Grayling Blog

Should Foreign Investors Fret Over Change of Leadership in Moscow?

Posted on 27.09.2010 by Vladimir Melnikov

For the Russian media, public at large and ‘Kremlinologists’ this summer’s hottest topic has been whether the 18-year reign of Mayor of Moscow Yury Luzhkov would be brought to an end. One of the gargantuan figures, if only metaphorically, of the Russian political scene since the fall of the USSR, some foreigners might forget he was once seriously touted as a rival to Vladimir Putin for the Federal Presidency, back in 2000. Today President Medvedev seemed to ‘dump his stabilizers’ and ride the Presidential bike on his own: he very publicly fired Mayor Luzhkov and, in Russia, this has started a debate about whether Medvedev is his own man now, or whether he is still the tool of Prime Minister Putin. Some people assumed Medvedev didn’t have the realpolitik power to depose the Moscow Mayor-Tsar, even if he has the clear constitutional power (the City of Moscow is a Federal district whose mayor is a Presidential appointee).

Picture Source: http://ru.reuters.com/

“No, foreign investors will be fine” is the general tone of today’s publications
(see http://www.vedomosti.ru/finance/analytics/18991/kak_povliyaet_otstavka_luzh#ixzz10okl5Vly <http://www.vedomosti.ru/finance/analytics/18991/kak_povliyaet_otstavka_luzh#ixzz10okl5Vly> or http://vremya.ru/2010/175/51/261809.html <

At the same time it is crystal-clear for everyone that Luzhkov’s “localism” in managing Moscow will be replaced by a more federal approach. What are the implications? Moscow is much richer than St. Petersburg or any other region in the Russian Federation. The most sharp contrast is between overflowing Moscow city’s budget and the dire straits of the Moscow region’s finances (remembering that the 11 million Moscow City is a separate Federal district from the ‘doughnut ring’ Moscow Oblast of some 7 million which surrounds it). It is therefore likely that for the new “Federal” team which Medvedev will appoint to run the City, an issue of uniting Moscow city and the Moscow region, or redistribution of financial flows within the territories of these regions, will be put back on the agenda fairly soon.

It is also noticeable that the United Russia ruling political party keeps banging on about sky-rocketing realty prices under Luzhkov, which will probably mean more populist measures to drive the cost down for public welfare housing and, correspondingly, more pressure on the city’s social expenditures. The ousted Mayor’s wife, Yelena Baturina, has become Russia’s richest woman from construction, and largely from the Moscow City budget, and this has been known for years; but only recently – by Presidential insistence – have Russian state media been highlighting this fact.

Retail companies operating in Moscow is a different story. It may well be they will see a sharp change of the city’s policy which currently seems to focus on letting big chains build hypermarkets close to the centre of the city. Luzhkov’s management system is corrupted at the highest level but is working quite efficiently to get stable income to the city’s budget (“Greed works” as Gordon Gekko would say). It may well be that with the arrival of the new Federal team there will be some failures of the system in terms of filling in the Moscow budget. That may be balanced temporarily by Federal methods: making some of the big companies register back in Moscow to pay taxes there or through a redistribution of financial flows between the federal and Moscow budgets. However, in the long term, we are sure to see a global redistribution of the monies “earned” in Moscow for Federal needs. How these needs will evolve and how these will be spent, post-2012 (the next Presidential Election), is a big question.