Introduction

The first anniversary of the Russian invasion of Ukraine on February 24th has been the catalyst for an enormous amount of analysis as to how the conflict has evolved over the last twelve months and the direction that it might take in the course of 2023, but with less weight on the longer-term scenarios.

The assessment of the immediate past is relatively straightforward. Vladimir Putin moved against Ukraine on the thesis that military resistance would be modest and ineffective, that the leadership in Kyiv would place their own personal security ahead of any other factor and so flee rather than risk being caught up in the fight and that the United States and Europe would issue little more than loud diplomatic condemnation and some symbolic (but not arduous) sanctions, not least because of the dependency of many big players on Russian gas supplies. Much of what has proved to be a massively inaccurate series of advice and recommendations appears to have come from the so-called “Fifth Service”, the Department for Operational Intelligence, within the Federal Security Service (known as the FSB in its anglicised acronym). Russia’s considerable economic, political, and military losses in the last year could have been avoided if the Kremlin had not been told simply what it wanted to hear. It is, though, now in too deep in Ukraine to reverse course, at least not under its present leadership.

That does not mean that Russia has unambiguously “lost” the war. Yet, it certainly cannot “win” it if victory is deemed to be the original hypothesis that Moscow could remove the central Government of the Ukraine and replace it with an administration which was essentially under Mr Putin’s say-so. It can, nevertheless, strive for an outcome where the better part of 25% of what was Ukraine in 2013 (before the incursion into Crimea a year afterwards) is under direct Russian command and annexed into the Russian Federation, while what is left of Ukraine is destabilised to the extent that it cannot function as an effective state and its public ambitions for EU and NATO membership are impractical.

Russia’s plan B

This is, in reality, what the next stage of the conflict is likely to be about during the rest of 2023. Russia hopes that by the sheer saturation force of troops on the ground (at least 250,000 more men are set to be deployed relatively shortly) it can break out of its current position where it is dominant, but not completely in control, in the far eastern regions of Donetsk, Luhansk, Kherson and Zaporizhia (plus Crimea where its grip is tighter) and then oblige Kyiv to enter talks and recognise the need for territorial concessions. Such a conclusion would be a comparatively acceptable result for Russia now.

Ukraine’s plan B

Ukraine, by contrast, believes that the combination of a very strong sense of national mission, heavy and demoralising Russian losses, and the impact of better NATO-sourced weapons such as tanks and warplanes will lead the coming Russian offensive to make minimal progress and even allow for counterattacks, notably in the south of the country, which may allow Kyiv to isolate the Crimea area. Were that to occur, although pushing Russia out of the entirety of the sphere that it has occupied by military means alone is probably too difficult, it would still mean that Russia would find itself after eighteen months of war and huge casualties, no more in control of the Ukraine that it was the day before the war was started. Such a situation would be a relatively acceptable result for Ukraine now.

Made in Moscow

It will take until September before it becomes clearer which of these two positions comes to pass or whether, as is entirely conceivable, it is a messy deadlock in the middle with Russia holding more of the Ukraine than it does today, but not enough for it to claim a strangle-hold on that country. While this might be regarded by some as a “stalemate” or a “draw”, it would be extremely damaging to Russian prestige and the authority of Mr Putin as President, leaving him few appealing options to consider other than the threat of a further escalation that he might not be able to implement. All of which will occur in advance of the Russian presidential elections in March/April 2024, while they will not be anything close to free and fair remain important to the legitimacy of the administration.

This means that political machinations inside of Moscow are at least as vital to how overall events ultimately play out as anything that may occur on the battlefield in terrain and towns across Ukraine.

Russia – the constitutional theory

The post-Soviet Russian Federation has a detailed Constitution with much of it drawn from the first version of the French Fifth Republic. The Head of State is the President who initially could only serve two consecutive terms of four years in duration but could return for a second set of up to two terms if so elected. This provision compelled Vladimir Putin to stand down as President in 2008, and revert to running the show as the Prime Minister instead under Dmitry Medvedev, until 2012 when he was restored to the Kremlin. His restoration came with a new constitutional arrangement which kept the principle of a term limit of two successive terms in office but with six – not four – years as the tenure.

Mr Putin was re-elected against token opposition in 2018. He should, therefore, have been ineligible to stand in the 2024 presidential elections but in 2020 pushed through a further package of changes to the constitution which while superficially reducing the powers of the presidency actually made it a yet more important institution because the barrier on seeking a third successive term was removed.

The two other crucial offices are the Chairman of the Government of the Russian Federation (known as colloquially but not formally as the “Prime Minister”) and the Chairman of the Federation Council (who is the Speaker of the Upper House of the Russian Parliament). The Prime Minister is chosen by the President and has to be approved by Parliament, but then serves as the President’s pleasure bar a somewhat complicated formula by which Parliament can attempt to dispose of the PM. This means that most of the time the Prime Minister is close to a mere puppet of a President of the day with the exception that if the President were to die or resign then the Prime Minister would become Acting President until fresh presidential elections were held (which must be within three months of such a vacancy occurring). If a President were to dismiss a Prime Minister and after themselves die or quit, then it would be the Chairman of the Federation Council who would step in as the Acting President.

Russia – the political practice

This constitutional architecture – of considerable democratic integrity – masks the raw reality of power. The most important constituency in Russian politics is the Federal Security Service (FSB). It is where Vladimir Putin came from, and it is at the heart of the siloviki (men of force) who over the past 25 years have come to command the core of the state apparatus including key state companies.

The FSB has its roots in the old KGB but in many senses has a wider sphere of influence than it had. It was founded in 1995. Mr Putin was its Director from 1998-1999 and it was from this position that he was able to conduct what will be described below as “The Yeltsin precedent”. The FSB has been reorganised by Mr Putin and now has a Director (since 2008 General Alexander Bortnikov) and a First Deputy Director (from 2021 Sergei Korolev) and a series of deputy directors overseeing a range of departments covering everything from economic security to counterintelligence to terrorism to analysis, forecasting and strategic planning to scientific and technical. It is a shadow government.

It is also the body which will determine at what point (if any) the price of the fighting in Ukraine has become too high for the FSB itself, never mind Russia more broadly. Almost everyone who is senior within the organisation has become subject to external sanctions of late and found the exercise of moving their personal assets around much more challenging as a consequence. It is hard to conceive that any person could become the President of the Russia Federation of whom the FSB disapproved. It is the unacknowledged selectorate who will determine which candidate faces the real electorate.

The Yeltsin precedent

The model for real regime change in Russia relies on the single precedent of how Boris Yeltsin was eased out of the Kremlin in 1999 and how Mr Putin was installed as his successor. Mr Yeltsin had been elected by genuine popular acclaim in 1991 and then re-elected in more dubious circumstances in 1996. By 1999, the Russian economy was in a condition of chaos, friendly relations with the West had been upended by the Kosovan conflict, corruption (including at the highest level) was rampant, the President’s physical condition was in obvious dire disrepair, his own approval rating was in single figures (down to 2% in one estimate) and he was in any case term-limited for the 2021 election. If he continued in the Kremlin, then the risk of outright systemic collapse was an extremely credible one.

So, he had to be persuaded to depart. The deal involving him agreeing to appoint Vladimir Putin, the then Director of the FSB, to be his Prime Minister in August 1999 (as Mr Yeltsin had hired and fired multiple Prime Ministers and Cabinets while President, the full significance of this shift was hidden). An understanding was then reached that if he resigned and “retired”, no questions would be asked as to how he and his family had managed to acquire such a vast amount of wealth, he would not be subject to any kind of house arrest during the rest of his life (as Nikita Khrushchev was between his fall in 1964 and death in 1971) and would receive the full status of a former President. In return, he had to stay out of politics altogether and limit the amount of time that he was visible in the capital.

Mr Yeltsin resigned on December 31st 1999. As Prime Minister Mr Putin became Acting President. His first decree was to afford Mr Yeltsin immunity from prosecution for life. With the advantage of incumbency, Mr Putin sought and easily won election to the presidency in his own right in 2000.

If there is to be an end to the Putin era sooner rather than later, this precedent is the playbook.

Key signals of potential political change in Russia

Mr Putin is probably strong enough to be allowed a second roll of the dice in Ukraine over the next six months. Any third roll would be much tougher to secure. There are a set of signals which should indicate whether the political tectonic plates in Russia are moving and if so in what sort of direction.

The known unknown

There is also a huge (to borrow from the former US Secretary of Defence Donald Rumsfeld) “known unknown” out there which has to be factored in, even if it is extremely opaque in its character. It is the state of health of Mr Putin himself and who in Moscow understands what about its exact nature.

A year ago, almost everything concerning Mr Putin’s health was speculation with even intelligence agencies uncertain as to what, if anything at all of any relevance, might be the matter with him. This remains a question of uncertainty but there are more clues available to analysts than there were.

The tentative consensus is that Mr Putin is unwell and sufficiently sick to have had chemotherapy (which many believe to be continuing). There are those who would state with some confidence that he has a form of blood cancer, but this is a condition that can vary from being terminal within a small number of years to one that can be treated and allow the patient to function is a largely normal way. Exactly what the diagnosis is here will be available to an extremely small number of people, but it would be astonishing if the FSB did not have a reasonably accurate picture of the true prognosis. It would be yet another asset that it enjoys which no other organisation in Russia comes close to. What is harder to calculate is whether this makes The Yeltsin precedent easier to revisit (as Mr Putin’s health, rather than the embarrassment of mistakes in Ukraine, would be the alibi for him to leave), or if it puts that possibility off further (why bother with the risk of it if he will not live much longer?).

Assuming, in the absence of better information, that Mr Putin’s health is not a decisive factor then there are probably three indicators of unusual value in determining where power lies in Russia.

The next minister for defence

Unless the second Russian offensive is considerably more effective than the first one has been, then by the end of the summer with Russian deaths in Ukraine potentially moving up as high as 200,000 (compared with the 14,500 official fatalities experienced in Afghanistan between 1980 and 1988) and little to show for it in terms of freshly snatched territory on the map, then the search will be for someone to take the blame (other than the President) and for a replacement to be found for him.

That individual is highly likely to be Sergei Shoigu, a Putin loyalist who has been Minister of Defence since 2012. His standing in that post has never been absolutely solid, because unlike most of his predecessors he has no military record of his own. He is also not at the centre of the FSB network. He is eminently disposable. The issue is when such a move could be made, how to avoid it seeming like a tacit admission of error in the Ukraine, and who comes next – someone who is career military, a different civilian or an FSB figure which would imply that the agency was taking over the war effort (but with the intention of shaping it in its own interests, not necessarily those of the President)?

The next director of the FSB

The present Director of the FSB General Alexander Bortnikov will soon have served for 15 years. He is past the conventional retirement age of 70 for his portfolio. He is widely viewed as unimaginative but an honest figure, less tainted by corruption than most, and a sceptic on the Ukrainian incursion. He could emerge as the short-term “safe pair of hands” successor to Mr Putin if one were needed.

It is precisely for this reason that Mr Putin might well want to encourage him to stand down and replace him either with his predecessor as Director of the FSB, Nikolai Patrushev, now the Secretary of the Security Council of Russia, or Sergei Korolev, First Deputy Director of the FSB. Mr Patrushev is a similar age to General Bortnikov but closer to Mr Putin personally and a long-standing hawk when it comes to the United States and Europe. The President would see him as a Putin continuity person. Mr Korolev is a decade younger and a potential successor to Mr Putin. Although on paper his rather shameless corruption and links to the Russian underworld make him look unattractive to the realm outside of Moscow, he is a ruthless pragmatist who might strike a bargain to get out of Ukraine and restore the FSB’s ruptured links to the international economy (and multiple frozen bank accounts). A change of the guard at the FSB involves friction, particularly if General Bortnikov aspires to stay on.

The next Prime Minister

Any attempt to replicate The Yeltsin precedent has to involve a Prime Minister who is aligned to the FSB and who could make the role of Acting President the basis for taking a total grasp on power. The present Prime Minister, Mikhail Mishustin, who had been in situ since January 2020, is a technocrat of some ability, a respected economist and a former Director of the Federal Taxation Service. These are not impressive attributes in the eyes of the FSB. He would only become President by accident if Mr Putin were suddenly and unexpectedly to expire. Even then, he would be under a lot of pressure not to put his name forward for the subsequent presidential ballot but be a transitional individual.

Who would be a more plausible Prime Minister (in the calculus of the FSB)? It could be one of the Bortnikov/Korolev/Patrushev set drawn from the inner sanctum of the FSB if the leadership swap of 1999 was to be repeated close to exactly. A more subtle switch would involve Igor Sechin, a trusted member of the FSB inner circle but currently the CEO of Rosneft, the State oil company, which puts a little distance between the Kremlin and FSB if he were to take the helm as President. Alternatively, on the basis that he would have virtually no learning curve, and particularly if the FSB is prepared to make substantial concessions to extricate itself from Ukraine, a political comeback for the relatively young (57) ex-President and ex-Prime Minister Dmitry Medvedev cannot be discounted. Earlier in his career he was also Chairman of Gazprom and a reformer of that institution. He has been the Deputy Chairman of the Security Council since 2020 and could be an acceptable candidate to all factions.

Conclusion

Why does any of this matter to private equity, the business community at large or anyone else for that matter? The blunt answer is that whoever resides in the Kremlin is intensely significant and more so in contemporary circumstances than might be otherwise. If neither an outright Russian conquest of Ukraine (which may be a military resolution of a sort but hardly be a basis for a political settlement) or a Ukrainian triumph that involves the complete expulsion of Russia from all its borders are likely, then at some point a process of deliberation and negotiation between the parties will have to come.

Without that, a form of permafrost will set in with supply lines continuing to be badly hit, an energy supply crisis will continue unresolved and relations between Russia and the West will remain toxic. This is not a situation which those involved with the international economy should want to continue.

Yet it is close to impossible to imagine how a Russian-Ukrainian dialogue of any substance might manifest itself while Vladimir Putin is the President of the Russian Federation. His departure is the pre-condition for at least a partial return to the order that existed on February 23rd 2022. None of the potential contenders highlighted here – Alexander Bortnikov, Sergei Korolev, Nikolai Patrushev, Igor Sechin or Dmitry Medvedev – could be described as a closet liberal (nor would it make much sense for any of them in terms of their interactions with the FSB to be regarded as such a person) but what they all have in common is that the conflict in Ukraine is not “their war” nor seen as their act of aggression and hence they are at more liberty at least to explore escape routes from it than Mr Putin can do even if he decides it is what he wants (which one doubts). Russian politics has long been rough for outsiders to read. Despite that, in this case, certain chess moves can be anticipated. Who comes out as Minister of Defence, FSB Chief and Russian Prime Minister will speak volumes.