Eyes Wide Shut

On December 4, Russian president Vladimir Putin delivered his annual state of the nation address to the Federal Assembly. Many analysts looked forward to the speech with great anticipation; however, it raised the question of whether President Putin realizes the full extent of the economic and political crises facing Russia.

President Vladimir Putin’s annual address was accompanied by the customary frenzy. Many political analysts predicted that this year’s speech would be of paramount historic importance, heralding “a liberal vector” against the backdrop of the current deepening economic crisis.

A banker with a state-run financial institution, who spoke to Vedomosti newspaper on the condition of anonymity, said he and his colleagues had expected Putin to announce a sharp and decisive change in economic policy that would prioritize business interests ahead of all other issues and acknowledge the inefficiency of existing national policies and government reforms. This year, for the first time, Putin’s address turned out to be a clear disappointment, as it seemed far removed from reality. Putin failed to deliver any appropriate solutions to the catastrophic decline of Russia’s economy, or to a wide range of other geopolitical challenges. The notion of reform was not mentioned in the context of Russia’s economic development at all. “I had a feeling as if we [and Putin] were living in two countries,” another banker noted.

Many observers expressed similar sentiments, begging the question of why the president’s annual address seemed so sharply divorced from reality. In order to answer this question, let us closely examine the content of his address.

This year marked the first time since 1994 that the president failed to address pertinent national political issues in his state of the nation address. This omission wasn’t surprising, though, given that in the past couple of years, Russia’s public policy has been on a steep decline. Following a short period of relaxed control brought about by public unrest in late 2011 and early 2012, Russia’s political situation is again marked by a level of control in which local election results are overturned (a bill to support this is now being considered by the State Duma). A non-systemic opposition is virtually non-existent in Russia, with its leaders either convicted or undergoing prosecution. Political public venues, as well as traditionally democratic regulatory judicial, government, and media agencies, have been completely done away with. Given the circumstances, the decline of the country’s public administration system is inevitable.

Furthermore, there is no one among the Russian elite allied with Putin—excluding opposition leaders—capable of expressing views that oppose the president’s. Typical comments by policy makers in reference to Putin’s latest address and his decision-making in general demonstrate a lack of critical strategic thinking on their part: “Putin’s annual address was impeccable,” said Putin’s press secretary Dmitry Peskov; “This address puts forth ‘a national idea,’” said chairwoman of the Federation Council Valentina Matviyenko; and “[The] president’s speech was inspiring,” said Russian Duma deputy speaker Serghei Neverov. This ongoing praise deludes Putin into thinking he’s in total control, numbs his sense of reality, and blunts his ability to assess risks.

When the president becomes a country’s sole guarantor of national stability and security, any discussion of alternative scenarios ceases to exist. For example, President Putin mentioned a “discussion” he had with prime minister Dimitry Medvedev that zeroed in on the launch of a “new system of a single technical contracting authority.” The new system will centralize control over all state-run construction sites, the sector with one of the highest corruption rates in the country, according to many studies. Instead of reforming the system of government contracts, President Putin offered to use a proven approach of adding more departments to the already existing oversight system. According to unofficial reports, Prime Minister Medvedev was none too enthusiastic about this solution, but Putin appeared to have a deaf ear to objections. Moreover, the president didn’t even mention corruption in his address, as if the issue doesn’t exist in Russia.

When the president becomes a country’s sole guarantor of national stability and security, any discussion of alternative scenarios ceases to exist.

Putin’s address also demonstrated the diminishing role of economists within Russia’s ruling elite—a trend reflected in the economic portion of his speech. Putin avoided the issues of a falling Russian ruble and a national economy headed for recession (and the subsequent increase in social risks and instability). The president called on the National Bank to crack down on the black market and to bring inflation down to 4 percent, which seems a Herculean effort given the current inflation rate of nearly 8 percent and the devaluation of the national currency. It also seems highly unlikely that a professional economist would have advised the president to include this in his annual address.

Almost every business incentive guaranteed by Putin has failed to live up to expectations. Russian small businesses had high hopes for measures that would ease the burdens of cumbersome business rules and regulations, heavy taxation, and corruption, among others. But all President Putin promised to the small business community was a moratorium on audits carried out by supervisory and regulatory agencies—a moratorium that would be relevant only if the applying businesses had succeeded in steering clear of any “serious claims” over the past three years. What the president means by “serious claims” was not clearly defined.

Putin also guaranteed to halt tax legislation; however, this was done immediately after the State Duma passed a law that will substantially increase fees imposed on lessors of shopping areas. Finally, neither the business community nor government officials were satisfied with the most important economic portion of President Putin’s address, which dealt with the recently announced “amnesty for capital.” “It is not quite clear what our president meant,” Vedomosti analysts said as they struggled to understand if amnestied businesses will have to pay taxes on capital repatriated to Russia. Nor is it obvious where businesses will be able to invest their capital if they decide to return it (given the litany of existing issues, including the government’s failure to guarantee certain rights to entrepreneurs, the subversion of Criminal Code articles regulating the country’s economy, general unrest, Western sanctions, and the slumping Russian ruble).

In addition to its economic crisis, Russia faces a deepening government crisis. The current administration appears to have lost its authority, and this, too, was reflected in the president’s address: this year marked the first time that Russian cabinet officials did not participate in the drafting of the president’s address. Putin’s economic advisor, Alexey Belousov, has boldly overshadowed the role of Russia’s key Ministry of Economic Development, fueling the latest rumors of a looming resignation of its head, Alexey Ulyukaev. Additionally, Putin commissioned the Agency for Strategic Initiatives to draft a program to bolster Russia’s non-resource sector, a project traditionally handled by the cabinet’s relevant departments.

But perhaps the most important factor to influence this year’s address were changes in President Putin’s personality. He clearly trusts no one, and driven by “military logic,” Putin sees everywhere enemies and “foreign agents” whose goal is to destroy Russia. As a result, Putin is detaching himself not only from society but also from his own inner circle. Simultaneously Putin is in the process of positioning himself as a pre-eminent historical figure who makes other state officials look like “mediocre managers.”

If we can take one thing away from President Putin’s speech, it’s that he is incapable of recognizing the depth of the crisis engulfing his country, and that his departure from reality presents a much more dangerous threat to Russia than the ruble’s devaluation or Western sanctions.

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