The Hard Road to Federal Reform

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The general consensus among Russia and Western observers is that President Vladimir Putin's reforms of the federal system have not been very effective.

Numerous essays in the Russian and Western media have come to this conclusion and the sense of failure is quickly becoming pervasive

To date, Putin's main accomplishment has been a change in atmosphere. During the late 1990s, there was a prevailing sense that the Kremlin was no longer in charge and that the governors were free to do as they wanted. Today, no governor openly opposes the president or his policies; in fact, everyone declares that he is loyal to the president. Beyond the atmospheric changes, the changes to the tax code have centralized control over a greater share of the country's tax revenue. The impact of these reforms remains unclear, but the federal government now determines the distribution of a larger share of Russia's tax revenue than it did in the past.

Beyond these substantial victories, the successes have been meager. Putin's removal of the governors and regional legislative chairmen from the Federation Council was offset by his decision to hand them the ability to appoint their own replacements. Last summer, Putin also won the theoretical ability to fire governors. However, in practice he chose not to use this power against Primorye Governor Yevgeny Nazdratenko and instead offered Nazdratenko a lucrative Moscow position to secure his resignation and commitment not to participate in the elections called to replace him.

The key element of Putin's federal reforms was the creation of seven federal districts and the appointment of presidential representatives to them. The stated purpose of this move was to fight corruption and bring regional laws in line with federal legislation. The reforms have not achieved this goal.

Some problems were obvious from the start. Putin did not make clear exactly what the representatives' functions would be. Consequently, like any self-interested bureaucratic player, they sought to increase their amorphous mandate by seeking real control over the money flows in their districts. However, the representatives quickly came into conflict with other agencies, including some elements of the presidential administration, the economic ministries and the governors. Rather than creating a clear chain of command, the new system merely set in play power battles among the different players.

The representatives boast about the numerous regional laws they have now brought into conformity with federal norms. However, the numbers they cite are probably about as meaningful as Soviet-era crop statistics. While some compliant regions have made the necessary changes, the usual suspects such as Tatarstan, Bashkortostan and Sakha remain defiant on key issues. Georgy Poltavchenko, Putin's envoy to the Central Federal District, recently admitted that it was "too soon to speak of a unified legal space."

Perhaps the most obvious failure of Putin's first-year federal policies was the federal government's inability to shape the outcome of the more than 50 gubernatorial elections that have taken place since December 1999. If Putin wanted to make fundamental changes in the relationship between the federal and regional governments, he would have done well to change the makeup of the regional elite. In fact, the Kremlin's ability to secure victory for the candidates of its choice turned out to be limited. Most likely Putin fired Sergei Samoilov, the former head of the presidential administration's territorial directorate, for his failure to ensure more Kremlin victories in the regions. Samoilov's dismissal is striking because of the few people Putin has fired to date.

A key source of the governors' power is their relationships with regional, and increasingly, national business. Where the local political and economic elite is united, the Kremlin and wealthy outside business interests can rarely dislodge the governor. Outside candidates generally lose if they do not have key local supporters. The Kremlin learned this lesson in Kursk, where it was able to oust Governor Alexander Rutskoi, but could not replace him with the candidate it supported.

By backing the incumbent governor in his reelection bid, business interests can gain considerable influence and lucrative benefits. This is the case for example in Volgograd, where LUKoil backed the sitting governor during his recent campaign and is now collecting on this support by placing its person in the governor's cabinet as deputy governor in charge of the energy sector. LUKoil is one of the largest enterprises in the region and is seeking close ties to the governor to ensure a favorable tax and business environment. Siberian Aluminum helped Alexei Lebed win in Khakasiya and benefits from his support in return.

The oligarchs are now discovering the importance of having regional bases. Major firms that do not have good ties to Putin, such as LUKoil, which supported Moscow Mayor Yury Luzhkov before Putin's rise, are now strengthening their position by building regional bases with incumbent governors where the company has major interests. Oligarchs who have close ties with Putin are using their Kremlin access to build their own empires. For example, Russian Aluminum's Oleg Deripaska recently used his ties in the Russian government to win the Chelyabinsk governor's support for his purchase of a local automotive factory.

Businesses are competing directly in elections, and the battle is over the control of property. "Some are trying to get more while others are trying to hold on to what they have," according to an analysis in Vechernyaya Perm on March 1. In fact, according to this interpretation, the battle for property is transforming into a battle for territory. With Roman Abramovich as Chukotka's governor, his Sibneft undoubtedly will secure the rights to develop the region. In several regions, Sibneft has backed one candidate while LUKoil supported another. For example, in the Nenets Autonomous District, Sibneft backed Governor Vladimir Butov against LUKoil's attempts to put its own man in this position. The companies also supported opposing candidates in Perm and Volgograd. The battle in the Evenk Autonomous District is between candidates backed respectively by Yukos and Slavneft. Even in a relatively developed region like Irkutsk, aluminum magnates are calling the shots in this year's gubernatorial election.

The 20 new governors elected in the latest election cycle provide clues to how future center-periphery relations will evolve. Newly elected Perm Governor Yury Trutnev perhaps best represents this new group. Trutnev was elected to office even though Putin supported his opponent. Nevertheless, Trutnev is not anti-Putin. He is a pragmatic businessman who has made clear his loyalty to the president. Such loyalty is not uncritical, however. For example, he has blasted the Russian government for not doing enough to improve business conditions in the country. He argued that last year's tax cuts were too small. According to his figures, enterprises still pay about 70 percent of their profits in taxes, leaving too little to invest in improved production lines. He wants to bring the overall tax rate down to about 30 percent to 35 percent. Governors like Trutnev will avoid open confrontation, but they will still bargain hard for their region's interests. To push ahead with economic reforms, Putin will now have to enter a long series of negotiations with the governors.

Robert Orttung is the editor of the EastWest Institute's Russian Regional Report, for which he wrote this comment.