Moscow’s worst terrorist attack for six years has shaken Russia, a country used to turmoil and tragedy. For much of its history, it has striven for greatness and modernity, only to be threatened with the atavistic forces of chaos and reaction.

In the North Caucasus, 900 people died violently last year in Europe’s only remaining civil war, a legacy of the post-cold war chaos that once enveloped Russia.

In some sense, the bombings are a verdict on the Kremlin’s model of rule in this southern, mountainous, and mainly Muslim rim. By supporting strong warlords, who pay loyalty to the Kremlin in exchange for a free hand to rule as they see fit, the local population has been alienated by corruption and brutalised with impunity. Fighting, some say, is the last resort of the desperate.

This semi-feudal model of rule is not unique to the troubled southern republics, but is applied with variations across Russia’s 83 provinces and autonomous regions. Governors are appointed, and few questions are asked, so long as they deliver stability and loyalty. Largesse from an oil-fuelled state budget that is 40 per cent of the country’s GDP has bought both.

This model worked for much of the past decade, but is starting to unravel. Increasing protest across Russia’s heartland shows that this “social contract” of political passivity in exchange for rising living standards may be coming to an end.

In many regions, federal subsidies have been cut, forcing local tax rises that have ignited protests, notably the “day of rage” demonstrations in some 50 cities on March 20. Many protestors called for the return of governors’ elections and, for the first time, even the resignation of Vladimir Putin.

Most citizens do not feel that the economy is improving, though on paper it is. “A year ago the middle class had savings,” says Gleb Pavlovsky, a political consultant to the Kremlin, “but today the savings are practically exhausted. This is a situation we have not been in for 10 years.”

However, Russia is far from being a country on its back – after an 8 per cent decline in 2009, economic growth rose for the first time in January, with year-on-year growth of 5 per cent – and the protest movement is too sporadic so far to topple anyone.

The country’s response to the crisis was well calibrated – the devaluation of the rouble was controlled, and has been largely erased by recent gains. But the crisis exposed the flaws of an economy still dependent on exporting raw materials, and seemingly incapable of moving up the value chain.

Until 2009, economic achievements were substantial. In nine years, real GDP more than doubled, as did real incomes. However the ease with which this achievement was reversed last year has analysts asking whether the reasons for underdevelopment are more deeply ingrained than thought.

Many experts are unsure whether Russia deserves to be in the top tier of emerging economies, the R in the Bric acronym, or whether it is destined to muddle through as a cantankerous supplier of raw materials. 

The country has its advantages. It is a world leader in many high-tech sectors, such as aerospace and armaments. Boeing, the US aviation company, operates a design centre and develops much of its software in Moscow. The recent conclusion of a treaty with the US to reduce stockpiles of nuclear weapons has raised Russia’s profile on the international stage.

The state, meanwhile, is awash with money, and not afraid to throw it at problems. But a dysfunctional government – “legal nihilism” in the words of president Dmitry Medvedev – and pervasive corruption, make private sector investment a risky proposition.

The inability to mobilise domestic resources of capital was graphically demonstrated by the crisis. When foreign lending dried up in 2008, the banking system, dependent on these credits, proved incapable of coping. Although there was no large bank failure as in the US and the UK, the financial system is crammed with bad debts and has largely stopped being a source of credit to the economy.

This exacerbates a pattern of chronic underinvestment that has plagued Russia since before the end of the Soviet Union. The economy is geared primarily towards consumption, rather than investment.

“Economically, it [looks like] the Soviet Union more and more,” says Peter Aven, president of the private Alfa Bank. “There is a huge dependency on oil, a need for capital, a need for serious reforms, while the social burden is very strong. Stagnation is the main threat,” he says.

To move forward, much will depend on political leadership, tightly held by the duo of President Dmitry Med­vedev and Prime Minister Vladimir Putin, who brought his protégé to power in 2008 after his constitutionally allotted two terms as president.

Mr Medvedev has sought to cut himself a political identity separate from his mentor by criticising the ways of the past and championing modernisation, starting with an article in September 2009 called “Russia Forward”.

Few oppose modernisation in principle, but the way it is done and by whom has provoked a behind-the-scenes struggle between supporters of Mr Medvedev and those of Mr Putin.

Late last year, this clash of ideologies broke into the open at the congress of United Russia, the ruling party. United Russia proposed a new ideological initiative entitled “Russian conservatism”. Mr Medvedev chastised the party for being hidebound and championed modernisation. The party compromised, putting forth a modified platform of “conservative modernisation”.

“The problem is that when we talk of conservatism, this is not the conservatism of Thatcher. This is the conservatism of Brezhnev,” says Aleksei Makarkin of the Center for Political Technologies in Moscow. “It is not a conservatism of ideology, but a conservatism of instinct, a desire for stability, a desire to live today like yesterday.”

The struggle continued in February, when Igor Yurgens, a key adviser to Mr Medvedev, claimed that the only way to achieve true modernisation was through sweeping liberal reforms.

But hopes that Mr Yurgens’ proposal would carry any weight were quickly checked by Vladislav Surkov, Mr Medvedev’s powerful deputy chief of staff. Soon after Mr Yurgen’s call, Mr Surkov gave an interview to Vedomosti, a business newspaper, saying the country would remain on the path of “authoritarian modernisation”. He announced the creation of a Russian “Silicon valley”, a 70-hectare development in a Moscow suburb, to entice foreign investors and homegrown start-ups.

Members of the elite, however, say there is little chance of modernisation without liberalising the economic – and political – playing field. Without competition, companies will have no incentive to innovate, bankers and businessmen say.

People close to Mr Medvedev say he would like to push ahead with liberal reforms, and has already begun reshuffling top bureaucrats in law enforcement agencies, in response to some high profile scandals, such as the death in custody of lawyer Sergei Magnitsky in November. To pursue his agenda, he must stay in power and cannot risk alienating his political base, and most importantly, Mr Putin, chairman of United Russia and the country’s most powerful politician.

The natural constituents for Mr Medvedev’s proposals, meanwhile, have become cynical about bold proclamations and do not trust them, or are waiting for a sign that he has the will to push his agenda through the establishment.

“Medvedev’s problem in advancing modernisation is that he has no one he can rely on,” says Mr Makarkin.

Mr Pavlovsky, however, says Mr Medvedev’s political punch is increasing, as power and functions are slowly transferred to him. The tandem, as most refer to the arrangement, “is now a proper political alliance”, he says.

But any hope for a more liberal agenda from Mr Medvedev will depend on whether he can remain as president for a second term in 2012. This is a question that has transfixed the Russian establishment. Most assume Mr Putin can simply take the job back if he wants it, but Mr Pavlovsky says the question of the succession is not simple.

“It will depend on the two men deciding. I think they were hoping the choice would be obvious, but I am now not so sure it will be.”

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