Russia’s New Mega-Government:Implications for Foreign InvestorsMoscow, May 2012
2ContentsIntroduction 3Changes Meant to Please Putin’s Target Audiences 3Out of the Frame But Built Within the System 4Who will Run The Cabinet 4What It Really Means for Foreign Investors 5Priorities for the Government 6Changes in the Cabinet 8Appointments in the Presidential Administration 10About GraylingGrayling is a leading independent Public Relations, Government Relations, Investor Relationsand Events Consultancy with specialist services including CSR, environment and sustainabilityand digital.Grayling has over 1000 staff in 70 offices in more than 40 countries across the US, Western andEastern Europe, Africa and Asia Pacific.The company has revenues in excess of €100 million.Written by Pavel Melnikov, firstname.lastname@example.orgEdited by Vladimir Melnikov, email@example.comAll Right Reserved, Grayling Eurasiawww.grayling.com
3IntroductionIn May 2012 the new-old Russian President Vladimir Putin skipped the G8 Summit to form theCabinet and the Presidential Administration: a two tier mega-government with more checks andbalances and lines of informal supervision and control than ever before.The Prime-Minister Dmitry Medvedev has been given a new toy: an Open Government –extending the Cabinet into the Public Space by setting up various expert working groups. Thiswill keep Medvedev busy while his senior colleague defines the Russia’ strategy for the next sixyears.Changes Meant to Please Putin’s Target AudiencesVladimir Putin and his team have tried to please various target groups while forming the newCabinet:– The population at large is thought to be generally satisfied that 64% of the cabinet hasbeen renewed (18 out of 28) resulting with the long-awaited ‘face lifting’ of thegovernment (see Appendix 1).Unpopular ministers moved from the government to the Presidential administration (seeAppendix 2). They will continue to shape the government’s strategy but behind thescenes, hidden from the public eye.– The protesters’ concerns related to the absence of social lifts were also thought to bepartly addressed by Putin. He invited a 29 year old politician Nikolai Nikiforov fromTatarstan to head the Ministry of Telecommunication; the United Russia functionaryVladimir Medinsky was given a chance to head the Ministry of Culture, while the moststriking appointment was made by having the Uralvagonzavod’s Igor Holmanskykh takethe post of the Presidential envoy in the Urals Federal District (given that the PresidentialAdministration is now effectively part of the new Mega-Government).– To the (ruling) elite the mega-government’s structure is positioned as a compromise forvarious “clans” warring over control over financial flows. Putin applied a situationalmanagement model whereby decisions are taken to ensure even more checks andbalances within the management system than ever before.– Investors and western leaders are expected to be “pleased” as well since the liberalsled by First Deputy PM Igor Shuvalov (and Deputy PM Arkadiy Dvorkovich) still seem tobe in power while the government’s policy is ensured to be the same (e.g. re-appointment of the Minister of Finance Siluanov and Andrey Belousov’s appointment asMinister of Economic Development).Putin confirmed his role as a strategist thinking through the barriers between the governmentand presidential administration. This, for example, makes any change within the top of thegovernment (deputy prime ministers) having as little impact on the overall state strategy aspossible. Equally, the current “assistants” to Putin (Fursenko, Golikova et al) may easily move tonew roles / replaced by newcomers over time without distressing the overall managementsystem.
4The new mega-government (Putin’s administration and Medvedev’s government combined)“melts” down the vertical with no clear decision centres except Putin himself. The only thing ismore or less clear: the ministers acting as professional executors of the policy largely defined inthe presidential administration.Putin therefore maintains full control across every key economic and social sector whilemitigating his own risks having multi-layered decision makers take unpopular decisions to beheld potentially liable for any failures (who can easily be removed without distressing the systemas noted above).Out of the Frame But Built Within the SystemRosatom CEO refused an offer to become Minister of Energy: Rosatom has global ambitionswhich supersede the ministry’s tasks.Equally, Rosneft, now headed by former Deputy PM Igor Sechin, has long been nurtured tobecome a global major. Surgutneftegaz and Zarubezhneft are expected to merge with the oilgiant. Igor Sechin will also retain his influence over energy affairs in Russia and abroad, at leastwhen it comes to defining the overall state energy strategy / policies.The rector of the Higher School of Economics Yaroslav Kuzminov, having refused to becomethe minister of education, will nonetheless be active in the open government being set up byMedvedev via new minister Mikhail Abyzov.Who Will Run The CabinetMedvedevs new government is focused on maintaining policy continuity and includes one primeminister, 7 deputy prime-ministers (one of them is the first), 20 ministries and 21 ministers, 34federal services and 25 federal agencies.Deputy PMs will have the following responsibilities1:– “Igor Shuvalov, who is the only first deputy prime minister, will take care of investmentand migration policy. He will also be overseeing the financial sector which was formerlysupervised by Arkadiy Dvorkovich.– Dmitry Kozak will continue to oversee sports, preparations for the 2014 Sochi OlympicGames, regional policy, construction, housing and utilities.– Dmitry Rogozin will retain supervision of the defense industry, the nuclear and spacesectors, military-technical cooperation, civil defense, and emergency situations.– Alexander Khloponin will keep his focus on the North Caucasus.– Arkady Dvorkovich will be formally responsible for the real sector of the economy,including civilian sectors of industry, energy, transportation, communications, agriculture,1As confirmed officially via RIA Novosti on May 24, 2012
5forestry and fishing. Informally, he will try and influence the decision making process inthe financial sector overseen by Shuvalov which may cause some clashes of interests(between – ironically - Medvedev’s and Shuvalov’s/Putin’s camps)– Vladislav Surkov will take on justice, courts, prosecutors, media, and statistics agencies.He is also head of the governmental staff.– Olga Golodets will take charge of science and the social sector, including nationalprojects, demographic policy, healthcare, social development, education and tourism”.At the ministerial level some new ministers like Alexander Novak (former deputy financeminister appointed as Minister of Energy), will be doing a comprehensive audit of the ministry inthe same manner Golikova did to the former Ministry of Health and Social Development andAnatoly Serduykov to the Ministry of Defense. Obviously Minister of Education Dmitry Livanovhas also been tasked to conduct an audit and report to Putin with a new strategy.It is of note that Egor Gaidar’s (well-know Russian liberal) think tanks will less engaged informing new industry strategies which means a less focus will be made on Adam Smith’sinvisible hand of the market, and the state influence will imminently grow across every economicsector.Only five ministers of the previous government retained their posts (Sergei Lavrov – foreignaffairs, Anatoly Serdyukov - defense, Alexandr Konovalov - justice, Anton Siluanov - finance,Vitaly Mutko - sport).The Ministry of Health and Social Development has been divided into Ministry of Health, headedby Veronika Skvortsova, and Ministry of Labor and Social Safety, headed by Maksim Topilin.Appointment of Vladimir Kolokoltsev as Head the Interior Ministry sent a clear message that thepolice will get more professional.Career bureaucrat Anton Siluanov has been re-appointed finance minister. This will be viewedwith cautious optimism by the market as Siluanov is a committed fiscal hawk.A professional economist Andrei Belousov has become economy minister. This is a positivedevelopment from any perspective.The composition of the new cabinet also suggests that it is likely to focus on budget stability vs.structural reforms / pro-market agenda.What It Really Means for Foreign InvestorsRelations with the foreign investors will continue to be pragmatic. The Foreign InvestmentAdvisory Council will continue to play a vital role (see our last year think piece Re-ThinkingForeign Investment in Russia).The Government will develop new expert councils (e.g. the Council on Financial Stability)instead of real actions,. Various industry associations have already begun consultations with thenew Minister of Open Government Abyzov to form such dedicated expert platforms.
6International companies operating in the Russian market will now have to increase number ofdoors to go into with formation of the mega-government. Also during the transitional periodsome clashes of interest are inevitable (e.g. aforementioned Dvorkovich/Medvedev vs.Shuvalov/Putin potential conflict of interests over the financial market development).However, the Ministry of Economic Development / Ministry of Finance - Shuvalov vertical willwork straightforwardly for foreign companies seeking to resolve their acute / big issues (seeRe-Thinking Foreign Investment in Russia). Moreover, officials from the mega-government willbe more open and accessible in general: appointment of Maksim Akimov, former deputyGovernor of Kaluga Region, famous for his transparent relations with foreign investors, asdeputy head of the Government’s Secretariat only proves the point.Stanislav Voskresencky, deputy minister of economy, responsible for investment and majoreconomic events is likely to move to Nabiullina’s office in the Presidential Administration whichwill also open the door for foreign companies seeking consultation from this part of the mega-government.As for the industry-specific issues, the accessibility of Veronika Skvortsova in the HealthMinistry, for example, has already been tested by many foreign pharma and medical devicescompanies. Any other minister one can think of has either got younger or/and more open for therational dialogue with the market players.Existing relations with Golikova, Nabiullina, Levitin, Fursenko et al in the PresidentialAdministration will help foreign companies maintain the dialogue, although now it needs to be atrialogue / qudrialogue with:1. The Presidential Administration2. The Ministry in question3. Shuvalov’s vertical4. Open government’s specific expert councilIn any event financial market players may rest assured no sharp movements in policy /regulation will be made, since Putin understands the importance of stability / continuity in thetimes of financial turmoil and Russia’s vulnerable position.Priorities for the Mega-GovernmentSome of the challenges the new (Mega-)Government faces (source: the Federal Service ofState Statistics):– Median salary in Russia is around 5,238 EUR per year. This means that 50% ofpopulation or 71.4 million Russian citizens earn less than 400 EUR per month. 350 EURpcm is the average pension– More than 26% - around 37 million citizens - are under poverty line earning less than150 EUR per month.– Only 7.3% of population have middle income (620-1,230 EUR per month), 1.1% areconsidered wealthy (1,230-1,850 EUR) and only 0.7% of population are rich, meaningtheir income is higher 1,875 EUR.
7– The ratio between the income of the wealthiest 10% and the 10% with the lowest incomehas reached 14.8 times.– The Russian ruble has weakened by 10% in dollar terms and 5% in Euro terms andprices on food, gas, transport have increased by 7-15% over the last two months. Thiswill imminently result in wages losing their purchasing.The unprecedented outflow of capital ($42 billion in net capital outflow between January andApril, which is equivalent to half of the $84.2 billion recorded in the whole of 2011) signalsanother major issue: increased probability of the economic crisis and loss of investors’ trust forstructural reforms in Russia.At the first government meeting, Medvedev listed seven short-term tasks for the government inthe next six months to implement Putins roadmap outlined in the first presidential decrees:1. Push forward basic socio-economic development programs;2. Submit budget plans for the next three years;3. Raise wages in defined social sectors;4. Improve the investment climate;5. Reform public services;6. Run the privatization program; and7. Set up the Open Government.The mega-government will also focus on:– Corruption. No new strategy is announced yet.– Underdeveloped IT and transport infrastructure. The state plans extensive privatizationprogram to address this issue among other activities.– Budget constraints (at both the federal and regional levels). This could be addressed byimproving the taxation system– Social reforms – pension, healthcare, education, housing and communal services.Solutions are still being determined– Poor investment climate – no clear action plan yet– Public justice and personal security – no clear action plan yetThe achieved public consensus may keep Putin in his position as long as economic crisis doesnot trigger political instability.However, if the new mega-government speeds up some long-awaited economic and socialreforms the system will be able to survive for years ahead.
8Appendix 1Changes in the CabinetStructural ChangesNew Ministry for Far East Development was created. It is headed by Viktor Ishaev, PresidentialEnvoy in the Far East district.Mikhail Abysov heads the Open Government Contacts Ministry. The “open government” idea,proposed by newly-appointed Prime Minister Dmitry Medvedev, is assigned to bridge the gapbetween policymakers and common people.The Federal Agency for construction and housing services and utilities under the Ministry ofRegional development was established.8 posts of deputy ministers of federal districts are introduced in the Ministry of RegionalDevelopment. The Ministry of Sport, Tourism and Youth Policy was transformed into theMinistry of Sport; functions in the sphere of youth policy were given to the Ministry of Educationand Science, in tourism – to the Ministry of Culture. Federal Agencies for Youth Issues and forTourism report to them as well.The Federal Fisheries Agency is under the authority of the Ministry of Agriculture.The Federal Service for Intellectual Property is under the Ministry of Economic Development,The Federal Agency for Forestry is under the Ministry of Natural Resources.The Federal Agency for Financial Monitoring is under the direct authority of the President,The Russian Statistic Service, the Federal Migration Service, the Federal Service onSurveillance for Consumer rights protection and human well-being, the Federal Service forDefense Contracts are under the government.Additionally, the government was taskedto set up government’s commission for coordination ofthe open government activities, which will be headed by Minister Mikhail Abyzov.Composition of the New GovernmentPrime Minister – Dmitry MedvedevFirst Deputy Prime Minister – Igor ShuvalovDeputy Prime Minister – Vladislav SurkovDeputy Prime Minister – Dmitry KozakDeputy Prime Minister – Dmitry RogozinDeputy Prime Minister – Arkady Dvorkovich
9Deputy Prime Minister – Olga Golodets (Golodets will oversee social issues.)Deputy Prime Minister and Presidential Plenipotentiary Envoy to the North Caucasus FederalDistrict – Alexander KhloponinFinance Minister – Anton SiluanovEnergy Minister – Alexander Novak. (Novak was previously deputy finance minister.)Economic Development Minister – Andrei BelousovLabor and Social Protection Minister – Maxim TopilinTransport Minister – Maxim SokolovSports Minister – Vitaly MutkoAgriculture Minister – Nikolai FedorovCommunications and Mass Communications Minister – Nikolai NikiforovRegional Development Minister – Oleg GovorunMinister in charge of Russia’s Far East Development and Presidential Plenipotentiary Envoy tothe Far Eastern Federal District – Viktor Ishayev.Industry and Trade Minister – Denis ManturovNatural Resources and Environment Minister – Sergei DonskoyEducation and Science Minister – Dmitry LivanovMinister of Culture – Vladimir MedinskyMinister of Healthcare – Veronika SkvortsovaJustice Minister – Alexander KonovalovDefense Minister – Anatoly SerdyukovForeign Minister – Sergei LavrovMinister of Civil Defence, Emergency Situations and Disaster Relief – Vladimir PuchkovInterior Minister – Vladimir KolokoltsevMinister for Relations with the Open Government – Mikhail Abyzov
10Appendix 2Appointments in the Presidential AdministrationPosts Name Areas of responsibilityChief of Staff of thePresidential Executive OfficeIvanov Sergei ChiefFirst Deputy Chief of Staff ofthe Presidential ExecutiveOfficeVolodin Vyacheslav HR and domestic policyFirst Deputy Chief of Staff ofthe Presidential ExecutiveOfficeGromov Alexei Media relationsDeputy Chiefs of Staff of thePresidential Executive OfficeVaino Anton Curator of Presidential AidesPeskov Dmitry Media relationsAides to the PresidentBrychyova LarisaHead of the State LegalAdministrationChuychenko KonstantinHead of the ControlAdministrationFursenko AndreiScience and grants forresearchersGolikova TatyanaSocial and economicdevelopment of the SouthOssetia and AbkhaziaNabiullina Elvira Economic issuesShkolov Yevgeny Human resourcesShchegolev Igor ITTrutnev Yury State CouncilUshakov Yuri Foreign policyPresidential Press Secretary Peskov Dmitry Media relations
11Chief of the PresidentialProtocolOstrovenko Vladimir Presidential ProtocolAdvisers to the PresidentAbramov Alexander SportBedritsky Alexander Climate changeFedotov Mikhail Human rights and civil societyGrigorov Sergei Technical controlLevitin Igor TransportTolstoy Vladimir CultureUshakov Sergei APEC SummitYakovlev Veniamin Legal issuesPresidential Plenipotentiariesat the Bodies of PowerKotenkov Alexander The Federation CouncilKrotov Mikhail Constitutional CourtMinkh Garry The State DumaPresidential Commissioner forChildrens RightsAstakhov Pavel Childrens RightsPresidential PlenipotentiaryEnvoys to the FederalDistrictsBabich Mikhail The Volga Federal DistrictBeglov Alexander The Central Federal DistrictIshayev Viktor The Far East Federal DistrictKhloponin AlexanderThe North Caucasus FederalDistrictKholmanskikh Igor The Urals Federal DistrictTolokonsky Victor The Northern Federal DistrictUstinov Vladimir The Southern Federal DistrictVinnichenko NikolaiThe Northwest FederalDistrict