Austerity hits Russia

In the space of 24 hours, Russia has cancelled plans to build a new Turkey-Stream gas pipeline under the Black Sea, shuttered its Ministry of Crimean Affairs and announced that it would not fund an inflation-linked increase in state pensions.

Call it Kudrin’s revenge.

Given how much of a show the Kremlin has sought to make of going from (ostensible) strength to (dubious) strength – touting its prudent reserves in the face of falling oil prices and stubborn Western sanctions – this sudden turn to (relative) austerity is bound to be jarring.

Start with Crimea: When the peninsula was annexed a little more than a year ago, it set off a feeding frenzy of asset-grabbing and pocket-lining. Olympstroi, the notoriously corrupt state-backed contractor that had built the Sochi Olympics, was literally renamed Krymstroi and tasked with managing key infrastructure projects to link the region to Russia (and de-couple it from Ukraine). In official budget terms alone, the Russian government has planned to spend 708 billion rubles (about $12.4 billion) on Crimea, money that had – until now – been flowing through the Ministry for Crimean Affairs.

Now, though, Vedomosti is reporting that President Putin is about to liquidate the ministry, declaring the integration mission accomplished and decreeing that all further funding go through the usual governmental channels, the clear implication being that someone needs to keep a closer eye on how much money is being spent down there.

Earlier in the day came the news that Gazprom had cancelled contracts for the construction of Turkish-Stream, a new Black Sea gas pipeline mooted late last year as a booby prize after the cancellation of South Stream, a bigger and more expensive pipeline to Europe. This, amidst (Turkmen-fueled, and rather ridiculous) rumors that Gazprom is effectively bankrupt. Gazprom, of course, isn’t bankrupt, and neither is the Russian state, but there is apparently little appetite in either head office right now for more spending.

And lest we think that it’s only fat cats and kleptocrats who are feeling the pinch, Finance Minister Anton Siluanov declared that Russia would not index pensions to keep up with inflation.

Let me repeat that: For the first time in Putin’s (several) presidencies, Russia will not make sure that pensions keep up with inflation.

It is the aforementioned fat cats and kleptocrats who keep Putin in power, of course, but it is the pensioners who have traditionally allowed Putin to put on a good show of democracy, by voting for him in droves. For the first time, he’s breaking the tacit quid pro quo in that relationship. (He already confiscated the pension savings of working-aged Russians to help pay for Crimea. Twice. But that’s another matter.)

Siluanov, Kudrin and others have been calling for this kind of thing for some time now – and, indeed, renewed those calls today – but Putin has resisted. Exactly why the president has had a change of heart is unclear. Russia’s reserves, while much lower than they were a year ago, have stabilized (and even recovered a bit from where their lows in April. And while the ruble is back to 57 to the dollar, it’s still far off its lows.

Perhaps the Kremlin and its financial advisers see something coming down the road, a reason to batten down the hatches now. Perhaps they’re spooked by continuously falling oil prices, or by weakness in China. Russia is, after all, a commodities trader first and foremost, and that kind of weakness in a core market is bound to get their attention.

It might, however, be the the political advisers who have bent Putin’s ear in the direction of austerity. Knowing that the financial sh*t would hit the fan sooner or later, and that cuts would need to be made, they may have calculated that those cuts will be less costly now: In the midst of summer, Russians have never been as enamored of their president as they are right now. They are less likely, as a result, to notice any of the bad news. High approval ratings (to the extent you can trust them) are also a useful backstop against any oligarchs or officials who might dream of jumping ship to the opposition.

The likeliest explanation is probably a bit of both, with a few other things thrown in for good measure. Complex political decisions are rarely taken for simple reasons. But the fact remains that the Kremlin is cutting costs, and it will be very interesting to see how deep the knife eventually goes.

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