Putin’s Reversal of Democracy Pledge Risks New Protest Wave

Vladimir Putin risks reigniting the unrest that gripped Russia last year as opponents accuse him of backtracking on pledges to make the political process more democratic, investors from Frankfurt to Moscow said.

Four months after President Dmitry Medvedev promised to restore direct elections for regional governorships, Putin’s lawmakers are introducing measures that make it harder for candidates to run, a move criticized by former Finance Minister Alexei Kudrin. The Kremlin is also racing to appoint governors before the law takes effect.

That’s sparking complaints that Putin, 59, tricked the opposition to quell the protests that brought tens of thousands to the streets of Moscow and other cities. Putin’s actions may test whether Russians are prepared to go back on the streets to challenge his authority, with the risk for investors being a new round of the market turmoil that wiped out 7.3 percent of the value of companies in Russia’s benchmark stock index in a week.

“There is still significant risk of opposition protests, both in Moscow and further afield,” Roland Nash, chief investment strategist at Verno Capital in Moscow, which manages $200 million in assets, said by e-mail. “The political genie is out of the bottle, and if the government doesn’t react, then protests will continue.”

Re-pricing of Risk

Renewed political unrest, particularly if it affects Moscow, “will definitely lead to a re-pricing of Russian risk,” said Sergey Dergachev, who helps oversee $8.5 billion in emerging-market funds at Union Investment Privatfonds in Frankfurt.

The dollar-denominated RTS stock index lost more than 13 percent of its value and the ruble had its longest losing streak since January 2009 in the 10 days after the disputed Dec. 4 parliamentary vote as tens of thousands of people protested in Russia’s largest cities against what they said was fraud during the election.

Russia’s 83 regions will be the focus of political competition as Putin, who’ll be inaugurated on May 7 for a six- year Kremlin term, ruled out any national challenge to his power by refusing to hold new parliamentary elections after fraud claims. The opposition, which mounted a hunger strike in the southern city of Astrakhan after a disputed mayoral vote, is vowing to escalate its campaign.

Right to Veto

Putin will probably have the right to veto candidates. Aspiring governors must be vetted to protect Russia from the threat of “nationalism and separatism,” he said on April 11. The country fought two wars in the 1990s against breakaway rebels in the mainly Muslim region of Chechnya.

“There won’t be any stability in the regions anymore,” said Gleb Pavlovsky, a former Kremlin adviser who heads the Moscow-based Effective Policy Foundation. “A new life is starting there and this law is going to provoke a growing number of conflicts.”

As the unrest escalated, Medvedev announced the return to direct elections for governors, who have been appointed by the president since 2005, along with measures to make it easier to register parties and run for president.

Political Stagnation

Medvedev on April 24 trumpeted the changes as “unprecedented for the past 20 years,” while saying that Russia’s political system is showing signs of “stagnation” after stabilizing.

The president denied today that the law restoring the direct election of governors approved yesterday by the lower house of parliament created “obstacles” to political competition.

The measure won’t remove the threat of regional authorities bullying opposition candidates, according to Kudrin, who left the government last year after clashing with Medvedev.

“We have ended up with an imitation of competition, which is even worse than the absence of any elections,” Kudrin said on his website. “This has discredited the whole process of political reform.”

With the last major protest having taken place in Moscow on March 10, attended by about 10,000 people according to police, the unrest has petered out since Putin’s re-election to the presidency with 64 percent of the vote.

‘Strong Leader’

“Russians want democracy with a strong leader,” Ivan Tchakarov, chief economist for Russia and the Commonwealth of Independent States at Renaissance Capital in Moscow, said by e- mail, adding that he doesn’t see any appetite left for protests.

Regional elections now are the “main instrument for change,” according to billionaire Mikhail Prokhorov, who ran in the presidential race as a pro-business candidate with Putin’s blessing, picking up 8 percent of the vote.

“The return of elections for governor and the continued election of mayors gives us the chance to bring to power new, outstanding and effective people,” he wrote last month in an article in his RBC Daily newspaper.

Vladimir Artyakov, the governor of the Volga region of Samara whose five-year term expires in August, said he’s confident of re-election even after United Russia got only 39 percent of the vote in the December parliamentary elections.

Ending the practice of appointing governors will “stimulate the development of political competition and help build civil society,” Artyakov said in an e-mail.

No Election Guarantee

Mikhail Matveyev, an independent lawmaker in Samara, says the political changes “don’t guarantee honest elections” and won’t result in “big competition.”

Challengers will need the approval of as many as 10 percent of municipal lawmakers in the region. That may make it difficult to challenge Putin’s ruling party, said Rostislav Turovsky, who studies regional politics at the Moscow-based Center of Political Technologies,

Most regional parliaments are controlled by United Russia and will decide individually whether independent candidates are allowed to run. If a region permits them to, non-party challengers would have to gather between 0.5 percent and 2 percent of voters’ signatures in addition to the municipal approval.

“The problem here is not only the dominance of Putin’s United Russia party in the parliaments, but the municipalities’ financial dependence on governors,” Turovsky said by phone. “Governors seeking re-election can easily put pressure on them.”

Opposition Victories

Opposition candidates prevailed in mayoral votes in the regional capitals of Yaroslavl, Oryol, Naryan-Mar, as well as in Togliatti, where Russia’s largest carmaker, OAO AvtoVAZ, is based. Togliatti’s new mayor Sergei Andreyev was barred from the 2008 election because of a complaint about the unauthorized use of a photograph of a building on his campaign literature. Still, the mayor’s freedom of action is limited because the city is running a budget deficit and depends on the regional authorities for financing.

The new process may end up hurting Putin rather than fostering competition as the administrative hurdles give people more opportunities to “show their discontent,” said Turovsky.

Public anger may also be stoked by municipal tariffs rising in July as well as plans to make Russians pay more for state medicine and education from July 1, said Dmitry Orlov, an analyst at the Moscow-based Agency for Political and Economic Communications, which advises the government.

Putin will face a “zone of maximum risk” in 2015, half- way through his six-year term, when about a third of Russia’s regions will hold gubernatorial races, said Pavlovsky.

“Regional protests will definitely exist, but their severity and their transmission and ability to mobilize more protesters in Moscow will be key to watch,” said Dergachev at Union Investment. “If public discontent grows further and mobilizes people in the capital, I regard the risk of tougher and more populous protests in Moscow as a real possibility.”

To contact the reporters on this story: Stepan Kravchenko in Moscow at skravchenko@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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