Kremlin at crossroads over financial crisis

By Shamil Baigin - Analysis

MOSCOW (Reuters) - The Kremlin is at a crossroads over how to respond to the global financial crisis -- by tightening its control over the economy and public life, or by using it as a catalyst for reforms.

It is not clear which way President Dmitry Medvedev and Prime Minister Vladimir Putin will turn, but the stakes are high because political analysts fear the economic downturn could lead to a deep social crisis.

Russia's stock market has fallen about 70 percent this year and government measures to help businesses hurt by the global liquidity crunch will cost $200 billion.

A battle is under way between Russian liberalizers who favor long-delayed reforms and hawks who see greater state intervention in the economy and political life as the best way to prop up the economy and keep a lid on discontent.

"One (option) is to find a scapegoat and resort to populism," said Igor Bunin, head of the Center of Political Technologies think tank. "Another is to try and create certain pluralistic institutions, which could help dampen the crisis."

The hawks, many of whom have security backgrounds and links to major state-owned corporations, believe the Kremlin should combat economic problems by ramping up the state's role.

Analysts say the hawks hope to defend their own interests by blaming the crisis on financial mismanagement in the United States and liberal economic policies at home, making these the scapegoats. Both are targets for criticism among voters.

The hawks' liberal opponents want the economy modernized to make it more competitive, and say the crisis underlines the need for a more spirited media, truly independent political parties and stronger civil society.

SPLIT IN ELITE

Crisis measures have included regular market interventions, drawing on Russia's vast gold and foreign currency reserves.

The government also plans to use $50 billion of its reserves to help corporations redeem foreign debt. The choice of which businessmen, including billionaire oligarchs, are bailed out is highly political.

Echoing the hawks' demands for a larger state role in the economy, nearly 60 percent of Russians want the property of Russia's biggest businessmen nationalized and 70 percent favor state regulation of prices, an opinion poll by the VTsIOM polling group showed.

"A 'development dictatorship' may realistically be a scenario if the crisis persists," Georgy Satarov, a liberal former Kremlin official who heads the INDEM think tank, said.

The liberalizers, many of whom have business backgrounds, believe the solution is not only to make Russia's economy more competitive but to reinstate some of the institutional safety valves to head off any social unrest.

Analysts say Russia's political system is vulnerable to popular discontent because, with deferential television stations and a parliament loyal to the Kremlin, there are insufficient political safety valves in times of economic difficulty.