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A Velvet Glove on an Iron Fist

Two interesting articles on Russia were just posted to the FT, the first from Paul Betts, the second from Neil Buckley and Catherine Belton excerpted after the jump. From Paul Betts:

A large part of the problem is Russia’s continued poor reputation in business. Justifiably or not, the World Bank still places Russia near the bottom of its governance pile. According to this year’s Edelman Trust Barometer, Russian companies are the least trusted in the world. This reputation undermines the chances of Russian multinationals pulling off mega foreign takeovers.

The Russians may well complain of unfair stereotypes, arguing that most of its largest companies are adhering to international standards, and of a lack of reciprocity on the part of western partners keen to secure Russian energy exports and acquire Russian assets. But Mr Putin’s systematic policy of renationalising what he considers strategic Russian assets, coupled with all the familiar western complaints of heavy-handed bureaucracy, weak legal institutions and accountability, not to mention the blurring of business and government interests, hardly help Moscow’s case.Nor does Mr Putin’s endorsement this week of Dmitry Medvedev, the youthful chairman of Gazprom, as his successor provide much comfort. The new heir apparent is likely to provide a velvet touch to Mr Putin’s iron fist. This is what he has already been doing at Gazprom, where he has been hoovering up assets from Shell and BP in the two biggest foreign-owned energy projects in Russia and describing these arm-twisting deals as reasonable compromises.Mr Putin does not seem to have any intention of giving up power or of stopping his re-nationalisation of assets. Under his young protégé, this is expected to become what people in Moscow are already calling nationalisation “with velvet gloves”. This is unlikely to make European Union members more comfortable when Russian multinationals come knocking at their door.

Neil Buckley and Catherine Belton in the FT:

Some observers suggest Mr Medvedev’s loyalty and youth (he is 42) might even make him willing to make the ultimate political sacrifice and step down early should Mr Putin wish to return to office at the 2012 election or before. Others cast his youthfulness in a different light. “Conspiracy theories that Putin might step back into the presidential post after 2008 have been dealt a blow, given that Medvedev is the youngest of all the candidates … and is unlikely to cut short his presidential term,” says Yaroslav Lissovolik, economist at Deutsche Bank in Moscow. But many political analysts say he is likely to remain malleable and obedient to Mr Putin, at least in the early stages.His image as rather more of a liberal than either Mr Ivanov or Mr Zubkov, his closest rivals for the presidency, has also prompted hopes that he might bring a comparatively stronger pro-business and pro-western slant to the next administration. There have been suggestions that he could start to shift Russia towards a more open democracy, easing controls on the media and civil society and rolling back some of the hyper-centralisation of the Putin years. Mr Medvedev has, for example, questioned the idea of “sovereign democracy” invented by Vladislav Surkov, the Kremlin’s ideologist – the idea that Russia must follow its own course to democracy, free from outside pressure. He has echoed opposition critics by suggesting democracy is a concept that should have no qualifying adjective.Pharos Financial Group, a Russian hedge fund manager, said in a note to investors this week the choice of Mr Medvedev would “help define Putin’s legacy, and reposition Russia’s perception in the west”.“Although it continues to be a single-party state, Russia can now be seen more in the tradition of Japan, Mexico and Sweden, all of whom went through similar periods of political adjustment,” it said.Yet interviews and speeches suggest Mr Medvedev’s views are very close to those of Mr Putin. Unsurprisingly for a man who also chairs Gazprom, the state gas monopoly, he backs state control of energy resources and what Christopher Granville, of the consultancy Trusted Sources, calls “the shared responsibility of state and business for the wellbeing of Russia”.Most investors see Mr Medvedev as above all promising continuity, with a focus on delivering the planned $1,000bn (£488bn, €680bn) investment in modernising Russia’s transport, industrial and social infrastructure. Mr Granville suggests the most suitable label for the likely next Russian president is not liberal but “moderniser”.Some insiders also reject the liberal tag for Mr Medvedev. Andrei Illarionov, who as Mr Putin’s former economic adviser knows Mr Med­vedev well, says he is “not a liberal but from the civilian side” – in other words, not part of the siloviki clan of former security and military men. From the two wings of the regime – the silovik and the bureaucratic – Medvedev represents the bureaucratic,” says Mr Illarionov.This may represent the biggest risk in a Medvedev presidency. If, as Winston Churchill described it, Russian politics is like “dogs fighting under a carpet”, then the carpet has been positively writhing in recent months. Signs have emerged of feuding within the far-from-monolithic security services bloc as well as between siloviki and liberals. Many Moscow political analysts say what appeared to be a carefully unfolding succession plan may in fact have been rewritten several times as Mr Putin was buffeted by those developments.One well-connected banker cites several sources as saying Mr Surkov, the Kremlin ideologist, did not know Mr Putin would announce in October he was heading the United Russia list – indeed, the president appeared to be writing his speech by hand during the party congress.The infighting broke into the open on the day of that speech when a senior officer in Russia’s Federal Anti-Drugs Service was arrested at gunpoint in a Moscow airport. General Alexander Bulbov was leading an investigation into a high-profile smuggling and money laundering case that has embroiled senior officials in Russia’s law enforcement structures and led to a shake-up in the prosecutors’ office last year.Gen Bulbov’s boss, Viktor Cherkesov, hit back with an unprecedented open letter in Kommersant, a business daily, warning that infighting over power and influence was threatening to tear apart a ruling “corporation” of secret police.The battle was seen by analysts as jostling for position by rival siloviki factions – one led by Mr Cherkesov and seen as having the prosecutor-general’s office on its side, the other by Nikolai Patrushev, chief of the FSB (the former KGB), and Igor Sechin, shadowy deputy head of the Kremlin administration. The latter faction is allied with another law enforcement wing, the newly created Investigations Committee.Infighting flared again last month when a close associate of Alexei Kudrin, the liberal finance minister, was arrested on charges of attempted embezzlement of $43.5m in state funds. Sergei Storchak, Mr Kudrin’s deputy minister, was held just before he was due to depart for South Africa for debt negotiations along with Mr Kudrin, who was astonished when Mr Storchak did not make it to the aircraft.Then, on the eve of the parliamentary elections, Kommersant published an interview with a fund manager who claimed to be leading a drive for a “velvet re-privatisation” of Russian assets with the backing of members of the presidential administration. The manager, Oleg Shvartsman, also claimed to be managing $3.2bn in assets for unnamed political figures connected to the Kremlin administration and said he took orders indirectly from Mr Sechin. Mr Shvartsman later disowned part of the interview; Kommersant stuck by the story.One former insider says the tussles looked as if the siloviki were paving the way for a takeover of power. The jousting certainly made it important for Mr Putin to win a convincing mandate in the parliamentary elections, to avoid the appearance of weakness. He will have to remain arbiter between the warring groups for a while, says Nikolai Petrov, a political analyst with the Carnegie Moscow Centre think tank. “Because of the way Putin has structured power, he is the only one able to make sure a balance is enforced,” he says. “I think Dmitry Medvedev will be the object of serious attack from the siloviki.”But Alexei Kondaurov, a former KGB general, says the successful conclusion of Operation Successor will ultimately mean the further entrenchment of the Putin ruling group. “All these people are not independent. They are all connected to one team. Putin made them and they all depend on him.”