Analysis: The ins and outs of Russia's next government

MOSCOW Fri May 4, 2012 12:23pm EDT

Russian Prime Minister and President-elect Vladimir Putin (R) and Deputy Prime Minister Igor Sechin attend a meeting on the gas industry in Kirishi, a town near St Petersburg in Leningrad Region, March 23, 2012. REUTERS/Aleksey Nikolsky/RIA Novosti/Pool

Russian Prime Minister and President-elect Vladimir Putin (R) and Deputy Prime Minister Igor Sechin attend a meeting on the gas industry in Kirishi, a town near St Petersburg in Leningrad Region, March 23, 2012.

Credit: Reuters/Aleksey Nikolsky/RIA Novosti/Pool

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MOSCOW (Reuters) - When Vladimir Putin stood for re-election to the presidency in 2004, he named a new government even before the vote. Now, days before he is sworn in as Kremlin chief for a third time, the shape of his next administration remains a mystery.

Although outgoing President Dmitry Medvedev has been nominated by Putin to be prime minister in a job swap flagged as long ago as last September, it is not apparent that he will even rank as Russia's second most powerful man.

That status may shift to Putin's energy tsar, Igor Sechin, who has strengthened his hand since the March 4 presidential election vote by masterminding two big exploration deals involving state oil firm Rosneft and launching sweeping energy tax reforms.

Yet Sechin, ousted by Medvedev as Rosneft chairman last year, may not keep his formal job as deputy premier amid speculation that he could move to a security role in which he would report directly to Putin, a close friend for 20 years.

"Elevations and falls from grace have become enmeshed in the hidden but acute rivalry between the two rulers, (and) clashes of interests between clans and ambitious newcomers," analyst Pavel Baev wrote in a commentary for the Jamestown Foundation.

Russia's unresolved conflicts, from street protests over alleged electoral fraud to power struggles in the ruling 'nomenklatura', have entrenched the risk premium that investors demand to buy the country's financial assets.

Promises by officials that the next government will act decisively to privatize state companies, strengthen the budget and fix a hole in the pensions system cut little ice with the financial community.

"To be a strong Russia bull one must hold a sanguine outlook on the oil price and expect the next Russian government to initiate an ambitious reform package," said Peter Westin, chief economist at Moscow brokerage Aton.

Westin, editor of a new book on Russia called 'In From The Cold', suggests however that rising prices for oil, the main export driver for the country's $1.9 trillion economy, will sap its leaders' will to reform.

"It's a Catch-22 situation," he said.

WATERSHED

Although Putin's return to the Kremlin ends an unhappy four-year experiment with 'tandemocracy', as his double act with Medvedev came to be called, the return of one-man rule can hardly bring back the boom years of the early 2000s.

The financial crash of 2008 and ensuing economic slump have slowed the speed limit of the economy, increased the state's reliance on energy revenues and allowed Kremlin capitalists to retake the economy's commanding heights.

"Future historians will come to view the 2008 credit squeeze as the pivotal event of modern Russian economic history," hedge fund manager Steven Dashevsky wrote in Westin's book.

"It was the last straw that broke Russian capitalism's back - if you can call a highly-leveraged mix of cronyism, corruption and backroom dealing capitalism, of course - and opened the gates for the state's successful final march on the economy."

In another big deal struck during the two-month transition, billionaire Alisher Usmanov won control over MegaFon, positioning Russia's No.2 mobile phone firm to partner with the state in offering next-generation '4G' services.

Banking sources say MegaFon's departing CEO, Sergei Soldatenkov, could become Russia's next telecoms minister in a move that, if it happens, would cement Usmanov's standing as Russia's richest and best-connected oligarch.

Russian stocks trade at a forward price/earnings ratio of 5 - a discount of around 50 percent to emerging markets as a whole - and to close that gap will require action on reforms from the next government and not just words.

"The legacy of 2008 looms large over the market," said Chris Weafer, chief strategist at Troika Dialog in Moscow. "People will want to see specific action taken, rather than pay for it in advance."

SHADOW GOVERNMENT

Russia's factional divisions between the "siloviki", or men of power, led by Sechin, and a liberal camp grouped around Medvedev, now spread beyond government following the ouster of hawkish Finance Minister Alexei Kudrin last autumn.

Kudrin, who restored Russia to financial health from the devaluation and default of 1998, has launched a policy task force, already dubbed a "shadow government", that could position him to return to government should Medvedev stumble.

But, for now, Kudrin's successor as finance minister, Anton Siluanov, is likely to keep his job, having notched up a successful $7 billion international sovereign debt placement in March.

Medvedev's economic adviser, Arkady Dvorkovich, should land a senior economic role while Deputy Economy Minister Andrei Belousov may be promoted to cabinet rank, replacing Elvira Nabiullina, sources say.

Natalya Komarova, governor of the oil region of Khanty-Mansiisk, has been linked to a cabinet job. But another Medvedev protege, ex-power sector boss Mikhail Abyzov, may be blocked by Sechin from taking a top energy role.

First Deputy Prime Minister Igor Shuvalov, who has acknowledged his wife made millions of dollars in deals financed by Russian business oligarchs but says there was nothing illegal in this, may hang on despite speculation he could be shifted to a regional role in Russia's far east.

Unpopular ministers from the old guard who could be on their way out include Interior Minister Rashid Nurgaliev, after botched police reforms and a series of scandals involving the deaths of people held in custody.

But the last word will be that of Putin, who will be sworn in on Monday. Under the constitution, Medvedev would then have two weeks to form a government that could include the odd token figure from an opposition party, sources say.

"Only one man, Putin, knows the shape of the next government. The other, Medvedev, makes suggestions, but they mostly get shot down," said one Kremlin-connected analyst.

(Additional reporting by Gleb Bryanski, Writing by Douglas Busvine; editing by Ralph Boulton)

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