WINNERS AND LOSERS IN POST-CONFLICT RUSSIA'S ELITE

C O N F I D E N T I A L MOSCOW 003042 SIPDIS E.O. 12958: DECL: 10/14/2017 TAGS: PGOV PHUM PINR RS SOCI SUBJECT: WINNERS AND LOSERS IN POST-CONFLICT RUSSIA'S ELITE REF: MOSCOW 02791 Classified By: Ambassador John Beyrle. Reason: 1.4 (d). ¶1. (C) Summary. The Georgian war and recent financial crisis have highlighted intensified competition within the Russian elite and demonstrated the continued volatility among the Kremlin clans. Many here saw the Georgian conflict weakening the "internationalists" -- those who promote economic integration with the West -- and the strengthening of the more militant, nationalist camp. Some observers saw the war and souring attitudes among elites toward the U.S. allowing the emergence within the latter camp of an even more militaristic, xenophobic, and stridently anti-Western wing. Moreover, they argued the emergence of a hyper-nationalistic camp threatened to shift the center of the political spectrum further away from the West. Others contacts, however, were more sanguine, maintaining that the primary competition remains between the Yeltsin-era oligarchs and Putin's siloviki captains of state capitalism, with neither side able to gain a preponderant position. Those observers argue that while the Georgia conflict may have strengthened the nationalist's hand, the financial crisis has similarly helped the position of the internationalists. End Summary. War Strengthens Nationalists -------------- ¶2. (C) In late August and early September, we heard increased warning that the Georgian war had precipitated a change in the balance of power among the elite, creating a perception of a deepening divide between two overarching camps. Pro-Kremlin TV personality and Public Chamber member Maksim Shevchenko defined the camps as "cosmopolitan" vs. "nationalist," while U.S.-based political scientist Andrey Piontkovskiy delineated between "global" and "national" kleptocrats. They painted the "internationalist" camp as: - committed to creating global business empires and making money from overseas investments; - advocating for WTO membership and closer integration into the global economy; and - favoring, at least rhetorically, the benefits of democracy and free markets, if only as a sop to Western governments and investors. Specifically, our contacts pointed to the Yeltsin-era oligarchs as the core of the internationalist camp, with their investments both in expanding overseas (American steel mills, European airlines),purchasing capital goods to improve productivity at home, and in securing foreign properties (Spanish villas, British soccer teams). ¶3. (C) As we have noted in earlier reporting (Reftel),the nationalist camp is a more nebulous formulation, more often cast as the "anti-matter" to the more easily defined internationalists. Many equate this group with the siloviki clans, particularly the powerful grouping around former Kremlin grey cardinal Igor Sechin and Security Council Secretary/Former FSB head Nikolay Patrushev, who have sought to break the power of the oligarchs, confiscate and amalgamate their assets into state companies under siloviki control, and to limit Western influence. However, self-interest has moderated the behavior of this group. Like the oligarchs, these individuals are interested in maximizing profits, hence Sechin's efforts to reform Rosneft and appeal to international investors. Like the oligarchs, they also often own property abroad and educate their children in elite Western schools. A Darker Force Emerging? -------------- ¶4. (C) The Georgia conflict, tension with the West, and souring attitudes among elites and the public toward the West and the United States have allowed the emergence of a hyper-nationalist grouping. Piontkovskiy and the editor of the newspaper Kommersant's economic section Dmitriy Butrin are among those who argue that these hyper-nationalists are far poorer than either the older oligarchs or the nouveau riche Kremlin insiders. They are invested almost exclusively in Russia and thus have little interest in Western opinion and actions. ¶5. (C) Although there is little granularity about the composition of the ultra-nationalist wing, our contacts argue that the grouping includes: - a predominance of military and security service officers (Butrin points to senior officers who had once served in the Soviet-era Western Group of Forces); - associated businessmen from the military-industrial complex or other inward-looking firms; and - second and third tier bureaucrats, particularly among those who gain financially from tapping funding for North Caucasus reconstruction projects. All are committed to a strong traditional ideology, rooted in Orthodox Christianity but more racist in outlook and fiercely "patriotic." ¶6. (C) The ultra-nationalists hew to a line that is fiercely protectionist and unabashedly authoritarian. They are portrayed as inimical to even the pretense of political pluralism and as advocates of a more assertive foreign policy that is suspicious of any foreign ties, including investment. Oleg Voronin of the Moscow Institute of Economics, Finance, and Law asserts that the principal source of the ultra-nationalists' funding is the military industrial complex, where former officers play a vital role in running firms with limited potential beyond the domestic market. Similarly, Butrin sees an important link to the leadership of the North Caucasus republics (including Kokoity's South Ossetia) and government funding for reconstruction and development in that region. Financial Crisis May Lead to Rebalancing -------------- ¶7. (C) The financial crisis that has shaken the Russian markets and threatens to spill over into the broader economy introduced yet another element in the intra-elite competition. It provided a cold shower of reality, at least temporarily checking the growing ascendency of the mobilization camp. Medvedev and Putin publicly dismissed the idea that the Georgian conflict and foreign pressure could cause Russia to "tighten the screws" or change its development course. In September 19 speech to selected NGOs, Medvedev (apparently mixing up the reality of who created the Iron Curtain and why) rejected any attempt to wall Russia off from the world as it had been in Soviet times. Putin has publicly emphasized Russia's openness to foreign investment, in particular in his public remarks at the Sochi Economic Forum in September, and has even reiterated Moscow's commitment to joining the WTO. ¶8. (C) Optimists like New Economic School Rector Aleksey Sitnikov told us that he expected Medvedev to use his newfound popularity following the conflict to push forward with his "four i's" modernization agenda. Having proven himself sufficiently strong to face down the U.S. over Georgia, Medvedev may be able to check the influence of the ultra-nationalist camp and more aggressively pursue modernization, including especially efforts to rein in official corruption. In this, he may find allies among the "internationalists," several of whom have expressed to us concern at the economic consequences of continued tension with the U.S. and the West. In this context, the Medvedev government has an interest, which the oligarchs strongly support, in renewing its commitment to reform as a way to restore investor confidence in the Russian economy. ¶9. (C) Some of Russia's top analysts, like Center for Political Technology Deputy Director Boris Makarenko and the Moscow Carnegie Center's Dmitriy Trenin, also argue that the Medvedev/Putin team is ready to press its "modernization" agenda. Makarenko, who also serves as an adviser to the Medvedev-affiliated Institute of Modern Development, told us that Medvedev had agreed to an increase in defense spending, but otherwise saw "no change in the strategic lines" of Medvedev's approach. Makarenko allowed that Medvedev faced challenges: the modernization plan to 2020 will "track longer" and it will take intense political will to push through the anti-corruption agenda. Similarly, Trenin told us in late September that the "doves" had prevailed; while modernization had been at risk, with mobilization seen as an alternative, the financial crisis had brought the leaders back to the recognition that Russia is a part of an interdependent and globalized world. Rhetorically, Trenin commented, the tandem can rail against uni-polarity, but the financial stability of the international system is a shared agenda with the West. Comment -------------- ¶10. (C) The events of August and September illustrated the complexity of intra-elite competition within Russia. Liberals, internationalists, siloviki and ultra-nationalists are all engaged in an intense, continuous competition for power, influence and wealth and they will use events as they occur to their best advantage. Pride in "standing up to the U.S." over Georgia and the euphoria over the "short, victorious war" gave evidence of the deep wellsprings of nationalist sentiment, both within the elite and among the populace. On the other, the financial crisis gave a renewed boost to economic "internationalism," highlighting Russia's dependency on foreign capital to develop its economy and on foreign demand for its energy resources. ¶11. (C) It remains to be seen what lessons the Russian elite will take from this "time of troubles" as they look to a future in which the main plank in Putin's plan -- continued improvements in the quality of life -- are at risk due to global economic turbulence. Medvedev alternates his moderate persona with the more aggressive and combative belligerence of his mentor, not only with foreign audiences, but even against Russian business -- as seen in his veiled threat to gold producer Polyus on September 24. Medvedev and Putin continue to heave spears at the U.S., either in their aspersions of U.S. complicity in the Georgian attack on South Ossetia or in their penchant for ascribing Russian economic woes primarily to the U.S. financial crisis. Those tactics feed the worst of elite and popular misconceptions. However, the challenges of the financial crisis appear to have renewed the leadership's commitment to modernization and integration (and the corresponding need for at least vestiges of political freedom) as the necessary precursors to continued rising living standards and the political stability they provide. End Comment. RUBIN