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Analysis & Opinion
06.05.08 Scratching The Teflon
By Graham Stack

Vladimir Putin’s “Teflon coating” that prevents negative policy fallouts from affecting his personal popularity has been a continuous source of frustration for his critics. His willingness to blame the reversals on the government and the prime minister has played a crucial part: his televised castigation of officials from the White House for laziness, inefficiency and stupidity, has been a staple of the Putin show for the last eight years. Despite the fact that it is the president who appoints both the prime minister and individual ministers, the buck has always stopped one door down.

Ironically, it has always been in the government’s interest to accept the blame, and to indulge in queasy scenes of self- inculpation, as Putin’s popularity rating has been the generator of this government’s political power. However, once out of office, one former prime minister decided to avenge the years of humiliation: Putin’s first-term Prime Minister Mikhail Kasyanov, fired in 2004, turned into one of his most bitter critics afterwards.

Yet there was no visible tension as Putin spoke to the government for the last time in his capacity as president on May 5, thanking its present and past members for the contribution they have made to the “rebirth of the economy, the social sphere and the defense.” This was not surprising, since Putin himself will very soon be sitting with the government as prime minister, and hoping that his “Teflon touch” does not desert him in the traditional scapegoat’s seat.

Still less to eat

But the economic news that broke on the same day will not reassure Putin. It was all about inflation – both out of the government’s control, like food prices, and under it, like energy price liberalization. This scissor-like movement of food prices, rising in the global context with the Russian government unable to intervene, while electricity and gas supplies to domestic customers grow on direct government orders, that could cut right through Putin’s Teflon.

On May 5, the Federal State Statistics Service released figures for the months of January to April that calculated inflation in the consumer basket of staple foods at nearly 15 percent. Moreover, price inflation for a number of crucial products accelerated through April: sunflower oil prices rose by 8.6 percent in April, after growing 4.6 percent in March. The price of bread and baked products increased by 6.4 percent, that of pasta – by 6.1 percent. The price of fruit and vegetables grew by 5.5 percent in April, and all this despite the government having strong-armed retailers into freezing the price of staples during the election season.

These ineffective price controls are about to be lifted, and will cause an additional spike in food prices for May – an inauspicious beginning for the Medvedev-Putin tandem. In an emerging market such as Russia, food prices are potential political dynamite. While inflation is always taxing for the poor, the current global growth of food prices is particularly cruel. On average, food constitutes the largest part of household expenses. However, food can be the sole expenditure of the urban poor, such as pensioners and families with small children, making those who have no access to other sources of income or to garden patches extremely vulnerable. While pensions are inflation-indexed, inflation in food prices far exceeds the overall inflation, the latter having reached 6.3 percent in the first four months of 2008, Rosstat reports.

The Achilles’ heel

Putin was clever enough to excuse himself from the remainder of government proceedings dealing with implementing gas and electricity price liberalization for household consumers that took place on May 5.

Russia’s electricity monopoly RAO UES is due to be dismantled next month, and power generation is set to transmigrate to a liberal’s paradise of competitive markets and unregulated wholesale prices. Deputy Economic Development Minister Andrei Klepach spelled out the implications of this move for domestic consumers: electricity prices for households would increase by 14 percent in 2008, by 25 percent in 2009, by another 25 in 2010 and by 25 percent in 2011. Along with electricity, gas prices are set to rise steeply, with Gazprom set to earn netback parity (equal profit levels) with European prices by 2011. According to Klepach, this means that household gas prices could rise by 25 percent in 2009, by 30 percent in 2010 and by a whopping 40 percent in 2011.

Despite these increases, household electricity and gas will remain cheap by European standards. Russians will basically start paying for things they previously were hardly conscious of having to pay for. Very low demand elasticity will mean that if the price increases are not adequately compensated for by transfer payments, the poor will be hit the hardest once more.

And, come a cold winter, it will all be Anatoly Chubais’ fault, again. The electricity reform is the brainchild of a veteran liberal reformer Anatoly Chubais, who was considered “Russia’s most hated man” due to his Machiavellian masterminding of privatization in the 1990s. Saying that “Chubais is to blame for everything” has become customary in Russia, and he is every nationalist’s and communist’s favorite target.

In 2005, Chubais narrowly escaped assassination by former military nationalist intelligence officers, who used a rocket and a machine gun to attack his car near Moscow. On pretrial detention, ringleader Vladimir Kvatchkov failed to get elected to the Duma, which would have bestowed immunity upon him. Wags quipped that if he had succeeded in assassinating Chubais, he would have gotten elected. Kvatchkov’s trial has been dogged by jury selection controversies, since the state prosecutor claimed that any pensioner whatsoever is ipso facto prejudiced in favor of Kvatchkov and against Chubais.

This goes to show the political iceberg that lurks in the waters of Putin’s premiership. For the past eight years, Putin has successfully avoided being associated with Chubais and “liberal reforms,” not least through hiding behind his government. A freezing of the energy reforms, however, could cause the foreign investors, who have pledged $30 billion to upgrade Russia’s power generation, to revoke their commitment. It could also threaten Gazprom’s gas supply arrangements with Europe and stall Russia’s industrial development, and thus is out of the question.

With economic growth and investment surging, the price scissors created by food price inflation and energy price liberalization are unlikely to derail the Medvedev-Putin presidency. But a rerun of the wave of social and political unrest could see Putin’s “Teflon” scratched, and the man who used to symbolize national consensus as president will become a more divisive figure as a prime minister.
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