Putin, Medvedev Diverge as Protege Shows He Isn't a `Puppet'

By Henry Meyer

Aug. 1 (Bloomberg) -- The honeymoon between Russian President Dmitry Medvedev and Prime Minister Vladimir Putin may be over.

Medvedev's implicit accusation yesterday that his predecessor caused ``nightmares'' for business in Russia by attacking a steel and coal company was the latest sign of division.

The two have rarely been seen in public together since the May 7 presidential inauguration, though Medvedev says they speak several times a day. While Putin maintains control of foreign policy, some key allies, including First Deputy Prime Minister Igor Shuvalov, are now siding with the president.

``Medvedev does not want to remain a puppet president any longer,'' said Alexei Mukhin, director of the Center for Political Information, an independent research group in Moscow. ``He's trying to speed up a handover of power.''

For now, Medvedev's criticisms are more warning shots than a struggle for power with Putin, who is still the nation's pre- eminent politician. Putin, not Medvedev, will be traveling to Beijing next week for the opening of the Olympic Games and to meet world leaders, including U.S. President George W. Bush.

Putin's July 24 attack on OAO Mechel for alleged price fixing halved its share price and wiped more than $60 billion, or almost 9 percent, off the Russian stock market.

Shuvalov, who stands in for the prime minister when he is away, and the president's economic adviser, Arkady Dvorkovich, were among those who showed displeasure at Mechel's treatment.

Divided Loyalties

They belong to a group of Russian officials who, like Medvedev, oppose state intervention in the economy and favor foreign investment. Putin has a history of interference, including the takeover of OAO Yukos Oil Co., once Russia's largest oil producer.

``There are number of people with split loyalties,'' said Sergei Markov, a pro-government lawmaker and director of the Institute of Political Studies, which advises the Kremlin. ``People like Dvorkovich dreamed of a person like Medvedev becoming president and they are happy to be Medvedev supporters.''

So far, Putin, 56, who handed the presidency to Medvedev, 42, after stepping down at the end of his eight years in the Kremlin, has managed to keep the main levers of power. Putin allies dominate the presidential administration and the Cabinet.

The Russian president may seek to reshuffle Putin's Cabinet as early as September or October, according to Mukhin.

The president will start replacing regional governors who owe their jobs to Putin, and possibly Moscow Mayor Yuri Luzhkov as well, Kremlin spokesman Alexei Pavlov said.

Stronger Hand

While Medvedev formally has the power to dismiss the prime minister, Putin currently has the stronger hand as leader of the ruling United Russia party. He controls a two-thirds majority in the lower house of parliament, enough to impeach the president. He has also set up a mini-cabinet that reports only to him, including the defense, interior and foreign ministers, who should nominally be under presidential control.

Western diplomats in Moscow say their governments were taken aback when Russia vetoed United Nations sanctions against Zimbabwe on July 12, four days after Medvedev agreed to punitive measures at a meeting with other Group of Eight leaders in Japan.

Medvedev, a lawyer by training, has stressed the need for more dialogue between East and West. Under Putin, a former KGB colonel, ties with the U.S. and Europe became increasingly strained.

Russia's new foreign affairs strategy, approved last month, for the first time made explicit the role of the prime minister in implementing the policy.

Putin's Popularity

Putin remains Russia's most popular politician, trusted by 54 percent of Russians, compared with 36 percent for Medvedev, according to a poll published July 25 by the Moscow-based Levada Center.

Tension between the two men was clear already on May 9, when Putin watched stonily as the new president addressed the nation from Red Square on the anniversary of victory in World War II.

The first sign that Medvedev may be challenging his second-tier status came a day before the Mechel affair broke, when he demanded a shake-up in the bureaucracy he inherited, condemning the sale of posts to the highest bidder.

Putin's Mechel attack exacerbated investor concern toward Russia amid turmoil in global equity markets and falling commodity prices.

`Utmost Care'

Shuvalov said Mechel shouldn't share the fate of now bankrupt Yukos. Dvorkovich warned of the need to exercise ``utmost care'' toward publicly quoted companies and the stock market.

Investors are assuming the current power structure will last for a 12-month ``honeymoon period, but the risk of some changes ahead of that is one reason why investors remain nervous of Russia and why they are inclined to panic quickly,'' said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.

Medvedev will have to tread carefully if he wants to avoid open war with Putin, said Yury Korgunyuk, an analyst with the INDEM research group in Moscow.

``For the moment, Medvedev is biding his time, hoping to exploit more of Putin's mistakes,'' he said. ``It's important for him not only to push Putin aside but to avoid an all-out conflict.''

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net