Dividing the spoils of deceptive democracy

What makes a candidate stand for an election that he knows he cannot win, and in the process is destined to drift to the verge of bankruptcy? As inside information on the intense struggle leading up to the Duma elections last December is beginning to leak out, a clearer picture evolves of how political and economic power is divided in today's Russia.

2007 was truly an eventful year in Russia. Information on deals, negotiations, and intrigues in the ongoing process of how to divide power and resources in the country regularly floated to the surface. Most, however, remained unknown to the general public. It soon became clear that the decisive factor was not the 2008 presidential elections, but the parliamentary ones in December for the State Duma seats. Here, defending and conquering positions, not only in parliament but also in the incoming administration, was arguably a much more important process than the ongoing Chekist struggle.

One example may illustrate this. A candidate running for a loyalist opposition party in one of the larger contitiencies used an average of USD 1 million a week during the campaign, totalling USD 6 million in the end. However, this was merely the money the candidate in question took out of his own pocket, which also must be put in perspective of the additional money he received from other funders. What is significant is that the candidate was not even running for the power party - United Russia - and knew quite well he would never get elected.

So, what makes a person spend so much money on something he beforehand knows will not result in a parliamentary seat? The question here is clearly not to succeed but merely to be in the race. For the main reason for such a candidacy is what might be acchieved in the process of running and in its aftermath. On the one hand it is a question of defending existing political and business interests, on the other to try to conquer new ground on the expense of competing interests. Needless to say, the failed candidacy resulted in an offer of a high-ranking job in the incoming administration already on the day after the elections.

Furthermore, it has become apparent that the process exemplified above has come not only to involve Russia, but also neighbouring states. Last summer, a man who for weeks had been criss-crossing the border from a neighbouring state in the end attracted the attention of customs authorities. Intercepting him, customs found a case containing USD 100.000 in cash. Questioning him, it turned out that the money was intended as campaign funds for a candidate in the upcoming Russian elections. By funding his candidacy, business circles in the neighbouring country hoped that he might protect their economic interests in relation to Russia. Apparently, the detainee had been smuggling equivalent sums on a daily basis for several weeks.

That great sums of money were in sway last year is quite apparent. Less attention has been given to the results of the struggle for political and economic positions. Another interesting observation is that United Russia's full-out victory may not have resulted in their absolute domination of government. In today's Russia, also loyal opposition may be rewarded if the candidate in question is sufficiently successful in defending the political and economic interests of himself and his backers. Even if United Russia nominally has next to absolute power, it seems that the party has to employ some sort of "trickle-down" system, to better reflect the actual situation rather than the one produced by the elections. Popular power is not always real power, it seems.

What is worrisome is the effects this may have for the current Russian government. Both Medvedev and Putin have underlined the importance of building rule of law in Russia and fighting the omnipresent malaise of corruption. However, they are put to run a power apparatus where many people have spent a lot of money to get where they are. Drained of economic resources, these people have to compensate themselves somehow to cover losses incurred. The obvious answer is to seek refuge in corruption to get back the money they have lost. Therefore, all talk of fighting the malaise seems empty, when rationality and reality among government officials assumably would result in a drastic rise in corruption.

Still, this is how spoils are divided in a deceptive democracy, and perhaps one should not be totally moralistic when knowing that these are the realities any Russian leaders have to deal with. Even if finding Russian democracy a mere mockery of the term, one should perhaps take a closer look at such informal redistribution of power. Democracy it aint, but perhaps it is a step back from the total power of Putinism feared by the West.

A Bursting Baltic Bubble?

Are the Baltic states facing an impending economic crisis? So seems to be the case, due to the current overheating of both Estonian and Latvian economies. Earlier this week, Standard & Poor's as well as Deutsche Bank warned that Latvia's economic imbalances might cause a currency devaluation. Estonia risks a similar fate in the runup to its 4 March parliamentary elections. Only Lithuania seems to be getting off scot free.

In January, Standard & Poor declared Latvia Europe's "most dynamic economy in 2007" with a GDP growth of 8.9%, and with neighbouring Estonia coming in second, with a 7.5% growth. Estonia and Latvia - along with Slovakia - are the fastest growing economies in Europe.

Growth, however, has a price. Both economies are facing an inflationary spiral with most economic indicators going wild. In the battle over customers, Latvian banks have lended money to consumers at an interest lower than the inflation rate, and Estonian banks have followed suit.

However, Latvia's problems are the most acute. Since January, economic growth has risen to 11%, by far exceeding the 6-7% that are long-term economically sustainable. High domestic demand and corporate investment rates add to the problems. The increase in imports - clearly over what the country exports - has also created a worryingly negative balance of trade.

As for the labour market, supply cannot meet demand as many Latvians work abroad. The annual wage-rises of an average 10% have so far been compensated by a corresponding growth in productivity, but this year the tendency is towards an impassable 20% rise.

What may really topple the economy, however, is the negative real interest rate combined with a high rate of public lending - largely in euro-loans. According to some sources, this has caused prices of real estate to double in recent years.

All in all, if Latvia were now to devalue its currency - the Lat - banks would be forced to compensate themselves by a drastic increase in interest rates. With loans largely in foreign currency, consumers would face acute solvency problems, potentially with a consequent crisis for the banking system. As it appears, recession seems to stand at the door.

So, what has the Latvian government done to curve inflation and battle economic overheating? Precious little, one must admit. Already last spring, Standard & Poor predicted several years' delay for Latvia's inclusion into the eurozone, postponing it for 2009-2010 at the earliest. Prognosis was based on sustained price growth, driven by demand and rising inflationary expectations. This, in itself, should have been a clear stop-sign for the Latvian government.

All the same, the Latvian economy is basically in good shape. The country's foreign debt is low and the state economy is under control. And, obviously, economy is booming. So, why waste a winning concept, seems to have been the reasoning of the government. Some measures have been made, but they have either failed or been dubious as for their effects.

Also, it is quite obvious that the government had had more reasons to be content. In October, the government coalition, led by conservative People's Party (Tautas Partija) leader Aigars Kalvītis, was the first to be re-elected since the country regained independence in 1991. No wonder the government had a laid back attitude to developments, wanting to enjoy its honeymoon with the voters as long as possible.

However, now the government has come to a rude awakening, as the situation has quickly gotten out of hand. The question is if it will dare to challenge the banking and financial sector, which - as in Estonia - belongs to its key support groups. It is questionable if the Kalvītis cabinet can rise to the challenge. In the meantime, the fear that the Baltic bubble bursts will linger on.