Interviews, INVESTMENT CLIMATE

Dmitry Orlov: No envy for governors’ fortune

Appointment of new governors is a major component of Russia’s political life. The way federal authorities judge performance of the regional governments is nowadays the key factor impacting policies of local administrations and ultimately affecting both population and businesses. The criteria applied by the federal authorities to the governors and the main principles of the Kremlin’s regional policies were discussed by Invest Foresight with a renown politologist Dmitry Orlov, Agency of Political and Economic Communications’ CEO.

– Mr Orlov, are we currently observing a new wave of governors’ rotations? Or should it be expected that such a wave will commence after the presidential election in Russia?

– Renewal of the governors’ corps is indeed coming recently in some sort of waves. As a rule, they are seasonal, happening in spring and autumn. I believe after the election there will be another wave of authorities reshuffle in a broad context. The federal government and other agencies as well as the gubernatorial ranks will be substantially revamped so that by the September regional election local and regional authorities are represented by new political figures.

– In your view, what are key reference points for the Kremlin’s valuation of the governors’ performance?

– The key criterion is a cumulative efficacy. The said efficacy incorporates some other criteria. Absence of any financial burden, for example. As a matter of fact, a governor should be a government servant and nothing else. A governor should not have any obligations to major financial and industrial groups that could threaten the region’s financial standing. He should not have any obligations to his entourage. He must be a manager, not a financial manager or a misappropriator of budgetary funds. Besides, the efficacy should be appreciated by the residents. If a governor is explicitly unpopular, he should in some while (certainly, not instantaneously) resign.

Recently, there appeared a new key factor which in this efficiency index may be rated first. It is a financial appropriateness of the regional authorities. If some overborrowing takes place, if a region can not honor its financial liabilities, that is a major reason for a governor’s resignation and for all sorts of reclamations to the governor.

These days, a governor finds himself in a tricky situation. He is to be efficient, financially solid, appreciated by the residents and successful in developing the region. That requires substantial managerial, personal, and political qualities from the appointees to such positions.

– Having observed for some five or more years the way relationships between federal authorities and regional governors develop, one may say that the criteria we have mentioned have evolved, with priorities changing places.

– The situation is certainly evolving, and that includes lower cost intensiveness and financial efficiency. Lower cost intensiveness, in a broad sense, means absence of financial obligations towards the inner circle or some federal clans. It also means inexpensive policies when a governor can not give any population strata any essential commitments which may overburden regional budget. Those are the criteria that recently gained priority. As for the approval ratings and population apprehension, these criteria have existed for long and are not varying.

– When business media writes about governors and assesses their performance, it primarily pays attention to their ability to attract investors, ensure investment attractiveness, ‘present’ their regions to investors, preferably those from abroad. Is that of any significance for the federal authorities?

– Certainly. N ability to deal with investors is after all a component of a more general matter, whether a governor is capable of fuelling the region’s development. That includes infrastructure, attracting investors, building hotels, restaurants, new industrial facilities, launching new touristic routes, promoting regional brands, setting and building up new industrial clusters. And a governor should not thrive on the easily available resources, but develop his region. That is another element complicating his work.

– Lately, because of the sanctions application, capitals repatriation to Russia is becoming visible. Clearly, the capitals are not repatriated by Moscovites only. Do you think there should be some conditions ensured for the capitals returning to Russia to be invested regionally?

– No doubt. Capitals are guided by a simple motive, a rate of return and an ability of a capital facility to generate profits. So an investment should first of all be secure, and second, high-yielding. For the current financial flows to Russia, the regional businesses capable of ensuring these two conditions will certainly be attractive in terms of investments. It should be noted such flows are quite active and even influence the national currency exchange rate. It is a true fact that there is an inflow of capitals which some while ago were moved to other jurisdictions and now look for high profitability application. If regional governments and regional businesses are able to offer higher profits than, for instance, the returns on federal bonds or some other securities currently offered by the Finance Ministry, the money will undoubtedly flow there. But there should be high profitability and repayment guaranties ensured, and the money will move in.

– In the current situation of imposed sanctions when Russia is toxic in the view of foreign investors, may it be said that regional authorities get an extra mandate or an extra obligation to follow their own foreign policies and external economic policies?

– No. No one is entitled to pursue one’s own policies. In this country, we have some tough restrictions in that regard, and the reasons are quite understandable. The policies are either conducted by the respectively authorized federal agencies or become fragmentized and atomized among numerous centers. I do not think Russia’s regions have been entitled to independently shape some foreign policies or negotiate Russia’s positions in some sphere.

External economic relations is a different matter. Anyone capable to ensure capital inflow, will be seen by the federal authorities as a positive economic agent. The regions therefore have the broadest options for action. Therefore, capitals repatriation, foreign economic ties, broad international business contacts are always welcome, but such communications must not be politically motivated which is absolutely impermissible.

– What is presently happening to powers distribution between the center and the regions, between the federal and regional authorities? Federal authorities have their own local offices and branches which in fact are additional decision-making centers, independent of the governors. May some trends or changes be noted in this respect? Is Russia now moving toward centralization or decentralization?

– In my opinion, in this regard the situation is rather stable. If there is some centralization process, it is quite careful and selective. At times, some steps are also made aimed at a smooth powers decentralization. Generally speaking, I would say the situation is now balanced and only evolves in some minor aspects and to a minor extent.

– As for the government subsidies, Russia has a mechanism redistributing funds from a narrow group of donor regions to a much broader spectrum of recipient regions. Some regions get huge subsidies while others only get minor support. Is the existing system to be reformed? Do the regions put forward any demands, for example, to be able to keep a greater share of taxes for their own use?

– Donor regions are understandably attempting to reduce their financial obligations which emerge through budgetary priorities redistribution. It should be noted though, their choice of the advocates of the idea was not very good. It is not fortunate the idea is manifested by Rustam Minnikhanov, the head of Tatarstan, who has been conflicting with federal authorities for 1.5 years. In general terms, donors are never happy, while recipients never have enough. That will always result in behind-the-scenes and public political struggles. It is evident though that subsidies will remain forever and can not be avoided. For donor regions, a reasonable approach may be making a low profile agreement on gradual cuts in their contributions. The public steps made by Rustam Minnikhanov can only undermine influence and potential of the Russian Federation entities. The relationships should certainly be harmonized, but the situations differ from one region to another and some kind of a financial redistribution is unavoidable.

– Former governor Nikita Belykh was sentenced to an eight years term. Many officials of the former team were recently arrested in Daghestan. Do you anticipate a further power politics pressure on the regional bureaucracies?

– I would not call that power politics. In respect of Daghestan, it is more a tough anti-corruption policy. It was not without reason that Vladimir Vasiliev, former member of the parliament and police general, was appointed to head Daghestan. I assume regional authorities will face a fundamental cleanup. In fact, it is already happening. But that will not be a one-off raid, but a systemic process. I believe similar developments will take place in other regions as well, which is not surprising at all. That is a trend in the federal policies which has been visible for a few years already, and it is a core of the federal policies towards regions.

– Ten years ago, it was unimaginable Russia would become a major agricultural exporter and its revenues from agricultural exports could exceed military exports incomes. Can agriculture become a driving force for economic growth in beneficiary regions?

– Certainly. There may be various driving forces. It can be a digital economy in the regions which do not have a developed agriculture or energy sector. It can be services which are in demand. One should not just endlessly complain about insurmountable dependence on raw materials, low manpower productivity, etc. One should simply work hard, that’s it. The example of agriculture is in this regard most illustrative, since that is the industry which in the USSR was seen as inefficient and was heavily subsidies for decades, while now it is a most powerful sector, a driving force behind country’s economic growth, and it is comparable in its scale and effectiveness to the agriculture of the Russian Empire of the late 19th and early 20th centuries. Production of oil and commodities in general can also be driving forces. There may occur changes in the sector of raw materials extraction and processing. It is in fact already happening. For example, what was the market share of Euro 5 standard fuel five years ago and what is it now? But it is a more sophisticated and more expensive product of a higher quality. That is what should be happening in the industry of commodities processing. Companies should not sell crude oil, but derivative products which should be of a constantly improving quality and growing added value. That is possible and is already happening. That should be the case for all sectors of Russia’s economy.

– Therefore, can a digital economy help Russian recipient regions?

– Such regions can establish enterprises, quasibanks, financial companies, new corporations to engage in blockchain transactions, and they all may be granted favorable conditions. I should point out that at some moment Switzerland became the leader of the banking industry by pure accident. It was due to the preferential terms and conditions ensured there for such sort of activities. Similar preferential conditions can be arranged for blockchain and digital economy in Russian regions which do not have rich mineral resources. Rest assured, that could trigger most dramatic positive shifts and create a totally new sector of the national economy out of thin air. That sector does not require mineral resources or any specific conditions to develop, it can be launched truly anywhere.

– If a name of whatever Russian region or city is typed in a news web search engine, the first one or two dozen links will lead to the news on problems, hardships and miseries.

– A newsflow has a certain structure. It took shape nearly a century ago and will hardly change. News are bad news, that is inevitable. Good news are no news, even when they do appear in the headlines, they are gone quite shortly and do not attract any attention since they do not irritate readers and do not impel thinking and discussion. So that is not a problem at all. It is not a problem of a news stream, but of some particular efforts to be made by the federal center, regional authorities and market players. One should not care about the news but about developing regions.

By Konstantin Frumkin and Sergei Nikulin

Previous ArticleNext Article

Leave a Reply

Your email address will not be published. Required fields are marked *