The Bell, 3/1/24

Putin’s state-of-the-nation address offers Soviet vision of Russia’s future

Russian President Vladimir Putin’s state-of-the-nation address Thursday broke records, both for length and the number of “spontaneous” outbreaks of applause (there were 116 of them, according to one count). But the parallels with the Soviet Union don’t end there. Putin spent only a short time talking about the main threat to the economy – Russia’s war in Ukraine – and instead threatened the West, engaged in nuclear saber-rattling, and appeared to promise a far greater role for the state in the Russian economy.

Putin competing with Putin

Unlike last year, Putin radiated confidence in his speech to lawmakers. He is clearly satisfied with the situation at the front, and believes there are enough resources to continue fighting for at least another year. However, opinion polls suggest that the most popular candidate in presidential elections next month would be someone who does not harp on about the war, but who offers solutions to Russia’s domestic problems. So, once he’d got the saber-rattling out of the way, the lion’s share of Putin’s speech was about his plans through 2030.

According to the president, Russia needs more social spending, higher birth rates, longer life expectancy and fewer imports. Of course, that’s basically what the country needed during his previous six-year presidential term. Putin continues to compete with himself.

One of the new initiatives that Putin announced was five “national projects.” Four of these (Family, Youth, Long and Active Life, and Personnel) are related to human capital. Only one, Data Economy, relates directly to the economy. 

Putin’s speech suggested the state intends to act as the major player on the market – not just as a guarantor. He set a target to double capitalization on the Russian stock market by 2030 – not a hugely ambitious goal considering that the S&P 500 Index in the U.S. doubles in value roughly every seven years (and inflation in Russia is much higher than the U.S.).

Putin also pledged billions of dollars of spending. The promised new spending over the next six years comes to around 6 trillion ($66 billion), or about one trillion rubles a year. It may sound like a lot, but in reality it is relatively little – about 0.6% of GDP each year. 

New taxes?

However, even these relatively modest sums must come from somewhere. And Putin hinted that the state could impose new taxes, or raise existing ones, to pay for its additional social spending, as well as to boost productivity and to wean the country off imports.

In particular, Putin suggested raising corporate taxes and hiking income tax for the wealthy. Coincidentally, just three days before the speech, pro-Kremlin media reported the existence of legislation that would raise taxes for high earners. That legislation was not backed by the United Russia party, so it is unlikely to gain traction. It should be seen as a trial balloon. However, the idea of raising income tax to 25% on those who earn above 500 million rubles a year would raise about 1 trillion rubles a year – enough to fund all Putin’s spending promises. 

Russian officials have spent years talking about shifting from Russia’s flat rate 13% income tax to a more progressive system. In 2021, income tax rate was increased to 15% on individuals who earn more 5 million rubles ($55,000) a year. The higher tax applies to all earnings above this threshold. From a bureaucratic point of view, however, implementing a progressive income tax presents several major problems:

• Income tax goes to regional governments, which means that raising taxes will increase Russia’s already significant level of regional inequality;
• Progressive taxation could cause companies to take salaries off the books and pay wages in cash – resulting in an overall fall in revenue;
• Progressive income tax is first and foremost a tax on the middle class. In modern Russia, a large proportion of the middle class are state employees, particularly security officers and soldiers who the Kremlin would not like to irritate by taking money out of their pocket. They would likely need preferential treatment.

A more realistic alternative to hiking income tax would be a review of corporate income tax, which currently stands at 20%. Indeed, businesses have already suggested they would not be unhappy with higher taxes. Alexander Shokhin, chairman of the Russian Union of Industrialists and Entrepreneurs, a lobby group, said in December that businesses had no objection to a tax rise if the government stopped levying one-off payments. 

A new elite

Another important takeaway from Putin’s speech was that those pursuing private business have, in effect, been erased from the national elite. Putin put it bluntly. “The word “elite” has discredited itself, especially when applied to those who lined their pockets in the 1990s,” he said. “The real elite are the workers and warriors who serve Russia.”

Putin confirmed what businessmen already understand: the nationalization of assets will continue. Strikingly, up until now, Putin has acted as guarantor of the outcome of the 1990s privatization. And as recently as last year he said there would be no new nationalization. But a creeping reversal is well underway. The former assets of Mikhail Abyzov and Andrey Melnichenko’s Metafrax company reverted to state ownership in 2023, and, so far this year, the state has taken control of leading auto-dealer Rolf, and a large metals holding formerly owned by Yuri Antipov, a 1990s billionaire who was detained on fraud charges.

Putin believes the true elite are the “heroes” of Russia’s armed forces fighting in Ukraine. And he called for military veterans to play a greater role in managing enterprises, teaching and state service. Starting March 1, veterans will be able to sign up for a special program called “Time of Heroes.” Soldiers in Ukraine already enjoy more social benefits than anyone else in Russia. Among the most recent proposals, the Finance Ministry suggested exempting them from interest payments on outstanding loans.

Come again? 

There were also some odd moments in Putin’s speech. The president praised Russians for drinking less, despite the fact that recent official figures showed the first increase in the number of alcoholics in Russia for a decade. He also said the number of people in poverty should be reduced to 7% of the population – even though six years earlier he had set a far more ambitious target. 

Ominously, Putin promised to prevent an economic collapse like the one that occurred in the late Soviet Union. Putin said that military spending accounted for 13% of GDP in the1980s (a figure that tallies with accepted Western estimates). However, Russian military and related expenditure is currently estimated to be running at 10% of GDP.

Why the world should care

State capitalism in Russia is becoming more and more about the state, and less and less about capitalism. State spending, national projects and inflated government outlays are now a much better pathway to wealth than the free market. Nor did Putin much bother with presenting a new vision for the future in his speech. His new six-year plan can be summed up as: everything will be like before, only better. Some of Putin’s planned projects have obvious beneficiaries, such as the construction sector, and the new military elite. But who exactly will be better off, and how exactly this will work, is not at all clear. 

By Fred Weir, Christian Science Monitor, 3/25/24

The horrific slaughter at Crocus City Hall, in which gunmen with automatic weapons and explosives killed over 130 people last Friday, has jolted Muscovites out of a sense of complacency that they have enjoyed, despite two years of war in next-door Ukraine.

In an address to Russians the day after the attack, President Vladimir Putin hinted that Ukraine might have been involved in the atrocity.

But he failed to mention a more plausible suspect: the group known as Islamic State Khorasan (ISIS-K), a sworn enemy of Russia generally associated with the kind of ruthless, face-to-face massacres that occurred in the Moscow concert hall.

The four prime suspects, who fled the scene in a car, were apprehended in Russia’s southwestern Bryansk region, near the borders with Ukraine and Belarus. On Sunday night, the suspects, who are from the former Soviet central Asian state of Tajikistan, were hauled before a Moscow court – all of them very badly beaten – and charged with terrorism, with a trial date set for late May.

While many Russians seem eager to embrace a Ukrainian connection to the attack, it looks like exactly the sort of threat emanating from Afghanistan that Russian security experts have been warning about for years.

The ISIS-K group is dedicated to creating a caliphate in the former Khorasan region of central Asia, which stretches from Iran to Tajikstan and includes parts of Uzbekistan and Turkmenistan, as well as all of Afghanistan. With Afghanistan once again under Taliban rule, the group has been moving into neighboring former Soviet states and infiltrating Russia through the stream of migrant workers, many of them Tajiks, who keep Russia’s construction and service industries running. Statistics are unreliable, but it’s estimated that over 1 million migrant workers are currently in Russia, many of them in Moscow, and are relatively free to move around.

In early March the United States warned Russia that ISIS was preparing an attack, and specifically mentioned a concert venue. Mr. Putin rejected the warning as a “provocation,” saying “these actions resemble outright blackmail and the intention to intimidate and destabilize our society.”

But, in fact, the Russians were already aware of the threat from ISIS. In early March, the Federal Security Service claimed to have raided and killed members of an “ISIS cell” near Moscow that was planning to bomb a Russian synagogue.

Now, experts say, the attack will almost certainly lead to tough security measures and stepped-up surveillance that the city hasn’t seen since a wave of terrorist attacks more than 20 years ago.

“There are so many questions and very few answers” about the Crocus City Hall attack, says Alexei Kondaurov, a former Duma deputy and former KGB major general specializing in anti-terrorist operations. “Any terrorist attack that isn’t caught at the stage of preparation represents a failure of special services. You can speak of solving 99% of crimes, but if one is not prevented, there is no justification. Particularly when the number of casualties is so high.”

A threat from Afghanistan

In the 1990s, Afghanistan under the Taliban was a haven and incubator of various extreme Islamist groups – such as Al Qaeda – who exported Islamist insurgencies to Tajikistan, Uzbekistan, and beyond.

After NATO occupied Afghanistan and Russia put down its own Islamist rebellion in Chechnya, things stabilized. The mass-scale terrorist attacks that had hit Moscow and other parts of Russia during the Chechen wars receded. But experts say the danger never completely went away.

Russia’s military intervention in Syria in 2015 again pitted Moscow against Islamist groups, and a planeload of Russian tourists was destroyed, reportedly by an ISIS bomb, over Egypt’s Sinai Desert that year, killing 224 people.

“What happened in that Moscow concert hall was a terrible tragedy,” says Grigory Shvedov, editor of Caucasian Knot, an independent online journal that reports on Russia’s mainly Muslim Caucasus region. “But, cynically speaking, it will be seen by some as an effective example and could revive this kind of extremism” within Russia, which has a very large Indigenous Muslim population.

The threat from ISIS-K, which is based in Afghanistan and Pakistan, is particularly acute for Moscow, due to the Russian economy’s reliance on migrant labor from central Asia. Afghan ethnic groups include Uzbeks and Tajiks, who may move easily into the neighboring states and then join the stream of migrant workers into Russia, as the four alleged Crocus City Hall attackers appear to have done.

Once in Russia, migrant workers may be subject to police harassment and extortion, but actual security measures that might prevent terrorist attacks are sorely lacking. Mr. Shvedov gives the example of dozens of illegal hostels, whose existence is an open secret in Moscow. Migrants live there without observing the requirement to register with authorities.

“The rules exist, but realities are very different,” he says, alluding to pervasive corruption in the system.

Consequences from Crocus City Hall

Depending on whom Russia officially decides to blame for the calamity, the terrorist attack may further sour relations with the U.S. Alternatively, it may improve them if the two adversaries acknowledge that they have a dangerous common enemy in ISIS.

At home, Russians will likely face the security crackdown that, ironically, they have largely avoided over two years of war in Ukraine. That would mean a further tightening of the screws on speech and make it much harder to use public transportation or gather in large groups. Communities of migrant workers will likely face a real crackdown.

“I expect more repression, inside the country and outside, and a new level of brutality,” says Andrei Soldatov, a Russian security services expert who is presently a senior fellow with the Center for European Policy Analysis in Washington. “We’ve seen it before – the tactics once adopted to deal with terrorists became quickly accepted as a new norm to treat political dissent.

“Thus the torture the Russian security services used against four suspects might be used against all sort of people in the country. This is the most direct consequence of the attack.”

Yesterday Seymour Hersh published a piece at his Substack in which he relayed what his US intelligence contacts have told him about the terrorist attack at Crocus Hall outside of Moscow last week. The gist of it is that US intelligence has a duty to warn all nations, including adversaries, of any terrorist attack that US intelligence sources pick up. HIs sources assure that US intelligence performed their duty by warning Russian authorities of the information they had of a possible terror attack:

This American intelligence community passed a warning of a possible attack involving religious extremists from Pakistan, Tajikistan, and Uzbekistan eighteen days in advance of the Moscow concert hall assault that killed at least 137 people and injured more than one hundred. Such a warning invariably comes from intercepts from the National Security Agency and agent reports from the Central Intelligence Agency.

The Americans did their job but the Russian intelligence community, heeding its boss, did not. President Vladimir Putin publicly called the warning “provocative statements” three days before the attack, and the Russian security services ignored it. They bear responsibility, in the view of American intelligence experts, for failing to do what was necessary to protect the concertgoers….

The prophetic alert released by the US Embassy in Moscow on March 7 explained that the embassy “is monitoring reports that extremists have imminent plans to target large gatherings in Moscow, to include concerts, and U.S. citizens should be advised to avoid large gatherings in the next 48 hours.”

By any standard, the American intelligence was riveting. President Putin chose to ignore the warnings, and in its aftermath he has fixated on what he apparently and wrongly believes was an attack that in some way had been orchestrated or known in advance by the Ukrainian government….

The tragic reality, as the Russian leader continues to insist on Ukraine’s involvement, is that he and his cowed bureaucracy failed his people and their children. In many nations, such a catastrophic mistake would have political consequences.

By Andrey Pertsev, Carnegie Endowment for International Peace, 3/11/24

The social spending commitments made by Russian President Vladimir Putin in his February state of the nation address indicate that at least one Russian official will get an influential new job. The lucky person will likely be either a deputy prime minister with expanded powers, or a special coordinator. Either way, they’ll get regular access to the president, the opportunity to disburse large sums, and the tools to shape their public image. That will automatically create an alternative center of power within the government.

Putin has not made any campaign pledges ahead of Russia’s presidential elections in March. Instead, he chose to use his state of the nation address to announce five new “national projects,” titled “Personnel,” “Youth of Russia,” “Family,” “Long and Active Life,” and “Data Economy.” Four of them are obviously socially orientated, and will involve subsidized mortgages, social handouts to families, and higher salaries for state employees, as well as building and modernizing schools, universities, and hospitals.

The reasoning is clear: the Kremlin reaps the biggest political dividends from social spending. People always notice when a local school or hospital is renovated. Of course, governors and the ruling United Russia party benefit from these projects, but the main beneficiary is Putin.

The new national projects will also be a boon for all those involved in executing them: above all, the deputy prime minister in charge of social affairs. Currently, this post is held by Tatiana Golikova, but after this month’s presidential election, the government will be required to resign, and there will likely be a reshuffle. To a lesser extent, the deputy prime ministers in charge of industry and construction will also be involved.

There are several possible benefits for these managers. Firstly, by manipulating the tender process, they can choose to award contracts to “friendly” companies with which it suits them to work. Secondly, they will get access to Putin, who will likely be hosting regular meetings on the national projects’ implementation: both in public and behind closed doors. That’s what happened with Russia’s first four national projects when they were launched in 2005.

Close contact with Putin is an extremely valuable resource in the Russian power vertical, bestowing financial and political rewards and often outweighing formal status. The best example is Dmitry Medvedev, who was the first person appointed to oversee the national projects in 2005. Then a deputy prime minister, Medvedev was selected by Putin three years later to succeed him as president.

It will be easy for the person in charge of the national projects to generate good PR for themselves. Indeed, they will be able to position themselves as something of an avuncular figure, doling out cash from a magic money tree. Any problems can be blamed on those in government who are directly responsible for the economy. The post will be an ideal opportunity to promote a personal brand.

Of course, whoever gets the job will have to be careful not to be seen to be dishing out more cash than Putin. But it’s clearly possible to have your own personal brand in Russian politics. Prime Minister Mikhail Mishustin, for example, has fashioned an image for himself of both a professional operator and the sort of guy who can pat a minister on the back while dropping slang into conversation with them. The profile of Sergei Kiriyenko, the Kremlin deputy chief of staff in charge of domestic politics, is something along the lines of “Lord of the Donbas,” inspecting social infrastructure in Russian-occupied eastern Ukraine and handing out largesse in the form of pensions and salaries.

Indeed, Kiriyenko is undoubtedly the frontrunner for the post of deputy prime minister overseeing the socially focused national projects. Apart from his close involvement in social issues in occupied Ukraine, he also previously headed the state nuclear corporation Rosatom, which ran a lot of social projects, and had a short stint as prime minister in the 1990s. He also works closely with the government’s social ministries, helped develop the ideological component of Russia’s school curriculum and new “Fundamentals of Russian Statehood” university course, and has organized major conferences and forums.

Of course, there are other possible candidates. Deputy Prime Minister Yury Trutnev, who is also the presidential envoy to the Far East, has long overseen social and infrastructure projects in that part of the country. Marat Khusnullin, one of Putin’s favorites, regularly reports to the president on the success of ambitious infrastructure ventures. There’s also Deputy Prime Minister Dmitry Chernyshenko, who oversees digitization and sport, and enjoys Putin’s favor. However, none of them are as well suited as Kiriyenko.

Either way, the creation of a new deputy prime minister post will cause a major shift in the balance of power within Russia’s bureaucracy. Considering Medevdev’s rise from national projects to the presidency, the appointment will mean the elite starts thinking about a possible successor to Putin. The person who gets the job will inevitably be seen in a new light. In addition, the emergence of a new center of influence in the government will likely generate conflicts with the prime minister, who will be required to find the money.

For many years now, Putin has avoided a major reshuffle among Russia’s top officials in order to head off any speculation about power transitions or successors. Now, however, he has little choice but to empower a major new political player.

By Andrew Korybko, Substack, 1/29/24

President Putin shared his vision of a new veteran-led Russian elite in late January when meeting with ministers and top St. Petersburg officials according to RT’s report about their conversation:

“The Russian head of state previously revealed that some 617,000 service members had been deployed in Ukraine. ‘I met today with students, who put their studies on hold, many of them, [and] went to the warzone,’ Putin remarked. ‘It’s out of these people that we should be forming the country’s elite in the future,’ he added. The Russian head of state described returning troops as those who can be entrusted with the country’s development. ‘Hence, they should be supported [and] assisted.’”

Here are five background briefings about the ways in which the Russian leader has sought to reshape his country’s domestic affairs by way of reforming its elite:

* 1 January 2020: “20 Years Of Putin: His Top Domestic & Foreign Policy Successes”

* 28 October 2020: “President Putin’s 2020 Valdai Club Speech Articulated His Vision of Populist Statism”

* 4 November 2021: “Is Putin’s ‘Healthy/Moderate/Reasonable Conservatism’ Really a New Russian Ideology?”

* 11 June 2022: “President Putin’s Insight Into State Sovereignty Is Instructive For All Countries”

* 3 October 2022: “Putin’s Revolutionary Manifesto Focuses On The Struggle For Democracy Against The Deep State”

He basically wants to facilitate the rise of patriotic conservative-nationalists who’ll prioritize sovereignty and seamlessly channel the people’s will in order to continue safeguarding and modernizing the country.

The special operation, which has gone on for much longer than both sides expected due to each of them underestimating the other as explained here back in July 2022, led to over half a million Russians proving their patriotism by defending Russia’s national interests on the battlefield. These can be summarized as preserving its sovereignty, protecting its conservative–nationalist values, and promoting multipolarity. They’re accordingly the best crop of people to gradually replace the existing elite.

Up until the special operation, Russia’s political and economic elite privileged the West over the Global South, which was done for reasons of convenience and familiarity. Director of the Foreign Policy Planning Department of the Russian Ministry of Foreign Affairs Alexei Drobinin shared his detailed thoughts on “The lessons of history and vision for the future” in August 2022 where he lambasted this class for their “ideological separation from the popular masses” over the centuries. All of that has now changed.

While most existing members of the elite were able to change their stripes by pivoting to the Global South in light of changing circumstances, it’s much better for them all to be replaced by proven patriotic conservative-nationalists who literally put their lives on the line fighting the West. The latter are much more politically reliable and can more easily adapt to everything than the “old guard”, who either fled or were compelled to change their ways in order to keep what they’d obtained thus far in their lives.

The “new guard” is just starting off with their lives, however, and have little to lose but lots to gain by growing within this new elite system. The Russian leader also knows that they haven’t been tainted by a life’s worth of Western-leaning sympathies unlike most of the “old guard”, whose naivete about the West led to them misleading him about its intentions. He’s responsible for his policy choices, but they were arguably influenced by Western-leaning advisors. Here are five background briefings on this:

* 7 July 2022: “Putin Cautioned Russian Strategic Forecasters Against Indulging In Wishful Thinking”

* 8 December 2022: “Merkel’s Admission That Minsk Was Just A Ruse Guarantees A Protracted Conflict”

* 24 December 2022: “Putin Explained Why He Had No Choice But To Protect The Russian Population In Ukraine”

* 26 December 2022: “The Five Ways In Which 2022 Completely Changed Russian Grand Strategy”

* 20 December 2023: “Putin’s Admission Of Naivety About The West Signals His New Stance Towards Peace Talks”

The lesson that he learned is that he can no longer rely on the existing elite after their pre-special operation paradigm of International Relations was comprehensively debunked. That’s not to say that there don’t exist any patriotic conservative-nationalists within the elite whose previously fringe views were proven right by events, nor that some previously Western-leaning ones didn’t sincerely change their stripes, but just that he’s obviously uncomfortable with how few there are within their ranks.

President Putin couldn’t in good conscience hand the country off to whoever his successor may be without knowing that the “new guard” is actively in the process of replacing the “old guard”. To be sure, this is already underway, but he wants to accelerate it as much as possible and that’s why he explicitly said in late January that he envisages a veteran-led elite in the coming future. Just like Moscow wasn’t built in a day, so too will it take time to rebuild the Russian elite, but thankfully they’re off to a solid start.