Puppet Show, Act 5: Yeltsin Fires Another Prime Minister

The appointment of Vladimir Putin raises the question of whether the Kremlin wants to postpone the coming elections.
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MOSCOW -- Markets reacted sharply, if briefly, when Russian President Boris Yeltsin Monday fired Prime Minister Sergei Stepashin, naming Vladimir Putin acting prime minister and anointing Putin his successor-in-waiting. But in the end, this move amounts to more of the same on the Russian political front.

After plunging more than 11% in morning trading, the

Russian Trading System Index

rebounded nearly 10% to close just 1.4% lower, as market participants shrugged off the change. Yeltsin has now axed four prime ministers in the past 17 months. With Russian parliamentary elections in December and presidential elections looming in July 2000, fears run rampant that the sacking is part of the intrigue of the "Family," the Kremlin insiders believed to pull the strings on the muddled puppet that is Boris Yeltsin.

Although intricate political maneuvering has become largely disconnected from Russian markets, added instability and uncertainty -- and the increased prospect of extraconstitutional measures -- give investors an excuse to take profits in what has been one of the world's best-performing equity market, up 73% so far in 1999. More worrisome is that world markets are unlikely to react positively in the coming months if the future of democracy in Russia appears headed for the rocks.

The Kremlin has good cause to be concerned that its hold on the reins of power -- at least via legal means -- is slipping. Last week's alliance between two of the stronger opposition parties --

Fatherland

, the party of Moscow Mayor Yuri Luzhkov, and

All Russia

, a collection of powerful regional leaders -- represents a major threat to the Kremlin's aspirations of having its own man elected.

Despite the oceans of money and months of state-mandated media coverage guaranteed to Putin as the official presidential candidate of the party of power, Yeltsin's single-digit approval ratings and the universal distrust of the Family mean that the Kremlin's candidate faces an uphill battle.

Ironically, that he is the chosen candidate of the Kremlin is likely to be Putin's greatest liability. Otherwise, he is a largely unknown quantity distinguished only by his loyalty to Yeltsin and by the fact that he heads up the

FSB

, the

KGB's

successor and arguably the most powerful government ministry in Russia. His nomination suggests that the Kremlin may be gearing up to ensure that its candidate wins -- by fair means or otherwise.

Yeltsin and the Family -- composed of Yeltsin's daughter Tatiana Dyachenko, oligarch Boris Berezovsky, Kremlin Chief of Staff Alexander Voloshin and a few others -- have good reason to be scared. If they are unable to get their man elected, political opponents will be able to wage political revenge by trying them and confiscating their ill-earned assets. Yeltsin, whom the

Duma

, the lower house of parliament, failed to impeach earlier this year, would likely face criminal prosecution and a retirement in prison, rather than on the French Riviera. The key question remains whether Yeltsin is willing to sacrifice his democratic ideals on the altar of self-preservation or whether he and his cronies can cut a deal with the likely future administration, thus permitting elections to move forward in at least a somewhat democratic fashion.

Stepashin was shown the door in part because the Kremlin didn't view him as enough of an insider. When he was named prime minister to succeed

Yevgeny Primakov

this past May, Stepashin was widely regarded as a stopgap stooge until the Kremlin decided whom to support for the presidential elections. The option of somehow forging an alliance with the opposition failed upon the announcement of the joining of forces of Fatherland and All Russia last week -- so Stepashin had to go. Stepashin will also likely take the blame for the steady escalation of hostilities in the Caucuses, which was the site of Russia's bloody defeat at the hands of breakaway republic Chechnya in 1996. Ironically, Stepashin has made something of a career as a professional fall guy: He also took a large share of the blame for Russia's defeat at that time.

Now it falls to Putin to solve the next Caucuses crisis, which over the weekend moved closer toward outright war. An option that the Kremlin is rumored to be considering, as a way to hold on to power, is to declare a state of emergency on the basis of hostilities in the Caucuses -- thus allowing for the indefinite postponement of elections. Putin, whose finger is on the pulse of the power ministries of the Russian government thanks to a career in the KGB, is unlikely to apply a soft touch in the conflict. Escalation, in fact, could even serve the cynical ends of the government, if it were to provide a pretense for the suspension of elections.

On Aug. 16, the Duma is due to vote on the new prime minister. A rejection of the Kremlin's candidate would lead to the dissolution of the body, and potentially call into question whether fresh elections will be held as scheduled on Dec. 19, despite Yeltsin's announcement Monday that parliamentary elections will take place as planned.

If it stands up to Yeltsin by refusing to give the nod to yet another prime minister, Duma members would make their own re-election campaigns (assuming, again, that elections are not called off) considerably more difficult, as they would have to make do without the advantages of holding office. Alternatively, if the Duma rolls over yet again by confirming the latest Kremlin favorite, it will even further discredit itself in the eyes of the public, making a credible re-election campaign all the more difficult. The Communist Party, as the largest faction in the Duma, clearly has the most to lose.

In any case, the political temperature in Moscow is still rising. And the prospects for the future of Boris Yeltsin, and of democracy in Russia, remain as hazy as ever.

Kim Iskyan is an equity strategist and senior analyst at Moscow-based brokerage firm and investment bank MFK Renaissance. Iskyan began his career at the emerging markets trading desk of Oppenheimer & Co. At the time of publication, he held no positions mentioned in this column, though positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.