Putin broke his social contract

Suddenly, Russian President Vladimir Putin has seen his people’s trust in him falling from an already low 59 percent in November 2017 to 39 percent in September, according to the independent pollster Levada Center. This might be too low for an authoritarian leader to be sustainable. The cause is his pension reform.

During his 19 years in power, Putin has faced three significant crises. In 2005, pensioners protested against his cut of social benefits, and Putin retreated. In 2011-12, Russia’s wealthy middle class lamented election fraud, and Putin steamrolled them.

Since June, Putin is facing his third major crisis over increased retirement age, but now he has broken his social contract with the Russian people.

When Putin came to power in 2000, he promised stability and economic growth, while he told people to keep quiet and stay out of politics. He arrived at a laid table with rising oil prices, giving Russia eminent economic growth of 7 percent a year until 2008, so people consented.

Alas, Putin did not develop Russia’s weak institutions. On the contrary, he gradually ground them down. Russian businessmen saw what was happening and exported their capital to safer lands. Poor institutions and large capital flight have kept Russia’s investment persistently low, rendering Russia’s economy stagnant since 2009.

Thus, Putin has violated his implicit social contract with the Russian people. He no longer delivers economic growth or rising standards of living. Instead, he has delivered increased repression and lawlessness.

Putin needs another source of legitimacy. He has chosen to hark back on the old tsarist idea of useful “small, victorious wars.” His five-day war in Georgia in August 2008 was a great domestic success and so was his annexation of Crimea in 2014.

Each took his popularity rating to the unprecedented height of 88 percent. His later wars in eastern Ukraine and Syria, however, have been neither victorious nor popular.

Even small wars are costly, especially if they unleash substantial foreign sanctions, as Putin’s war in Ukraine has done. I have estimated that the combined cost of Russia’s wars and the Western sanctions is 3-4 percent of GDP every year since 2014.

These wars condemn Russia to economic stagnation for as long as they last, and the West is persistently ratcheting up its sanctions on Russia.

Putin has promised to make his friends whole. In 2017, he signed a law that guarantees full compensation to individuals that suffer losses from hostile foreign sanctions. The U.S. Treasury claims that it has imposed costs of $3 billion apiece on the Russian businessmen Oleg Deripaska and Viktor Vekselberg, who were sanctioned last April. If Putin were to adhere to his own law, he would compensate these billionaires fully.

Curiously, Putin wants to take the money from the poor and give it to the billionaires, putting this financial burden squarely on the Russian people. During the four years of 2014-17, real disposable incomes fell by a total of no less than 17 percent, and investment slumped by 12 percent.

On June 16, as the World Cup was about to begin in Russia, Prime Minister Dmitri Medvedev announced two major “reforms.” The government would raise the retirement age for men from 60 to 65 and for women from 55 to 63 and the value-added tax (VAT) would be increased from 18 to 20 percent.

The State Duma quickly adopted VAT hike without significant protests, adding 0.5 percent of GDP to the state revenues.

To raise the retirement age proved much more difficult. Opinion polls show that only 8 percent approve, while 89 percent opposes it. Other post-Communist countries have carried out this unpopular but necessary reform long ago, but in 2005, Putin unwisely promised it would not happen in Russia as long as he was president.

The State Duma adopted the pension reform in a first reading last June, but only United Russia supported it, while the three largely-fictitious opposition parties voted against it. The Communist Party had little choice because it operates as a trade union for pensioners. It has organized extensive protests, as has the liberal opposition leader Alexey Navalny.

Uncharacteristically, on Aug. 29, Putin took ownership of the pension reform with a major television address to the nation. He made one concession. The retirement age for women would be increased from 55 to 60, instead of 63.

Putin explained at length why the reform was necessary, focusing on Russia’s demographic situation. He was uncommonly upright, even citing his promise from 2005, but he explained that the situation had changed.

Yet, Putin omitted that the pension reform redistributes funds from the poor to the very wealthy. The official excuse is that the money will go to infrastructure investment, but Russians know that much of such funding is pocketed by Putin’s friends.

The political reaction became apparent in the regional elections in some of Russia’s 85 regions in September. In the first round, United Russia lost three governorships to the communists, and in the second round, lost two more to Vladimir Zhirinovsky’s nationalists.

Participation was low, and the winning candidates were selected by the Kremlin as technical candidates without any chance to win. This appeared to be a pure protest vote.

The Kremlin is clearly out of balance. Putin’s favorite bodyguard, General Viktor Zolotov, commander of the National Guard, challenged the unmentionable Navalny to a duel in a video. Russian politologists interpreted this as him lacking access to Putin.

Putin has cold nerves and he has resolved prior storms. He is meeting one regional governor after another to regroup his troops. On Sep. 26, the Duma adopted the revised pension reform, though still with support only from United Russia.

Putin may benefit from some foreign destabilization once again, but more U.S. sanctions are likely in November.

Anders Åslund is a senior fellow at the Atlantic Council and author of a forthcoming book on crony capitalism in Russia.