That represents Putin’s biggest electoral setback since he rose to power in 1999. That’s not something he’s going to like.

It won’t change his plans to return to the presidency. He is still expected to win next March’s presidential poll, replacing his protegé Dmitry Medvedev, who will probably take Putin’s place as prime minister.

Team Putin clearly plans to stay in power for as long as possible. It has enriched itself to unprecedented levels by grabbing control of the bureaucracy and state companies, and pumping out torrents of cash. Corruption has flourished on a grand scale.

But it seems that the ‘managed democracy’ – as Kremlin officials sometimes call it – is reaching its limits.  For  more than a decade, Putin has ruled by channelling to the general public a slice of the money generated from growing oil and gas export revenues; by cracking down on political critics, manipulating elections and limiting democratic rights;  and by courting popularity by playing the macho hardman.

But many Russians are sick of the corruption they see around them – and call United Russia the party of swindlers and thieves. They are no longer satisfied with their own modest material gains when they observe the gross inequalities that permeate Russian life. They may not be attracted to the liberal opposition – parties which are largely banned from mainstream political life – but they are getting angry with Putin.  The prime minister was booed when he appeared at a martial arts competition last month.

Putin put a brave face on the result.  Speaking through gritted teeth, he said on Sunday: “This is an excellent  result which reflects the real situation in the country. Based on this result we can guarantee stable development of our country.”

But it won’t be as easy as it was before. United Russia has lost the two-thirds majority needed to make constitutional changes, such as the move which lengthened the president’s term in office from four years to six – although there is no imminent need for constitutional change and if Putin needed it he could count on the other Duma parties, all of which receive Kremlin support.

The Kremlin will now redouble efforts to ensure Putin does as well as possible in the presidential poll.  The result is a forgone conclusion. But it won’t disguise the fact that Putin’s armour of political impregnability has  been dented.

He has options. He could order the security police to crack down even harder on opposition political activities. But that would come with the risk of provoking wider protests and damaging Russia’s international reputation. Over the past decade, the authorities have secured control over the mainstream broadcasting channels but, unlike the Chinese, they have not clamped down on the internet. It would not be difficult, technically, to pull the plugs but it would come at the cost of disrupting the lives of the millions of Russians who have enthusiastically embraced the web.

Putin could also increase social spending, just as some oil-rich Arab states have done in response to this year’s political turmoil. But this is dangerous.  Following a recent binge of spending on public sector pay and pensions, infrastructure and defence, the budget depends more than ever on rising oil prices.  It now balances at $115 a barrel – compared to $40 five years ago. On Monday, Brent crude for January delivery – roughly equal to the price Russia gets for its oil – was trading at about $110 a barrel.

The public purse has to finance ever-bigger spending and allow for ever-larger corruption. Without oil revenues, the budget deficit would already be around 12 per cent of GDP. If oil prices don’t rise further, Russia’s networks of social support and patronage will come under strain. There will be conflicts within the elite – conflicts and divisions, just when Putin needs them least.

With over $500bn in foreign exchange reserves – the world’s third largest -  there’s little risk of a financial shock even if Putin were to boost pre-election spending by even more than already planned.

But that wins time, for a year or two. Then what? This is Putin’s challenge. If he carries on as he has done, Russia will face growing political and economic stagnation, with the danger that at some point commodity prices could fall, leaving the country exposed. Yes, the elite can carry on enriching itself for a while longer but it will become increasingly nervous. And nervous rulers don’t bode well for the ruled.

Of course, Putin could decide after the presidential elections, that it’s time for radical change – and adopt market-oriented political and economic reforms. But there’s little sign that he has such plans up his sleeve. And even if he did, he would have to move against the vested interests of the conservative elite that he has built around him – whose power is based on their control of the country’s natural resources. What incentive would these people have to share money and power?

For the moment this is not worrying the markets. The RTS dollar-denominated index was up 0.2 per cent at 11am London time and the rouble was 0.5 per cent lower against the US dollar at R30.94. But at some point, the vulnerability of Putin’s administration will come to trouble even the most short-term of investors.

Related reading:
Capital flight: $49.3bn and counting, beyondbrics
Stalin’s horrors still throw Russia into turmoil, FT
Kremlin’s top dogs tussle for poll position, FT
Special Report: Investing in Russia 2011, FT