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PP RUEHDBU
DE RUEHMO #1562/01 1661118
ZNY CCCCC ZZH
P 151118Z JUN 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3792
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001562 

SIPDIS 

E.O. 12958: DECL: 06/15/2018 
TAGS: PGOV PHUM PINR RS SOCI
SUBJECT: PUTIN, PIKALEVO, AND THE FAILURE OF THE POWER 
VERTICAL 

REF: A. MOSCOW 1538 
¶B. ST PETERSBURG 00068 
¶C. MOSCOW 00180 

Classified By: Ambassador John Beyrle. Reason: 1.4 (d). 

¶1. (C) Summary. The events two weeks ago in the northwestern 
town of Pikalevo, in which frustrated workers in three small, 
idled plants blocked a federal highway to draw attention to 
their plight, demonstrated the failures of Russia's "vertical 
of power" and gave insight into the balance of power within 
the elite (Ref B). That the impasse required the involvement 
of Prime Minister Putin -- the man "responsible for 
everything" in Russia -- illustrated the weakness of the 
federal system, in which poorly connected governors have few 
levers to influence the Moscow-based financial industrial 
groups close to the Kremlin. Moreover, none of the 
institutions designed to protect citizen interests 
functioned: labor unions, political parties, or even state 
institutions like the Federal Anti-Monopoly Service could not 
bring about a solution (even after President Medvedev 
reportedly told the Leningrad Oblast Governor Serdyukov to 
fix the problem in March). Experts are divided on the logic 
behind Putin's decision to make a public spectacle out of 
Pikalevo, but nearly all see his involvement after an 
independent demonstration by ordinary citizens as a likely 
catalyst for more localized protests by other dissatisfied 
groups, seeking to attract the Prime Minister's attention in 
the coming months. End Summary. 

The System Failed 
----------------- 

¶2. (C) The economic crisis is testing the "Putin system" of 
administration, established during 8-years of strong economic 
growth to establish central control over the county and 
maintain socio-economic stability. The points of pressure are 
found in widely dispersed "one-company towns" across Russia, 
where less efficient and less advanced companies, 
particularly in metallurgy and machine building, are failing. 
As such, the chances of localized protests -- a "bunt" of 
frustrated workers -- are increasing, potentially creating a 
crisis of confidence within the tandem. 

¶3. (C) The Pikalevo situation highlighted the weakness of 
Russia's federal structure. After Putin's reforms, governors 
serve at Moscow's pleasure and are judged less by their 
effectiveness as leaders or ability to solve local problems 
than by their resolute support for central authorities 
(demonstrated in their management of regional elections to 
secure the party of power, United Russia) and their ability 
to maintain political and social stability. According to 
XXXXXXXXXXXX, political and tax reforms over
the past years have curtailed the governors' influence
over the budget and reduced their authority to make
decisions without Moscow's approval. 
Economic prosperity, fueled by high energy prices, helped to 
mask the weakening of regional leadership; the crisis had 
made it more acute. 

¶4. (C) The case with Leningrad Oblast Governor Serdyukov
in connection with Pikalevo illustrates the problem of 
ineffective regional leadership. XXXXXXXXXXXX blamed
the Serdyukov's incompetence and the  local mayor's
"unprofessionalism" for allowing the problem to  fester.
XXXXXXXXXXXX had a more positive assessment
of Serdyukov, but noted that a "second tier" governor had no
ability to tell the well-connected Deripaska what to do –
- only the heavyweights had sufficient authority to challenge
 members of the tandem's inner circle. No matter what the
assessment of Serdyukov  "the man," his loyalties remained
primarily tied to keeping  Moscow's favor, leading him to cover
over the deteriorating  situation in Pikalevo by emphasizing
new investment projects,  like the Nissan factory that Putin
opened on June 2. 

¶5. (C) XXXXXXXXXXXX also has identified a second element
 that  led to Pikalevo: a crisis of dialogue between the political 
leadership (vlast) and society, in which any attempt to draw 
attention to serious problems are treated as a threat to the 
system and the regime. XXXXXXXXXXXX
noted the fate of Yuriy Onoprienko, the Speaker of 
the Khabarovsk Kray legislature, who was fired by United 
Russia after deputies there sent a letter to Putin requesting 
that tariffs for energy not be increased because of the 
economic crisis. Similarly, XXXXXXXXXXXX drew the ire 
of the pro-Kremlin press and almost faced charges of 
"extremism" XXXXXXXXXXXX. Now, he and others who have 
criticized the tandem's anti-crisis package are finding 

MOSCOW 00001562 002 OF 003 


themselves vindicated, although without any recognition from 
the authorities. The regime has also shown little tolerance 
for criticism from society; last December Moscow-based OMON 
police forces used force to dispel protests in Vladivostok 
against increased tariffs on imported automobiles. Deputy 
Prime Minister Igor Sechin dismissed the protests as the 
actions of "scoundrels" while United Russia Duma officials 
insinuated that the presence of Japanese flags by the 
protesters signaled instigation from overseas (Ref C). 

¶6. (C) Ultimately, commentators argue the crisis at Pikalevo 
resulted from the shortcomings of the tandem's crisis plan, 
which emphasizes maintaining employment (even with 
substantially reduced salaries) over accepting the pain of 
economic restructuring of inefficient and unprofitable 
enterprises. XXXXXXXXXXXX told us "the factories should be 
closed" and he admitted that Putin's solution does not solve 
the problem of a lack of demand for aluminum -- the catalyst 
behind the plants' closure. Thus far, the administration's 
response has been to demand more action on the part of 
regional and local leaders to follow through with the plans 
to maintain employment and stop wage arrears. 

¶7. (C) After Pikalevo, the central leadership made no 
reassessment of its strategy, but instead used the whip to 
put more pressure on regional leaders to follow through with 
the "stability" agenda. Medvedev on June 10 threatened 
regional leaders with dismissal if they fail to get wage 
arrears and unemployment under control -- telling them to 
"stop hiding under the table" and take charge of negotiating 
with industries and workers' collectives. Kremlin ideologue 
Vladislav Surkov told a conference of municipal heads that 
government at all levels should become "more open" and 
engaged in dialogue with society. However, as
XXXXXXXXXXXX  explained to us, this anti-crisis policy
rests on a fragile  social compromise, in which businesses keep
workers on the  books, albeit with reduced pay and hours;
local and regional  elites trumpet low unemployment; and
the populace patiently accepts the cuts in the hopes of 
improved wages "after the  crisis." As in the Pikalevo case,
that comprise can break down quickly if an owner's fears 
about consequences for  letting arrears pile up or firing
staff are less than the  possible gains for letting uneconomic
enterprises collapse.  Ordering governors to be more assertive
does little to  provide them political power to actually follow
through on  the assignment, especially against powerful oligarchs. 

Large and in Charge 
------------------- 

¶8. (C) Putin's intervention in Pikalevo also raised questions 
about balance of power within the tandem. XXXXXXXXXXXX
asked why Putin, and not Medvedev, was dispatched to the town
an issue that many here are  puzzling over. Some argue,
XXXXXXXXXXXX, that the showdown between Putin and Oleg
Deripaska was staged political theater. Since the money to revive the
BazelTsement came through government loans in an agreement
between the two before the visit,  XXXXXXXXXXXX saw no reason
 for the Prime Minister to go to Pikalevo except to show the masses
his ability to battle the  hated oligarchs. (XXXXXXXXXXXX also
claimed that the proposal  to nationalize the three plants in Pikalevo
was a conspiracy  between Deripaska and the two United Russia
deputies who  drafted the proposal, since Deripaska would have loved to 
unload the debt-ridden and inefficient firm on the  taxpayers.) In an
earlier conversation with Embassy,  XXXXXXXXXXXX had argued
that he saw Medvedev as confidently in  control and serving as "the"
President of Russia, suggesting that he sees Putin's involvement as a
way of asserting his continued political importance. 

¶9. (C) XXXXXXXXXXXX's argument runs against the conventional 
wisdom that Putin remains the fulcrum of power in the tandem. 
Others explained the Prime Minister's intervention as another 
illustration of Putin's continued position as the arbiter 
amongst the Kremlin clans. Indeed, Medvedev had given 
Serdyukov clear instructions to resolve the impasse over 
BazelTsement in March, but did not follow through to see that 
his instructions were implemented. We do not know if Medvedev 
himself directed Putin to take action in Pikalevo, or was 
even apprised of the Prime Minister's intentions. Whatever 
the case behind the scenes, Putin's intervention provided a 
clear signal to the elite and society that he remains the 
tandem's decision implementer. As XXXXXXXXXXXX
described it,  Putin's trip to Pikalevo showed that "he's the tsar, he 
decides all problems." 

¶10. (C) The laurels of the "tsar" come with heavy 
responsibility and nearly all independent observers agree 
that Putin's intervention will have the likely consequence of 

MOSCOW 00001562 003 OF 003 


more localized protests. The success of the Pikalevo workers' 
highway blockade provides a model for other disgruntled or 
frustrated workers in other "one-company towns" to attract 
top-level attention to their problems. Medvedev's caution to 
the governors June 10 that the center will no longer send 
"someone" to resolve local issues had far less flash than 
Putin's actions on June 4. 

Comment 
------- 

¶11. (C) Putin's Pikalevo intervention, followed by his 
surprise announcement that Russia would drop its independent 
bid for WTO accession in lieu of a joint bid with Kazakhstan 
and Belarus (Ref A), has put the Prime Minister in the 
spotlight at the expense of Medvedev. Medvedev appears to be 
playing "catch up" through his tough talk to the PolPreds 
(his representatives to regional blocs) on June 10 and a 
photo op sighting down the barrel of a sniper scope in 
Makachkala (after the murder of the head of the local 
Internal Affairs Minister). Pikalevo served to confirm the 
stereotypes about the two men -- Medvedev is a man of words, 
hobnobbing with Western businessmen in St. Petersburg; Putin 
is the man of action, setting the oligarchs straight in the 
provinces. Neither appears to see fully the systemic problems 
inherent in the Putin system, but Medvedev at a minimum seems 
more open to hearing a broader range of criticism. Putin 
apparently retains his conspiratorial worldview, even 
muttering about the Pikalevo protest being the result of 
forces colluding to stop him from coming to the town. If the 
situation deteriorates in the coming months with a surge of 
localized protest, Medvedev may be in a better position to 
promote a reform agenda that tackles the underlying issues, 
rather that papering over problems with a diminishing pot of 
government money. 
BEYRLE
..