Down to Business: SOEs and the 2018 Election

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“We’re part of a big and great country!” Source: Federal News Agency

Between the latest on investigations into the Trump camp’s Moscow ties and widespread protests this weekend, Russia has been in the news quite a bit in the past week. But two recent and related pieces of news have gone largely under the radar, both with major implications for the 2018 election and beyond.  The stories concern the Kremlin’s plans to activate its state-owned enterprises (SOEs) as part of a massive get-out-the-vote operation in upcoming presidential elections and as a tool to keep track of potential instability in Russia’s struggling regions. The lack of coverage of the news belies its importance, especially given the central role that these companies continue play in Russia’s economy. While the policy is a smart short-term step, it has risks for Russia in the mid-term, particularly its reform agenda.

Corporate Mobilization

According to business newspaper Kommersant, the Kremlin plans to turn to state companies not only to boost turnout in 2018, but potentially as a basis for the whole campaign, in what experts are calling “corporate mobilization.” Per the report, the Kremlin views United Russia’s organizational resources as insufficient to secure the turnout – which reached only 47.8% in parliamentary elections this year – that president Putin needs to credibly pursue reform. The strategy would see companies such as nuclear power and research provider Rosatom and oil giant Rosneft, both of which have a presence across Russia both physically and own media holdings, turn out the vote in the cities in which they operate. One source in the report comments “if there’s a chance to work with the factories of state corporations, turnout will be 70%.” Indeed, authorities have set themselves a goal they’ve termed “70/70”: 70% turnout and 70% support for Putin.

The other news, from newspaper Vedomosti, concerns a separate move to use state corporations to keep a finger on the pulse of Russia’s regions (essentially the local equivalent of US states), at least through the elections (until May 2018). Starting next month, companies from the energy to automotive sectors will provide the Kremlin regular updates on events “that may exert a negative influence on the socio-economic situation in the regions,” as well as suggested means to mitigate such risks. The reports go beyond the usual scope of what the companies provide the Kremlin, namely information on major events that officials can attend and build support. Several experts comment that economic concerns such as inflation and salary delays are the topics of greatest concern for the Kremlin, especially before elections.

SOE What?

The strategy marks a change in the way the Kremlin uses its state companies. SOEs around the world are frequently activated for other-than-business ends, or for tasks other than maximizing profit. In Russia they’ve been used to fund massive and wasteful infrastructure projects, keep people hired during the recent downturn, and even in preparation for the Sochi Olympics. While such actions have clear political consequences – for one, maintaining employment keeps people happy and more disposed to vote for United Russia – they are themselves not overtly political activities. Turning people out at polling places and keeping an eye on regional stability, are, on the other hand, quite overtly political.

The key medium-term risk for Russia here is not that this strategy is unlikely to succeed, it’s that it is. Putin faces a difficult domestic agenda after the elections, including unpopular items such changes to the pension system that would see a higher retirement age as well as tax hikes, and he needs the legitimacy that a meaningful electoral victory provides. State companies have a broad reach across Russia, including in many depressed one-company towns, and they provide employment to at least 6% (likely more) of Russians, some 8.6 million. Given this reach, and that many Russian directly depend on them for their livelihood, these companies are well placed to both turn out votes and keep a watchful eye out. In short, the strategy would see a huge elevation of the political importance of the Kremlin’s SOEs.

This is an issue because Russia’s single most important economic challenge right now is reducing the state’s footprint in the economy. At present, according to the National Antimonopoly Service, between the government’s direct holdings and through state companies, that figure is about 70%. The Kremlin’s economic gravity has led to tremendous inefficiency, and capped growth at a tepid 1.5-2%. Turning these companies into a critical political resource for the Kremlin makes the chance of meaningful economic reform in Russia that much more of a reach: why would officials part with a key element in maintaining domestic stability? This is a problem that will likely be exacerbated by the end of Putin’s next term. Because Russia’s political system is essentially built around Putin, whoever replaces him inherently will not have as much political influence. And what better a tool to use in building influence than the Kremlin’s economic champions? Gazprom and Rosneft may come to the rescue, but the cost could be sorely-needed reforms.

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