The New Russia:A Look at Internal Developments

"The social dimension of Russia's response to the current economic crisis will define the future of Russia's political development and the future of the Russian economy," said Andrei Kortunov, President, New Eurasia Foundation, at a February 5, 2009 lecture, chaired by Sarah Carey, Partner, Squire Sanders and Dempsey LLP. Kortunov contended that to understand the true scope of the problems facing Russia, it is important to look beyond the Kremlin and consider the conditions on the eve of the crisis, the immediate impact of the crisis, and possible social reactions should the crisis deepen.

According to conventional wisdom, Russia experienced rapid economic growth over the last ten years which greatly closed the gap between Russian and Western standards of living and resulted in a substantial decline in poverty levels. A resurgence of Russian national pride has accompanied these positive developments, which largely coincided with Vladimir Putin's two terms as president. These changes have gone well beyond Moscow, and are particularly evident in regional centers, with expanded residential and office construction and more cars on the street.

However, Kortunov cautioned, this economic stability has been "saturated with contradictions." First, the polarization of the Russian population has not been overcome. This discontent is especially apparent in the widespread perception that income disparity is Russia's main problem and that the wealthy do not care about the rest of Russian society. According to Kortunov, that sentiment has grown stronger during the crisis. Another contradiction is the gap between generations. More than just differing abilities or attitudes between young and old, this gap is evident in the high level of senior poverty in Russia. Finally, the regional disparities in Russia are stark. Kortunov noted that while 80 percent of Moscow residents are satisfied with conditions, the corresponding number for Pskov is 22 percent. The difference in living standards between urban and rural areas is profound, and the economic boom years were not enough to lift the numerous lagging regions.

Another area of concern in Russia is the rise in social paternalism, Kortunov said. According to surveys, during the 1990s young Russians most desired careers as businessmen. In 2005, the preferred career choice was manager of a large company. In 2008, the top choice was state bureaucrat. This shift in preferences indicates a return to a quasi-Soviet social contract, Kortunov maintained. Social paternalism is also reflected in the composition of the Russian middle class. Unlike in Western societies, the Russian middle class is predominately composed of state employees or employees of state companies or government contractors. They are conservative, protective of the state, and an unlikely source of social demand for change, Kortunov argued.

Today, Russian consumers, like consumers all over the world, are facing difficulty in securing consumer credit and mortgages. It is affecting more Russians than the financial crisis of 1998. Kortunov observed that the Russian dream of owning a car, apartment, and dacha, which seemed attainable to many in 2007, is now out of reach. The devaluation of the ruble is making imports and travel abroad more expensive, and surveys show that Russian economic concerns are shifting from finding the right mortgage to more basic concerns such as prices on goods and salaries.

The issue of jobs will only grow in importance, predicted Kortunov. Employment outside of Moscow is declining and one-company or industry towns are seeing layoffs and plant shutdowns. Unemployment is likely to hit 10 to 15 percent by the end of 2009, and regions with metals and machine-building industries, as well as the North Caucasus, are most at risk.

All of these developments are putting stress on Russian state capacity at all levels. Corruption is limiting the effectiveness of subsidies from the center to the regions that are intended to help those regions cope. Regional governments are struggling with meeting required infrastructure investments that local companies helped support in better economic times.

Kortunov predicted that one of two scenarios will develop should the economic crisis deepen or continue. Under a "radical scenario," by springtime there will be increasing labor unrest, especially among miners and employees in one-company towns. The approval ratings for President Dmitrii Medvedev and Prime Minster Putin will decline and opposition parties will grow in popularity. Eventually, the political structures built under the Putin administration will collapse. Under a more conservative scenario, the Russian state will find sufficient capacity to operate and social protest will remain fragmented and controlled. The real test for the regime will be the Duma elections in 2011, but Russia will muddle through under this conservative scenario.

Which scenario emerges will depend on the capacity of the Russian state, and the willingness of the leadership in the Kremlin to adapt by providing a new social contract to Russian citizens. This new contract would necessarily involve dismantling the legacy of Putinism's vertical power in order to address the low capacity of local leaders to meet the needs of their constituents, Kortunov put forth. The current crisis has exposed the weaknesses of the Putin system, but it will be difficult for those invested in the current system to undertake the hard choices necessary.