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Russian reshuffle

On Pancake Tuesday, President Putin tossed his government out of office, sacked Prime Minister Mikhail Kasyanov and appointed the deputy, Viktor Khristyenko, as acting Prime Minister.

Former PM Mikhail Kasyanov was regarded as being the last senior official to be closely linked to former President Yeltsin. Kasyanov was also the last member of the government to have been a vigorous defender of the oligarchs. His interests had led him to become obstructive to Putin&#39s reforms.

But the only remarkable thing about the sacking of PM Mikhail Kasyanov and his cabinet is in the timing. It was done three weeks earlier than expected. Typically, the PM and government would have resigned as a matter of course just before the presidential elections held this year on March 1.

Most people would stop to ask “Why has Putin done this?” and “What, if anything, does it mean?” The Russian market reacted in utterly predicable fashion – shoot first, ask questions later. Moscow&#39s RTS index immediately fell by around 3 per cent before effectively shrugging off the news to end the day down by 1.4 per cent.

Putin is so determined to push through his programme of reforms that he is careless of the democratic niceties that those in the liberal West regard as being normal. Putin&#39s centralisation of power and actions such as the imprisonment of Yukos boss Mikhail Khodorkovsky, are regarded by many as indicative of the re-emergence of an autocratic tsar.

Since capitalism works best in liberal democracies, or so goes the orthodox thinking, anything that strays from the shining path to Western democracy must be a threat to the development of stable capitalism. Detractors say Putin knows he is going to win and is showing his true colours by riding roughshod over the formalities of electoral democracy. Hence the jittery markets.

This is not the place to point out the errors in such thinking, suffice it to say that:

a: Many developing economies have managed to combine capitalism with strong rule – Malaysia, Indonesia, Thailand, Korea and Hong Kong all come to mind.

b: Russia is so vast that it is unlikely that the standard model of Western liberal democracy can be established any time soon, so no point in fretting at its absence.

Do remember that Russia has never been a democracy nor has it any democratic roots. Also remember that a mere four years ago, the country was notable for widespread corruption under the control of the oligarchs. In a very short time, Putin has brought order and pushed through reforming legislation. At the same time, he has managed skillfully to balance the various power-seeking factions. When people criticise Putin for supposed autocratic tendencies they should realise that Russia really does need a strong hand to prosecute effective and lasting change.

In the past, anyone who has wanted to understand what Putin&#39s intentions are has simply to read what he says. Unlike politicians elsewhere, Putin tends to say what he means. To cynical ears, this can sometimes sound too simplistic. Nevertheless, that is our view so we reproduce below what Putin himself says:

“In connection with Article 117 of the Constitution of Russia [the clause that allows the president to fire the government], I have made a decision to remove the government. This decision is not related to an assessment of the results of the work of the previous government, which I consider to be on the whole satisfactory. This was dictated by a desire to once again define my position on the issue of what the course of this country&#39s development is going to be after the March 14 elections.

“It is exactly, to a great extent, on the government that the implementation of all state and social-economic transformations depends. In accordance with Article 111 of the Constitution of the Russian Federation, I intend to introduce to the Duma, within the established period of time, the nomination of the chairman of the government [the prime minister]. Within a week after the appointment, the chairman of the government must present to me his proposals on the new structure of the federal executive bodies.”

“At the same time, I am ordering the current composition of the government to continue to fulfil their duties up to the formation of the new government.”

Taken at face value, Putin is saying that, by nominating a new government before the election, he is showing the public what they will get. The election requires a turnout of 50 per cent. If a popular cabinet is announced, this could boost voter turnout. Some of the polls suggest turnout could be as low as 37 per cent,with four-fifths likely to vote for Putin.

The move will permit Putin to claim the electorate is not just being asked to vote for him alone but for a clearly identified government. This seems a sensible tactic and gives a strong indication of Putin&#39s desire to continue with reforms.

However, we believe Putin is not a populist – he just needs people to vote for him. If the turnout is less than 50 per cent, this might bar him from re-election. Putin already knows he is popular, this move aims to create a pre-election buzz to ensure a satisfactory voter turnout. We believe this is the key reason for the early dismissal of the government.

There is a split of opinion regarding the appointment of Viktor Khristyenko as acting PM. Foreign commentators see the appointment of this technocrat with liberal reformist leanings as being significant.

Russian analysts, however, regard him as a temporary measure, citing his biggest qualification as being that there is no disagreement between himself and Putin. He has given out the odd oil licence or two but this is small beer in Russian terms. We still need to see who will be the new prime minister. This will be clear enough in time. It is pointless to speculate.

We would expect Putin to appoint a government which is strongly committed to reform, particularly with regard to finance, a clearer taxation of oil companies and further state control over the economy.

We would expect markets to remain jittery as the rumour mill starts grinding out speculation as to the composition of the new cabinet over the next few weeks and the Yukos affair is still unresolved and could provide further shocks to the market.

As the arch-value investor, Benjamin Graham once remarked: &#39In the short term, the stockmarket is a voting machine, in the long term it is a weighing machine.” This current event is, perhaps, a classic example of this dictum. Russia continues to enjoy strong economic growth, markets are buoyant, valuations are modest and liquidity is plentiful. Overseas Russian money continues to return to Mother Russia.

Hurrah for fickle markets – they provide fund managers with buying opportunities.

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