Russia’s New Mega-Government:

Implications for Foreign Investors

Moscow, May 2012

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Contents

Introduction 3

Changes Meant to Please Putin’s Target Audiences 3

Out of the Frame But Built Within the System 4

Who will Run The Cabinet 4

What It Really Means for Foreign Investors 5

Priorities for the Government 6

Changes in the Cabinet 8

Appointments in the Presidential Administration 10

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Written by Pavel Melnikov, pavel.melnikov@grayling.com

Edited by Vladimir Melnikov, vladimir.melnikov@grayling.com

All Right Reserved, Grayling Eurasia

www.grayling.com

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Introduction

In May 2012 the new-old Russian President Vladimir Putin skipped the G8 Summit to form the

Cabinet and the Presidential Administration: a two tier mega-government with more checks and

balances 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. This

will keep Medvedev busy while his senior colleague defines the Russia’ strategy for the next six

years.

Changes Meant to Please Putin’s Target Audiences

Vladimir Putin and his team have tried to please various target groups while forming the new

Cabinet:

– The population at large is thought to be generally satisfied that 64% of the cabinet has

been renewed (18 out of 28) resulting with the long-awaited ‘face lifting’ of the

government (see Appendix 1).

Unpopular ministers moved from the government to the Presidential administration (see

Appendix 2). They will continue to shape the government’s strategy but behind the

scenes, hidden from the public eye.

– The protesters’ concerns related to the absence of social lifts were also thought to be

partly addressed by Putin. He invited a 29 year old politician Nikolai Nikiforov from

Tatarstan to head the Ministry of Telecommunication; the United Russia functionary

Vladimir Medinsky was given a chance to head the Ministry of Culture, while the most

striking appointment was made by having the Uralvagonzavod’s Igor Holmanskykh take

the post of the Presidential envoy in the Urals Federal District (given that the Presidential

Administration is now effectively part of the new Mega-Government).

– To the (ruling) elite the mega-government’s structure is positioned as a compromise for

various “clans” warring over control over financial flows. Putin applied a situational

management model whereby decisions are taken to ensure even more checks and

balances within the management system than ever before.

– Investors and western leaders are expected to be “pleased” as well since the liberals

led by First Deputy PM Igor Shuvalov (and Deputy PM Arkadiy Dvorkovich) still seem to

be 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 as

Minister of Economic Development).

Putin confirmed his role as a strategist thinking through the barriers between the government

and presidential administration. This, for example, makes any change within the top of the

government (deputy prime ministers) having as little impact on the overall state strategy as

possible. Equally, the current “assistants” to Putin (Fursenko, Golikova et al) may easily move to

new roles / replaced by newcomers over time without distressing the overall management

system.

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The 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 is

more or less clear: the ministers acting as professional executors of the policy largely defined in

the presidential administration.

Putin therefore maintains full control across every key economic and social sector while

mitigating his own risks having multi-layered decision makers take unpopular decisions to be

held potentially liable for any failures (who can easily be removed without distressing the system

as noted above).

Out of the Frame But Built Within the System

Rosatom CEO refused an offer to become Minister of Energy: Rosatom has global ambitions

which supersede the ministry’s tasks.

Equally, Rosneft, now headed by former Deputy PM Igor Sechin, has long been nurtured to

become a global major. Surgutneftegaz and Zarubezhneft are expected to merge with the oil

giant. Igor Sechin will also retain his influence over energy affairs in Russia and abroad, at least

when it comes to defining the overall state energy strategy / policies.

The rector of the Higher School of Economics Yaroslav Kuzminov, having refused to become

the minister of education, will nonetheless be active in the open government being set up by

Medvedev via new minister Mikhail Abyzov.

Who Will Run The Cabinet

Medvedev's new government is focused on maintaining policy continuity and includes one prime

minister, 7 deputy prime-ministers (one of them is the first), 20 ministries and 21 ministers, 34

federal 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 investment

and migration policy. He will also be overseeing the financial sector which was formerly

supervised by Arkadiy Dvorkovich.

– Dmitry Kozak will continue to oversee sports, preparations for the 2014 Sochi Olympic

Games, regional policy, construction, housing and utilities.

– Dmitry Rogozin will retain supervision of the defense industry, the nuclear and space

sectors, 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,

1 As confirmed officially via RIA Novosti on May 24, 2012

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forestry and fishing. Informally, he will try and influence the decision making process in

the 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 national

projects, demographic policy, healthcare, social development, education and tourism”.

At the ministerial level some new ministers like Alexander Novak (former deputy finance

minister appointed as Minister of Energy), will be doing a comprehensive audit of the ministry in

the same manner Golikova did to the former Ministry of Health and Social Development and

Anatoly Serduykov to the Ministry of Defense. Obviously Minister of Education Dmitry Livanov

has 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 in

forming new industry strategies which means a less focus will be made on Adam Smith’s

invisible hand of the market, and the state influence will imminently grow across every economic

sector.

Only five ministers of the previous government retained their posts (Sergei Lavrov – foreign

affairs, 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, headed

by 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 the

police will get more professional.

Career bureaucrat Anton Siluanov has been re-appointed finance minister. This will be viewed

with cautious optimism by the market as Siluanov is a committed fiscal hawk.

A professional economist Andrei Belousov has become economy minister. This is a positive

development 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 Investors

Relations with the foreign investors will continue to be pragmatic. The Foreign Investment

Advisory Council will continue to play a vital role (see our last year think piece Re-Thinking

Foreign 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 the

new Minister of Open Government Abyzov to form such dedicated expert platforms.

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International companies operating in the Russian market will now have to increase number of

doors to go into with formation of the mega-government. Also during the transitional period

some 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 will

work straightforwardly for foreign companies seeking to resolve their acute / big issues (see

Re-Thinking Foreign Investment in Russia). Moreover, officials from the mega-government will

be more open and accessible in general: appointment of Maksim Akimov, former deputy

Governor of Kaluga Region, famous for his transparent relations with foreign investors, as

deputy head of the Government’s Secretariat only proves the point.

Stanislav Voskresencky, deputy minister of economy, responsible for investment and major

economic events is likely to move to Nabiullina’s office in the Presidential Administration which

will 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 Health

Ministry, for example, has already been tested by many foreign pharma and medical devices

companies. Any other minister one can think of has either got younger or/and more open for the

rational dialogue with the market players.

Existing relations with Golikova, Nabiullina, Levitin, Fursenko et al in the Presidential

Administration will help foreign companies maintain the dialogue, although now it needs to be a

trialogue / qudrialogue with:

1. The Presidential Administration

2. The Ministry in question

3. Shuvalov’s vertical

4. Open government’s specific expert council

In 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 the

times of financial turmoil and Russia’s vulnerable position.

Priorities for the Mega-Government

Some of the challenges the new (Mega-)Government faces (source: the Federal Service of

State Statistics):

– Median salary in Russia is around 5,238 EUR per year. This means that 50% of

population or 71.4 million Russian citizens earn less than 400 EUR per month. 350 EUR

pcm is the average pension

– More than 26% - around 37 million citizens - are under poverty line earning less than

150 EUR per month.

– Only 7.3% of population have middle income (620-1,230 EUR per month), 1.1% are

considered wealthy (1,230-1,850 EUR) and only 0.7% of population are rich, meaning

their income is higher 1,875 EUR.

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– The ratio between the income of the wealthiest 10% and the 10% with the lowest income

has reached 14.8 times.

– The Russian ruble has weakened by 10% in dollar terms and 5% in Euro terms and

prices on food, gas, transport have increased by 7-15% over the last two months. This

will imminently result in wages losing their purchasing.

The unprecedented outflow of capital ($42 billion in net capital outflow between January and

April, which is equivalent to half of the $84.2 billion recorded in the whole of 2011) signals

another major issue: increased probability of the economic crisis and loss of investors’ trust for

structural reforms in Russia.

At the first government meeting, Medvedev listed seven short-term tasks for the government in

the next six months to implement Putin's 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; and

7. 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 privatization

program to address this issue among other activities.

– Budget constraints (at both the federal and regional levels). This could be addressed by

improving 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 yet

The achieved public consensus may keep Putin in his position as long as economic crisis does

not trigger political instability.

However, if the new mega-government speeds up some long-awaited economic and social

reforms the system will be able to survive for years ahead.

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Appendix 1

Changes in the Cabinet

Structural Changes

New Ministry for Far East Development was created. It is headed by Viktor Ishaev, Presidential

Envoy 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 gap

between policymakers and common people.

The Federal Agency for construction and housing services and utilities under the Ministry of

Regional development was established.

8 posts of deputy ministers of federal districts are introduced in the Ministry of Regional

Development. The Ministry of Sport, Tourism and Youth Policy was transformed into the

Ministry of Sport; functions in the sphere of youth policy were given to the Ministry of Education

and Science, in tourism – to the Ministry of Culture. Federal Agencies for Youth Issues and for

Tourism 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 on

Surveillance for Consumer rights protection and human well-being, the Federal Service for

Defense Contracts are under the government.

Additionally, the government was taskedto set up government’s commission for coordination of

the open government activities, which will be headed by Minister Mikhail Abyzov.

Composition of the New Government

Prime Minister – Dmitry Medvedev

First Deputy Prime Minister – Igor Shuvalov

Deputy Prime Minister – Vladislav Surkov

Deputy Prime Minister – Dmitry Kozak

Deputy Prime Minister – Dmitry Rogozin

Deputy Prime Minister – Arkady Dvorkovich

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Deputy Prime Minister – Olga Golodets (Golodets will oversee social issues.)

Deputy Prime Minister and Presidential Plenipotentiary Envoy to the North Caucasus Federal

District – Alexander Khloponin

Finance Minister – Anton Siluanov

Energy Minister – Alexander Novak. (Novak was previously deputy finance minister.)

Economic Development Minister – Andrei Belousov

Labor and Social Protection Minister – Maxim Topilin

Transport Minister – Maxim Sokolov

Sports Minister – Vitaly Mutko

Agriculture Minister – Nikolai Fedorov

Communications and Mass Communications Minister – Nikolai Nikiforov

Regional Development Minister – Oleg Govorun

Minister in charge of Russia’s Far East Development and Presidential Plenipotentiary Envoy to

the Far Eastern Federal District – Viktor Ishayev.

Industry and Trade Minister – Denis Manturov

Natural Resources and Environment Minister – Sergei Donskoy

Education and Science Minister – Dmitry Livanov

Minister of Culture – Vladimir Medinsky

Minister of Healthcare – Veronika Skvortsova

Justice Minister – Alexander Konovalov

Defense Minister – Anatoly Serdyukov

Foreign Minister – Sergei Lavrov

Minister of Civil Defence, Emergency Situations and Disaster Relief – Vladimir Puchkov

Interior Minister – Vladimir Kolokoltsev

Minister for Relations with the Open Government – Mikhail Abyzov

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Appendix 2

Appointments in the Presidential Administration

Posts Name Areas of responsibility

Chief of Staff of the

Presidential Executive Office Ivanov Sergei Chief

First Deputy Chief of Staff of

the Presidential Executive

Office

Volodin Vyacheslav HR and domestic policy

First Deputy Chief of Staff of

the Presidential Executive

Office

Gromov Alexei Media relations

Deputy Chiefs of Staff of the

Presidential Executive Office

Vaino Anton Curator of Presidential Aides

Peskov Dmitry Media relations

Aides to the President

Brychyova Larisa Head of the State Legal

Administration

Chuychenko Konstantin Head of the Control

Administration

Fursenko Andrei Science and grants for

researchers

Golikova Tatyana

Social and economic

development of the South

Ossetia and Abkhazia

Nabiullina Elvira Economic issues

Shkolov Yevgeny Human resources

Shchegolev Igor IT

Trutnev Yury State Council

Ushakov Yuri Foreign policy

Presidential Press Secretary Peskov Dmitry Media relations

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Chief of the Presidential

Protocol Ostrovenko Vladimir Presidential Protocol

Advisers to the President

Abramov Alexander Sport

Bedritsky Alexander Climate change

Fedotov Mikhail Human rights and civil society

Grigorov Sergei Technical control

Levitin Igor Transport

Tolstoy Vladimir Culture

Ushakov Sergei APEC Summit

Yakovlev Veniamin Legal issues

Presidential Plenipotentiaries

at the Bodies of Power

Kotenkov Alexander The Federation Council

Krotov Mikhail Constitutional Court

Minkh Garry The State Duma

Presidential Commissioner for

Children's Rights Astakhov Pavel Children's Rights

Presidential Plenipotentiary

Envoys to the Federal

Districts

Babich Mikhail The Volga Federal District

Beglov Alexander The Central Federal District

Ishayev Viktor The Far East Federal District

Khloponin Alexander The North Caucasus Federal

District

Kholmanskikh Igor The Urals Federal District

Tolokonsky Victor The Northern Federal District

Ustinov Vladimir The Southern Federal District

Vinnichenko Nikolai The Northwest Federal

District