Putin and Zubkov - Less complex than it seems

When things get complex and unpredictable in Russian politics, most political observers seem to want to go with the flow and tangle things up more and more. While looking for an elephant in a glass of water in the appointment of Viktor Zubkov for the post of Russian prime-minister, many forget the underlying facts of the current economic environment.

While it is undoubtedly true that Mr. Putin would like to leave for the next president a cabinet he himself approves of, and one that would somewhere deep down guarantee the continuity of his policies, Mr Zubkov's expertise is crucial to the problems that Mr. Putin values for the future - financial and economic security.

Russia has already seen the first phases of speculative capital outflow from its capital markets, which resulted in a slight but nevertheless decrease of 5.5 billion USD to its foreign currency reserves. Although, the expected outflow was almost two times less than expected, more withdrawals could be on the way, since it is still unclear if and when the US economy slides into a recession, and who it will pull along with. The amount of sepculative capital still floating in Russia is at a high level, with many investors waiting for results in their carry-trade positions (borrowing in low-interest currencies and buying higher-yielding ruble securities).

As an expert close to the Kremlin, journalist and editor of weekly Profile magazine Mikhail Lenotiev, stated in a recent interview with Ekho Mozkvy radio-station the previous economic bloc of the Russian cabinet did not concern itself enough with financial and economic security of the Russian market despite lobbying from the President's administration. As a result most of Russia's major banks now appear in very shaky positions. As a result of overly generous lending practices around the world and the massive credit boom in Russia, these banks (Russian Standard, MDM Bank, Alfa Bank) are 30% funded by foreign capital. Such a level is highly dangerous to the system according to the first deputy director of Russian Central Bank Gennadi Melikyan.

Add to that the ballooning debt of Russian firms, most of which is owned by foreign investors/banks, the rapidly expanding individual/small business credit market, and a small glitch in the world economy could result in the closure of two or three major banks. The consequences of such a move for the Russian economy will be very severe. Mr. Zubkov, is an expert in all of the above issues and resolving them will be one of his primary missions for the next year at least.

Vladimir Putin's recent statements about Viktor Zubkov's potential as a successor in 2008, and the existence of two more such candidates (besides Sergei Ivanov and Dmitri Medvedev) are his last attempts to throw mud in the water and postpone his decision-making until after the December elections. Even more so, Mr. Putin is reluctant to give an easy ride to the presidency to anyone of the top candidates (Ivanov or Medvedev) by giving one of them a seat as prime-minister. With all of the top seats in the government taken, it is likely that Mr. Ivanov and Mr. Medvedev will have to battle it out from equal positions, providing the elections in March with a substantial aura of "free-election status".

Any talk of Vladimir Putin playing a complex chess game to regain his seat in 2012 (and light the Sochi Olympic flame in 2014) are even more speculative than those about Mr. Zubkov's potential as Russian president. The very day Vladimir Putin loses his seat, he will lose air-time, he will lose his influence, and he will be slowly losing his popularity. Even if the next president has a weak power base behind him, the very fact of being a president is significant enough to battle all major powerbases withing the government and within the President's administration.

No one knows this fact better than Vladimir Putin, who in 2000 faced the entire "Family" (Boris Yeltsin's family members and their loyal supporters along with the oligrachs). Mr. Putin by 2004 managed to convert a cabinet and administration structure of 4:1 against him into a 4:1 for him by carefully utilizing the influences of siloviki bloc. The next president will surely not want to sit and wait four years until Mr. Putin rides into the Kremlin on top of a white horse with shining silver armor.