PUTIN, PIKALEVO, AND THE FAILURE OF THE POWER

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001562 SIPDIS E.O. 12958: DECL: 06/15/2018 TAGS: PGOV PHUM PINR RS SOCI SUBJECT: PUTIN, PIKALEVO, AND THE FAILURE OF THE POWER VERTICAL REF: A. MOSCOW 1538 ¶B. ST PETERSBURG 00068 ¶C. MOSCOW 00180 Classified By: Ambassador John Beyrle. Reason: 1.4 (d). ¶1. (C) Summary. The events two weeks ago in the northwestern town of Pikalevo, in which frustrated workers in three small, idled plants blocked a federal highway to draw attention to their plight, demonstrated the failures of Russia's "vertical of power" and gave insight into the balance of power within the elite (Ref B). That the impasse required the involvement of Prime Minister Putin -- the man "responsible for everything" in Russia -- illustrated the weakness of the federal system, in which poorly connected governors have few levers to influence the Moscow-based financial industrial groups close to the Kremlin. Moreover, none of the institutions designed to protect citizen interests functioned: labor unions, political parties, or even state institutions like the Federal Anti-Monopoly Service could not bring about a solution (even after President Medvedev reportedly told the Leningrad Oblast Governor Serdyukov to fix the problem in March). Experts are divided on the logic behind Putin's decision to make a public spectacle out of Pikalevo, but nearly all see his involvement after an independent demonstration by ordinary citizens as a likely catalyst for more localized protests by other dissatisfied groups, seeking to attract the Prime Minister's attention in the coming months. End Summary. The System Failed -------------- ¶2. (C) The economic crisis is testing the "Putin system" of administration, established during 8-years of strong economic growth to establish central control over the county and maintain socio-economic stability. The points of pressure are found in widely dispersed "one-company towns" across Russia, where less efficient and less advanced companies, particularly in metallurgy and machine building, are failing. As such, the chances of localized protests -- a "bunt" of frustrated workers -- are increasing, potentially creating a crisis of confidence within the tandem. ¶3. (C) The Pikalevo situation highlighted the weakness of Russia's federal structure. After Putin's reforms, governors serve at Moscow's pleasure and are judged less by their effectiveness as leaders or ability to solve local problems than by their resolute support for central authorities (demonstrated in their management of regional elections to secure the party of power, United Russia) and their ability to maintain political and social stability. According to XXXXXXXXXXXX, political and tax reforms over the past years have curtailed the governors' influence over the budget and reduced their authority to make decisions without Moscow's approval. Economic prosperity, fueled by high energy prices, helped to mask the weakening of regional leadership; the crisis had made it more acute. ¶4. (C) The case with Leningrad Oblast Governor Serdyukov in connection with Pikalevo illustrates the problem of ineffective regional leadership. XXXXXXXXXXXX blamed the Serdyukov's incompetence and the local mayor's "unprofessionalism" for allowing the problem to fester. XXXXXXXXXXXX had a more positive assessment of Serdyukov, but noted that a "second tier" governor had no ability to tell the well-connected Deripaska what to do – - only the heavyweights had sufficient authority to challenge members of the tandem's inner circle. No matter what the assessment of Serdyukov "the man," his loyalties remained primarily tied to keeping Moscow's favor, leading him to cover over the deteriorating situation in Pikalevo by emphasizing new investment projects, like the Nissan factory that Putin opened on June 2. ¶5. (C) XXXXXXXXXXXX also has identified a second element that led to Pikalevo: a crisis of dialogue between the political leadership (vlast) and society, in which any attempt to draw attention to serious problems are treated as a threat to the system and the regime. XXXXXXXXXXXX noted the fate of Yuriy Onoprienko, the Speaker of the Khabarovsk Kray legislature, who was fired by United Russia after deputies there sent a letter to Putin requesting that tariffs for energy not be increased because of the economic crisis. Similarly, XXXXXXXXXXXX drew the ire of the pro-Kremlin press and almost faced charges of "extremism" XXXXXXXXXXXX. Now, he and others who have criticized the tandem's anti-crisis package are finding MOSCOW 00001562 002 OF 003 themselves vindicated, although without any recognition from the authorities. The regime has also shown little tolerance for criticism from society; last December Moscow-based OMON police forces used force to dispel protests in Vladivostok against increased tariffs on imported automobiles. Deputy Prime Minister Igor Sechin dismissed the protests as the actions of "scoundrels" while United Russia Duma officials insinuated that the presence of Japanese flags by the protesters signaled instigation from overseas (Ref C). ¶6. (C) Ultimately, commentators argue the crisis at Pikalevo resulted from the shortcomings of the tandem's crisis plan, which emphasizes maintaining employment (even with substantially reduced salaries) over accepting the pain of economic restructuring of inefficient and unprofitable enterprises. XXXXXXXXXXXX told us "the factories should be closed" and he admitted that Putin's solution does not solve the problem of a lack of demand for aluminum -- the catalyst behind the plants' closure. Thus far, the administration's response has been to demand more action on the part of regional and local leaders to follow through with the plans to maintain employment and stop wage arrears. ¶7. (C) After Pikalevo, the central leadership made no reassessment of its strategy, but instead used the whip to put more pressure on regional leaders to follow through with the "stability" agenda. Medvedev on June 10 threatened regional leaders with dismissal if they fail to get wage arrears and unemployment under control -- telling them to "stop hiding under the table" and take charge of negotiating with industries and workers' collectives. Kremlin ideologue Vladislav Surkov told a conference of municipal heads that government at all levels should become "more open" and engaged in dialogue with society. However, as XXXXXXXXXXXX explained to us, this anti-crisis policy rests on a fragile social compromise, in which businesses keep workers on the books, albeit with reduced pay and hours; local and regional elites trumpet low unemployment; and the populace patiently accepts the cuts in the hopes of improved wages "after the crisis." As in the Pikalevo case, that comprise can break down quickly if an owner's fears about consequences for letting arrears pile up or firing staff are less than the possible gains for letting uneconomic enterprises collapse. Ordering governors to be more assertive does little to provide them political power to actually follow through on the assignment, especially against powerful oligarchs. Large and in Charge -------------- ¶8. (C) Putin's intervention in Pikalevo also raised questions about balance of power within the tandem. XXXXXXXXXXXX asked why Putin, and not Medvedev, was dispatched to the town an issue that many here are puzzling over. Some argue, XXXXXXXXXXXX, that the showdown between Putin and Oleg Deripaska was staged political theater. Since the money to revive the BazelTsement came through government loans in an agreement between the two before the visit, XXXXXXXXXXXX saw no reason for the Prime Minister to go to Pikalevo except to show the masses his ability to battle the hated oligarchs. (XXXXXXXXXXXX also claimed that the proposal to nationalize the three plants in Pikalevo was a conspiracy between Deripaska and the two United Russia deputies who drafted the proposal, since Deripaska would have loved to unload the debt-ridden and inefficient firm on the taxpayers.) In an earlier conversation with Embassy, XXXXXXXXXXXX had argued that he saw Medvedev as confidently in control and serving as "the" President of Russia, suggesting that he sees Putin's involvement as a way of asserting his continued political importance. ¶9. (C) XXXXXXXXXXXX's argument runs against the conventional wisdom that Putin remains the fulcrum of power in the tandem. Others explained the Prime Minister's intervention as another illustration of Putin's continued position as the arbiter amongst the Kremlin clans. Indeed, Medvedev had given Serdyukov clear instructions to resolve the impasse over BazelTsement in March, but did not follow through to see that his instructions were implemented. We do not know if Medvedev himself directed Putin to take action in Pikalevo, or was even apprised of the Prime Minister's intentions. Whatever the case behind the scenes, Putin's intervention provided a clear signal to the elite and society that he remains the tandem's decision implementer. As XXXXXXXXXXXX described it, Putin's trip to Pikalevo showed that "he's the tsar, he decides all problems." ¶10. (C) The laurels of the "tsar" come with heavy responsibility and nearly all independent observers agree that Putin's intervention will have the likely consequence of MOSCOW 00001562 003 OF 003 more localized protests. The success of the Pikalevo workers' highway blockade provides a model for other disgruntled or frustrated workers in other "one-company towns" to attract top-level attention to their problems. Medvedev's caution to the governors June 10 that the center will no longer send "someone" to resolve local issues had far less flash than Putin's actions on June 4. Comment -------------- ¶11. (C) Putin's Pikalevo intervention, followed by his surprise announcement that Russia would drop its independent bid for WTO accession in lieu of a joint bid with Kazakhstan and Belarus (Ref A),has put the Prime Minister in the spotlight at the expense of Medvedev. Medvedev appears to be playing "catch up" through his tough talk to the PolPreds (his representatives to regional blocs) on June 10 and a photo op sighting down the barrel of a sniper scope in Makachkala (after the murder of the head of the local Internal Affairs Minister). Pikalevo served to confirm the stereotypes about the two men -- Medvedev is a man of words, hobnobbing with Western businessmen in St. Petersburg; Putin is the man of action, setting the oligarchs straight in the provinces. Neither appears to see fully the systemic problems inherent in the Putin system, but Medvedev at a minimum seems more open to hearing a broader range of criticism. Putin apparently retains his conspiratorial worldview, even muttering about the Pikalevo protest being the result of forces colluding to stop him from coming to the town. If the situation deteriorates in the coming months with a surge of localized protest, Medvedev may be in a better position to promote a reform agenda that tackles the underlying issues, rather that papering over problems with a diminishing pot of government money. BEYRLE ..