Charm and Consumerism Work Wonders

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Anybody watching President Vladimir Putin sipping from a teacup during three hours of questions on Tuesday could not have failed to be struck by his composure and confidence. Here was a president in full control of his brief, whether it was a softball question on living standards or a more delicate inquiry over military conscription. Putin, the man in control, was defending Russia's territorial integrity in the Kuril Islands one moment and fixing the plumbing for pensioners in Stavropol the next.

The television broadcast was just the latest episode in Putin's six-month charm offensive. Since the state-of-the-nation address in April, Putin has looked sternly competent in question-and-answer sessions with the international business community, the domestic business community, academia and now the general public. The question is -- where is it all heading? When he is not shaking hands and looking professional, what is Putin's actual game plan for Russia in the final two years of his presidency? Because the latest incarnation of Putin is a rather different man from the one who was sitting in the Kremlin at the beginning of this year.

Only nine months ago, Putin faced a rising tide of domestic and international criticism. Ukraine's Orange Revolution looked like a painful sign of Russia's inability to project its influence even onto its closest neighbors. Pensioners, that least flappable of voting groups, were out on the streets protesting over the muddled benefits reform. Businesses were voting with their bank balances, shutting down domestic investment projects. And the Yukos affair was rumbling along, generating considerable quantities of slickly spun Western media criticism of Russia, which eventually proved pretty ineffective.

It has been a remarkable turnaround and one that reflects well on the political professionalism of the president and his spin doctors. But it should not divert attention from the two themes that have underpinned the first six years of Putin's presidency and will likely characterize his final two. From his inaugural speech as president in 2000 through to Tuesday's call-in show, Putin has focused on generating economic growth and increasing the authority of the state. The president who promised to double the gross domestic product is the same president who has put such effort into gaining control over the strategic heights of the economy.

Unfortunately, these two themes are not readily consistent with one another. A successful market-based economy does need a certain amount of stability in which to operate, and Putin can take credit for much of the pickup in growth during the early years of his presidency. But too much control takes the "free" out of "free market" and leaves businesses confused over whether they should be looking first to market signals or the Kremlin for direction.

Therein lies the dilemma of the Putin presidency. Over the last few months, we've seen the president promise to raise living standards further and to open up Russia more to foreign investment. It is pretty much inevitable that at some point over the next two years we will see a president who wants to ensure that Russia's natural resource companies recognize the suzerainty of the state and who wants to generate the best possible political, economic and social conditions ahead of the election period in 2008.

If the private market is not delivering growth in living standards in line with the Kremlin's expectations, then we may well see intervention to fix the problem. Until recently, the Finance Ministry has proven remarkably successful at resisting lobbying pressure to spend some of Russia's petrodollar windfall. Now, however, the political imperative appears to have won out. On top of the $4 billion first promised by Putin on Sept. 5, there is $6 billion extra oil money built into next year's budget and lots of talk about publicly funded investment projects.

This is not to say that Russia's social infrastructure doesn't need upgrading -- it patently does. But the tension between control and market is evident when one judges the value of increasing spending without administrative reform to create a bureaucracy capable of implementing policy. Rather than improving infrastructure and stimulating growth, it could well result in inflation and, eventually, the opposite of the growth boost originally intended.

On the other side, we are unlikely to see any reforms that risk rocking the boat by pulling the state out of the economy. The sort of bold economic reform agenda of Putin's first term is likely to be deemed too risky for the final years of his second. Land reform, pension reform and the marvelously simple 13 percent flat-rate income tax put power into the hands of the private market. It is unlikely that the same risk will be taken with liberalization of the electricity market, administrative reform or further changes to benefits entitlement, all reforms originally planned for Putin's second term.

Perhaps the most important task for Putin to complete over the next two years is managing his succession. Putin has repeatedly emphasized the need to ensure stability during the transfer of power in 2008. With democratic institutions as young and fragile as they are in Russia, a simple vote is unlikely to be trusted by the Kremlin as enough of a guarantee of stability. Putin will want to help pick his successor, guide him through the electoral minefield and, as he hinted on Tuesday, assume a role in the next administration that will enable him to provide the expertise and experience he has developed during his own presidency.

On May 16, the senior judge in the case against Mikhail Khodorkovsky began reading out the verdict of the trial. On that day, the Russia's equity market index, the RTS, marked a low of 630 points. Since then, the market has gained over 50 percent and on Wednesday broke through the historic 1,000-point barrier. That implies that the market capitalization of Russian industry grew from $300 billion to $450 billion in four months. Part of that rise can be attributed to rising oil prices. But equally, part of it is a direct result of Putin turning on the charm and drawing a veil over the Yukos factor by presenting Russia's bright side to both international and domestic audiences. Powerful charm indeed. Sentiment toward Russia can change remarkably quickly, and it must have been well noted that any deterioration caused by a shift back toward greater state control to better manage the risks ahead of the 2008 presidential elections can be rapidly reversed by the right charm offensive.

Perhaps, however, the most important trend emphasized by Putin's conversation with the nation is how little attention it drew from the majority of Russians. The decline in political opposition and public debate is often blamed on the successful engineering of Putin's popularity and his parliamentary parties. But it is also a result of an increasing proportion of voters focusing first and foremost on their own well-being. Making money and spending on consumer goods is becoming at least as important as Putin's latest televised promise not to change the Constitution. As the private economy expands, so does the vested interest in limiting the power of the state. Ironically, given the apolitical nature of a consumerist free market, the middle class' ignoring of Putin is becoming the biggest barrier to any reversal of the promises made in his charm offensive.

Roland Nash, chief strategist at Renaissance Capital, contributed this comment to The Moscow Times.