By Gleb Bryanski and Douglas Busvine
MOSCOW (Reuters) - Russian President Vladimir Putin will unveil a government dominated by loyalists on Monday, leaving Prime Minister Dmitry Medvedev limited scope to pursue his reform agenda and entrenching the Kremlin's grip over the economy's commanding heights.
Medvedev, 46, named premier after Putin returned to the Kremlin on May 7, has pledged to launch pro-growth policies and a privatisation drive to wean Russia's $1.7 billion economy off its dependence on oil.
But, even though the partners in Russia's ruling 'tandem' announced they would switch jobs as long ago as last September, the lengthy and secretive process of forming a government has raised concerns that it will be riven by factional conflict.
Medvedev, speaking at a Group of Eight summit at the weekend where leaders discussed how to contain the euro zone's debt crisis, rebutted the skeptics.
"The government will be substantially renewed - that's why forming it has taken longer than in the past," he said at Camp David, U.S. President Barack Obama's retreat outside Washington.
"We have a plan of action ... that was tested in the first phase of the crisis," Medvedev told reporters. "If needed, we can put it into effect - in that sense all our guns are loaded."
The line-up to be unveiled on Monday will bring in new faces from the team of young market liberals who served in the Kremlin during Medvedev's four-year term as president.
One, Arkady Dvorkovich, shared smiles with Medvedev's spokeswoman as the prime minister took questions from reporters outside a log cabin at Camp David.
Dvorkovich has been tipped as a deputy premier, sources and media reports say, with Monday's edition of financial daily Vedomosti naming him among seven deputy prime ministers who will report to Medvedev. Four of the seven already hold that post.
WHO'S IN CHARGE?
Sources say Putin, 59, is likely to extend his influence over economic policy by ensuring that the finance and economy portfolios are taken by placemen who identify with his credo of state-led economic development.
Career bureaucrat Anton Siluanov is expected to stay on as finance minister while Andrei Belousov should be promoted to economy minister, in a sign Putin wants to take control of the economy, traditionally the preserve of the prime minister.
Putin's return to the Kremlin has been accompanied by the biggest protests of his 12-year rule against alleged fraud in the national elections, led by an emerging opposition that says its views - and those of millions of Russians who want political change - are being ignored by the country's leaders.
"They are making (forming a government) as conspiratorial as possible, and that doesn't sell well in this political climate," said Vladimir Frolov of government-relations firm LEFF Group.
The country's top banker German Gref, a former economy minister, said however that Putin was ready to heed the views of Russians and act to put the economy on a sustainable footing.
"The election campaign has shown that Putin is ready for a serious transformation - I know there is a lot of skepticism about that," Gref, who is chief executive of Sberbank, told reporters travelling with Medvedev.
Although latest figures show Russia's economy grew at a 4.9 percent rate in the first quarter, that has been pumped up by lavish pre-election spending that has driven up the oil price at which Russia's budget will balance in the future.
"The oil curse will get us sooner or later," added Gref. "The government has no option but to create a favorable climate for investment and growth."
Yet Putin, who opted out of attending the G8 summit to hold meetings on the new government, showed a more populist than reformist streak in decisions he took while Medvedev was away.
He signed an order slashing the number of officials' cars allowed to use flashing blue lights - hated by drivers on Moscow's choked roads - and appointed a production worker at a tank factory as his representative to the Urals industrial belt.
Putin's new Urals envoy, Igor Kholmanskikh, made waves when he offered in a video link-up with Putin in December to come to Moscow with "the boys" to chase protesters off the streets.
Gref's bank is at the top of a list of state assets slated for privatisation, but the sale of a 7.6 percent stake planned for last September has been repeatedly delayed.
First Deputy Prime Minister Igor Shuvalov recently slapped a veto on a near-term sale due to poor market conditions, that have since deteriorated further, reducing the value of the stake to $4.3 billion.
Shuvalov, according to sources and reports, should stay despite media reports over his wife's lucrative financial dealings with Russia's billionaire oligarchs. He has admitted the deals but denied any impropriety.
The English-speaking lawyer is seen as one of the few officials who can mediate in the battles for power and influence between the market liberals and another faction of men with a background, like former KGB spy Putin, in the security services.
The greatest mystery surrounds the political future of Igor Sechin, the informal head of the siloviki - or men of power - who as Putin's energy 'tsar' has enjoyed sweeping control over the oil industry in the world's largest crude producer.
In his last act as prime minister, Putin nominated Sechin to the board of Russia's main state energy holding company, a position that would allow Sechin to wield huge influence even if he loses his post as deputy premier.
Since Putin's election victory on March 4, Sechin has brokered three major offshore exploration deals involving state oil major Rosneft, sought to block the privatisation of state oil pipeline monopoly Transneft and acted to reassert state control over the power sector.
That sets the scene for a possible confrontation should Medvedev appoint billionaire former power industry boss Mikhail Abyzov, a co-author of reforms to break up the state power monopoly in 2007, to an energy role.
It could also spell trouble for Medvedev, whose durability has been called into question by what many saw as his humiliating agreement to step down to pave the way for Putin to return for one, and possibly two, six-year terms.
(Writing by Douglas Busvine; Editing by Ralph Boulton and Janet Lawrence)