East European Group

The Russian elections of

December 2003
Business implications and why the West does not "get it"

Dr Daniel Thorniley

Position paper No 40 December 2003

Frankly, the politics do not smell good. The media is under complete government control. No other
European country is run like this. The government has clearly manifested its dominance over the
nation’s main TV outlets along with other principal media outlets (radio and newspapers). The
leader is seeking to buy up even more prestigious newspapers. The leadership runs the country
like a private fiefdom. A praise-filled book of his life was even sent out to every household in the
country. On top of this comes the well-known role of crime gangs and the mafia at many levels of
society: renowned British journals have called the leader to account over allegedly serious criminal
activities, while former leaders have been arraigned and convicted before the courts for complicity
in mob murders. Yes, ladies and gentlemen, ITALY is in a real mess under that arch-oligarch Silvio
Berlusconi?

Now a few words about the recent Russian elections.

First we feel that Western media outlets often take a relativist view of politics in Russia: hence our
remarks above.

The results will have hardly any impacts on Western trading activities and, presumably, little on
Western investment trends. The election results and Western media comments on them will
require regional and country managers to explain the reality of the Russian political environment to
senior management and reassure them that the country is not going down the road of dictatorship,
which it is certainly not doing. Putin is no Pinochet nor a Josef Stalin and that is to the good. And,
hence again, our comments on relativism.

But some of the complaints about procedures during the Russian elections emanating from the US
and European administrations may well be only pro forma. After all, the US did overlook a much
more crooked election in Azerbaijan in October and turned a blind eye (or supported) extra-
parliamentary activity in Georgia last month.

Some 60% of the election coverage of the main TV stations was devoted to positive coverage of
United Russia. The elections were not a pretty sight, but even the OSCE’s report did not accuse
the regime of “electoral fraud”.

The ironic thing is that Putin-backed parties would have won the elections without media
manipulation during the campaign.

The idea that the Russian electorate is a dupe to propaganda shows ignorance of Russian society.
Politically the Russians are among the most astute electors in the world (having had 70 years of
Soviet propaganda rammed down their throats). That said, a consistently positive picture of the
regime does inevitably influence people.

But Western complaints also ignore the fact that Putin and his supporters had a lot going for them:

1) President Vladimir Putin represents stability. After a 20th century filled with horror,
butchery and turmoil, Russians love stability and Putin is Mr Stability.

2) The economy is doing well. Putin has been lucky with high global oil prices and the
economy is benefiting many, especially the rising middle class who tend proportionally to
vote more; the poor tend to be more disenfranchised in Russia as in the US.

3) Putin also gives the Russians pride. They have felt kicked around since 1991 and Putin
gives confidence to the country. Western business executives have spoken for several
years of the renewed confidence in their Russian business partners and how they look on
the world and approach negotiations with a more confident (and tougher) attitude. Putin
looks good at international meetings around the world. Russians can admire him
compared with the drunken stumbling buffoon that was Yeltsin in his dotage (readers will
note that I actually admire many things that Yeltsin achieved in 1991-94; sadly, like many
political leaders and CEOs, he just didn’t know when to retire gracefully).

Based on this, the widely reported remarks of Bruce George, head of the OSCE’s parliamentary
assembly, that the results were “overwhelmingly distorted” are inaccurate and exaggerated.

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Putin himself makes no bones about the fact that he favours “managed or controlled democracy”.
One issue is, what are the real alternatives in the real world? Russia is a transition economy and
also a transition polity. It is unrealistic to expect Russia to leap into some democratic nirvana
overnight. And where in the real world is this democratic nirvana? Excluding a dozen OECD
countries, fully-fledged democracies are hard to find. And the Russian people seem to like, for
now, the offer of managed democracy. For example, neither Putin nor most voters would relish a
system of proportional representation with a merry-go-round of coalition governments. It is
questionable whether this would help the Russian people; it would certainly harm the Russian
economy and Western business interests. As Putin puts it himself, “I don’t think people want a
democracy that leads to chaos”. And in Russia today, he happens to be right.

· Also based on the political evolution of the last 5-10 years in Russia, this electoral result
comes as little surprise to anyone. The 1990s saw a crash course in capitalism, turmoil, a tank
assault on the Russian parliament building, a crooked sell-off of Russia’s assets, a crash of
the rouble and now several years of relative calm, both economically and politically (we have
addressed the Yukos affair in an earlier paper). Much of this has the flavour of a political
system in transition finding its own way to a full political transformation that could take another
5-20 years.

An election of few surprises

· Of the 450 MPs, half are directly elected and half given seats according to the votes of their
parties. The full results at the time of writing are still preliminary, but the results on party lists
are already clear and those for individual seats can be estimated.

· United Russia did well but this was expected; only the extent of the victory was in question.
Massive positive publicity and opposition parties in disarray ensured that United Russia vote
exceeded most estimates (37-39% of the vote).

· The slump in the Communist Party vote, which fell by almost half to 13%, comes as no
surprise. Since the glory days in 1996 when Gennadi Zyuganov obtained 40% in the
presidential vote, the party’s days have been numbered. The age structure of the party’s
support (elderly voters) works against it as its support literally dies off. The sudden creation of
the spoiler-party Rodina (Motherland), which was only created some months ago, took votes
away from the communists with its nationalist and anti-oligarch rhetoric and came from
nowhere to gain some 10% of the vote.

· Obviously, the President and his supporters also jumped on the “let’s bash the oligarchs” band
wagon and picked up votes by imprisoning the head of Yukos Mikhail Khodorkovsky amid
much publicity.

· But the Rodina party is unlikely to act as a forceful opposition party after the elections. Most
commentators believe that the party is either actively or tacitly supported by the Kremlin in its
role of spoiler. Putin may not be averse to its existence, providing it is controlled, as it can act
as a safety valve for harder line nationalist rhetoric, which members of his United Russia are
more reluctant to express publicly.

· The mis-named Liberal Democratic Party substantially improved its result gaining some 12%
of the vote. Its leader, Russia’s one-time enfant terrible, Vladimir Zhirinovsky, is now regarded
more as a Kremlin-controlled buffoon than a reputedly dangerous fascist buffoon. His party
gains votes from extremists, racists and protest voters. This party and its leader have been
emasculated by the Kremlin; they will hang around, but are not a serious threat in Russian
politics.

· The real liberal parties performed badly: namely the Union of Right Forces and Yabloko.
These parties suffered from being associated with the traumatic policies of crash capitalism in
the early 1990s. They were also hurt by poor campaigning, weak party structures and
organisations headed by too many egos. Both parties each won some 4% of the vote, thereby
missing the 5% threshold for parliamentary representation via the party lists; some party
members will win individual seats but as a Duma force they are finished for now. Some real
differences in policy exist between the parties, but most voters see them as disunited forces,

© 2003 The Economist Newspaper Ltd. , Economist Corporate Network Vienna 3 of 5

 which should be coming together: they were crucified for their lack of unity. Anatoli Chubais,
who is head of the electricity giant UES, led the campaign for the Union of Right Forces and
he is widely associated in the public eye with the crooked loans for shares schemes of the
mid-1990s.

· The good news is that Putin will still listen to the reformers from these parties when he wants
to push reforms even if institutionally these reformers are crippled for now.

What are the consequences for politics and business?

We reviewed the current politics of Russian in Paper 37 of this series, which addressed the Yukos
affair.

Once again, hopefully without being complacent, we feel that the impact on Western business is
very limited. The election results have merely reinforced voting trends that have been shifting in
this direction for at least five years. The votes and the constitution of the Duma are less important
than the “general line” adopted by Putin and his close supporters. The elements of Kremlin policy
remain:

Ø Managed democracy;
Ø A hard line on terrorism;
Ø A hardish but adaptable line on Chechnya; the authorities would jump at any “escape with
honour option” from the Chechen mess, but Chechen extremist are unlikely to offer this for the
foreseeable future;
Ø Limited assaults on the oligarchs, with demands on them to pay more tax before selling off to
Western investors;
Ø An insistence that the oligarchs stay out of national politics;
Ø No crash course of economic reforms, but more of the same;
Ø This will involve a slow/steady structural reform of the gas sector, electricity, telecoms and the
railroads.

Putin will obviously win the March 2004 presidential elections and that will reinforce Kremlin policy
and ensure that Western investors continue to live in the present scheme of things.

A two-thirds majority in parliament can pass changes to the constitution and commentators argue
that this is Putin’s objective in order to allow him to extend his tenure (limited currently to two
terms) so that he can run for a third term in 2008.

The RTS, the key Russian stock market indicator, fell immediately after the election results (and
the initial international criticism) but then rebounded as investors realised that the results probably
entailed more stability for business.

As ever I would be pleased to hear any comments from you or to take any questions at your
convenience.

With best regards,

Dr Daniel Thorniley
Senior Vice-president
Economist Corporate Network, Vienna

Tel: (43.1) 712 41 61-40

danielthorniley@economist.com

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