Last week, the Russian capital played a great parlor game: who is in and who's out in the Putin presidential administration and Dmitri Medvedev's cabinet. More important for U.S. policy makers is understanding the contradictory nature of the new double-headed government Mr. Putin has created.

By applying the Roman dictum "divide and rule," Putin has enhanced his personal power while presiding over conflicting government structures and personalities as a supreme arbiter—something his predecessor Boris Yeltsin used to do well.

The new bifurcated government demonstrated what Sovietologists of a certain generation liked to call “continuity and change.” Younger blood was injected into the cabinet, including forty-year-old deputy prime minister Arkady Dvorkovich, a Medvedev ally and promarket economic liberal. Then there is the “baby,” thirty-year-old Nikolai Nikiforov, minister of communications. He will be in charge of “electronic government” and continuing Internet expansion across Russia's nine time zones.

Young does not always mean liberal or pro-Western: Vladimir Medinsky (age forty-two), a former PR man in Russia's Washington embassy, is now the minister of culture. A Russian nationalist and a propagandist with academic and literary ambitions, he may lead the way in promoting Russian nationalism. A positive image of Russia's past, complete with self-serving descriptions of imperial Russian and Soviet history, is an important component in the trifecta of "Orthodoxy, stability and patriotism." The ideology is reminiscent of the late-nineteenth-century czarist slogan of "Orthodoxy, autocracy and folkishness (narodnost)," which eventually pushed Russia into the abyss of two revolutions and imperial disintegration in 1917.

Despite widely reported recent scandals, Igor Shuvalov, the experienced economic-policy expert, will be at the helm of the cabinet as first deputy prime minister. The Council of Ministers, chaired by Medvedev, is located at Russia's White House, a couple of kilometers away from the red-brick walls of the Kremlin. The important characters who inhabit the Kremlin, the members of the recent Putin cabinet, as well as the "power ministers"—defense, FSB secret service, interior ministry (police)—provide continuity and have an even closer connection to Putin than the liberals and the technocrats who may report to Medvedev but also work for the Russian president.

The Power Core Unchanged

Putin retained the much-maligned defense minister Anatoly Serdyukov, who is supervising a far-reaching military reform. Over the last twenty years, on many occasions, Russian leaders and the military have announced that reform has been successfully accomplished. Yet it took until 2010, when Russia drew lessons from the Georgian war and recovered from the economic crisis, for the reforms to take off in earnest, including a transition from scores of paper-only reserve divisions to fifty actual brigades. These units, many of them mobile, will be the backbone of the Russian military in the twenty-first century.

For the first time since the czars, Russia has begun to buy war ships abroad, reaching out to France for the Mistral-class helicopter-carrier assault ships. Serdyukov, a former furniture salesman and a senior tax official, apparently is managing the difficult task of the reform. He is seconded by Dmitry Rogozin, an outspoken Russian nationalist and no fan of the United States. Rogozin, the former Russian ambassador to NATO, is in charge of military procurement and production. He also has a say in controlling Russia's space industry.

Putin appointed a new interior (police) minister, General Vladimir Kolokoltsev, replacing the risk-averse but loyal former minister Rashid Nurgaliyev. A professional cop, Kolokoltsev started out as head of a Moscow precinct in the 1980s, continued in criminal investigations and organized-crime divisions, and has a reputation for being tough and competent. The Kremlin believes he handled recent unrest well. Of course, protesters beg to differ, demonstrating broken bones and bruises. Kolokoltsev inherits a demoralized and corrupt force and has a Sisyphean task ahead of him. But with a low base line, it would be relatively easy to point out accomplishments.

Putin kept other key security and foreign-policy men: Foreign Minister Sergey Lavrov, whose stormy relationships with foreign colleagues, from Britain’s David Miliband to Hillary Clinton, are often the subject of news reports; and Nikolai Patrushev, the former chief of the FSB secret police and the head of the Security Council.

The Two-Headed Government

What is most fascinating is Putin's deliberate bifurcation of the government. The Kremlin presidential administration, headed by the foreign-intelligence general and former defense minister Sergei Ivanov, also boasts presidential aides and advisers chosen from among his former cabinet: former minister of economy Elvira Nabiullina, former minister of transportation Igor Levitin and former minister of natural resources Yuri Trutnev, to mention just a few. This is the shadow government that may be more powerful than the cabinet—the eyes and ears of the president.

As one of his first steps, Putin strengthened his contol over state-run companies. He rejected liberal calls for rapid privatization and will continue to let his associates maintain their grip over the most important Russian economic sectors, including extracting industries like oil and gas. He brought back a close confidant, powerful former first deputy prime minister Igor Sechin, to his earlier post of chairman of oil company Ronseft. Russia, Inc. is in full swing.

Thus, the fourth Putin administration (the Medvedev single term being effectively his third) is going to pursue liberalization and modernization led by the Medvedev cabinet, as Putin pays at least lip service to the necessity of moving away from a resource-based economy. Yet the goal of such efficiency is not only raising the standard of living but also boosting defense: the state-owned companies and energy exports will pay for a massive rearmament program costing $700 billion over ten years—a sum equal in annual terms to total civilian-infrastructure allocations.

Ambitious Geopolitics

Putin is also emphasizing further development of natural resources and creating a counterbalance to China by launching a ministry for development of the Far East. There are also plans to establish a government company that will control economic activities in the vast and remote regions along the border with China.

Finally, last fall Putin proclaimed that the Eurasian Union—which will include Russia, Belarus, Kazakhstan and at some point possibly Ukraine and additional Central Asian countries—will become a Russia-dominated economic and political supranational entity based on the existing customs union, the Eurasian Economic Space and the Collective Security Treaty Organization. Supported by a revamped military with a global reach, it will provide Russia with a sphere of "privileged interests" and geopolitical heft. With the Eurasian Union around it, Russia will become the most powerful country in Europe and be able project its power to the Middle East and Central Asia.

Yet as was often the case in Russian history, gargantuan plans are routinely mitigated by corruption, inefficiency and poor execution. These factors, together with a growing opposition at home, will be Putin's greatest foes during his new term in the Kremlin.