David Satter: Russia Incorporated

putin1217.jpgThis evening I am pleased to share the company of the Russia analyst Mr. David Satter, a colleague whose work I highly respect. During our conversation tonight, David mentioned that he had a new piece coming out in the Weekly Standard today, so I asked if he might give a short introduction for us to post up on the blog. Although his article largely speaks for itself (see full text after the jump), he commented that “Given the overt signs of tension in the Russian leadership, it’s a little premature for anyone to draw conclusions about the succession. Unexpected events are still possible. This is really a system without rules, and provocation is not out of the question.

From the Weekly Standard:

Russia IncorporatedWhy Vladimir Putin dare not give up his position as capoby David SatterThe Weekly Standard, 12/17/2007, Volume 013, Issue 14MoscowRussia’s parliamentary elections last week eerily imitated the one-candidate elections of the Soviet period–back when the popular attitude was exemplified by the remark of a worker who, holding a poster of Leonid Brezhnev, told a foreign correspondent, “Whatever they give me, I hold.”On December 2, United Russia, the party that listed President Vladimir Putin as its candidate, received 64 percent of the vote. This guaranteed it 315 seats in the 450-seat State Duma, more than enough to pass any legislation or amend the constitution. Another 15 percent of the vote went to two Kremlin satellite parties, the Liberal Democratic party and Just Russia. The two liberal parties, Yabloko and the Union of Right Forces, received 1 percent each, far below the 7 percent threshold needed to enter the new parliament. Of the parties that will be present in the Duma, only the Communists, with 11.6 percent of the vote, represent any sort of opposition.The elections were marked by grave abuses. Bosses all over the country threatened to fire workers who did not vote for United Russia. There was widespread ballot stuffing and multiple voting. In Chechnya, official figures indicated that 99 percent of those eligible voted for United Russia, a claim that was greeted with amazement on the streets of Grozny. Nonetheless, even with the abuses taken into account, the illiberal vote was overwhelming. For the first time since the fall of the Soviet Union, the Russian parliament will take office without a single deputy to represent the country’s liberal opposition.The illiberal and anti-Western mood in the country was reflected in the run up to the elections. In his speech at Moscow’s Luzhniki Stadium on November 21, Putin referred repeatedly to internal “enemies,” accusing them of being “scavenging jackals” seeking funds from foreign embassies to destabilize Russia. “Those who want to confront us,” Putin said, “need a weak and ill state. They want to have a divided society so they can carry on their deeds behind its back.”Putin’s remarks were echoed in the preparations made by the pro-Kremlin youth group, Nashi, to deal with any protests that might take place after the expected United Russia victory. Posters prepared in advance used a Soviet- era caricature depicting the United States as a bloated capitalist, referred to opposition figures as “traitors,” and said the United States wants to return Russia to the oligarchic rule of the 1990s when the country sold its oil and gas for virtually nothing. An employee of the Toronto Globe and Mail who attended a meeting of Nashi posing as a member said that the group was told to occupy selected areas of Moscow where it was believed that anti-Putin demonstrators would try to protest. “Our weapons are physical dominance and moral suppression,” said an instructor. “Never get into a dialogue with an instigator. As a final method, you can beat him. But try to do it carefully.” How carefully is a matter of doubt because Nashi, like other pro-Kremlin youth groups, is reported to have a group of fighters who have been trained on the bases of the OMON riot police (motto: “We know no mercy and do not ask for any”).The reason for the aggressiveness is the fragility of the system put in place by Putin as he nears the end of his second term: The next presidential election is scheduled for March 2. Buoyed by an unprecedented windfall from high energy prices, the regime appears strong, but internally it is weak, and those at the top of the Russian political pyramid know this.In Russia today, property and power are monopolized by a small group of people with ties to Putin from his days in the KGB and the government of St. Petersburg. Everywhere, high-ranking officials have been put on the boards of state-owned companies creating massive conflicts of interest. First Deputy Premier Dmitri Medvedev, for example, is chairman of the board of Gazprom; Igor Sechin, deputy head of the Kremlin administration, is chairman of the Rosneft oil company; Sergei Ivanov, another first deputy premier, is chairman of the board of the United Aviation Corporation, a new aircraft industry monopoly. It is estimated that those around Putin control companies accounting for 80 percent of the capitalization of the Russian stock market.Yeltsin-era oligarchs were allowed to keep their wealth but threatened with criminal prosecution if they showed the slightest political independence. Indeed, Mikhail Khodorkovsky, who as head of the Yukos Oil Company financed opposition political parties, is now serving an eight-year sentence in a labor camp. In this way, both economic and political power was concentrated in a single, ruling group. The internal conflicts of this group, however, were not visible to the general public.On November 30, however, the newspaper Kommersant published an interview with Oleg Shvartsman, the head of the Finansgroup, a financial industrial group with ties to Sechin, in which he described how the Putin system worked. Shvartsman said that his group’s assets, which were valued at $3.2 billion, included the Russian Oil Group, the Russian Diamond Group, and Russian Instrumental Technologies. The group worked under the general direction of Sechin, and its owners included companies based in offshore zones that were controlled by relatives of high-ranking members of the presidential administration as well as members of the Federal Security Service (FSB) and the Foreign Intelligence Service (SVR).Shvartsman described plans to develop a state corporation called “Social Investments” that would realize the concept of “velvet re-privatization” on behalf of Rosoboronexport, Russia’s state arms exporter. He described this as a market form of absorbing strategic assets in regions that are dependent on state subsidies. Instead of seizing enterprises, it involved using administrative instruments, including accusations of nonpayment of taxes, to drive down the market price.Shvartsman also spoke about a political organization called the Union of Social Justice of Russia where he is in charge of finances. He said the organization encourages businesses to fulfill their “social responsibility” by donating money for the needs of the “power ministries,” including, besides the FSB and SVR, the Defense Ministry, the Emergency Situations Ministry, and the Interior Ministry. Originally, the method used was straightforward extortion. More recently, however, the organization began offering partnerships to businesses. “We started to go to them with various proposals,” Shvartsman said, “and these resulted in joint activities. For example, the Russian Oil Group is the result of alliances with [the oil companies] Rosneft, TNK, and Lukoil. . . . In other words, these companies gave the Russian Oil Group part of their markets.”He also spoke about plans to create a national debt-collecting agency using veterans of the Interior Ministry capable of working with minority shareholders to force out owners “who are not loyal to the government.” When he was asked who initiated the creation of the agency, Shvarts-man said, “The party! The party for us is the power bloc [the faction in the leadership based on the power ministries], which is led by Igor Ivanovich Sechin.”In fact, the “power bloc” is not the only faction in the Russian leadership. There is also a “liberal” faction whose leader is Medvedev. It includes many of the Yeltsin-era oligarchs. Without civil society or reliable legal institutions, however, the conflicts between these groups and the factions within them can only be resolved by the president himself.Putin has indicated that he intends to continue to play an important political role in Russia after the end of his second term, but no one knows what that role will be. In fact, he has considerable reason to want to hand over the leadership. The suppression of the revolt in Chechnya has led to new rebellions in Ingushetiya and Dagestan. At the same time, there are signs that the economic good times in Russia may not last. The price of food is increasing sharply and is expected to rise by 50 to 70 percent in the spring. According to Stanislav Belkovsky, the head of the National Strategy Institute, this means that for families of moderate means–who make up half of the country’s population–expenditures for food will soon exceed their entire budget.Perhaps the most important reason that Putin may want to step down, however, is his desire to enjoy his massive private wealth. In an interview published November 12 in the German newspaper Die Welt, Belkovsky said, “The people sitting in the Kremlin are direct representatives and joint owners of large scale enterprises. Putin is also a big businessman. He controls 37 percent of the shares of Surgutneftegaz [Russia’s fourth-largest oil producer] with the market value [of Putin’s putative stake] coming to $20 billion. Moreover, he controls 4.5 percent of the shares of Gazprom [Russia’s natural gas monopoly]. In the company Gunvor, which sells oil, Putin has [a] 50 percent [stake] through his representative Gennady Timchenko. Last year, [Gunvor’s] turnover came to $40 billion and its profits $8 billion.”The system that Putin holds together, however, may not be able to withstand his voluntary surrender of office. The most ominous sign of this has come from the security services, which are the mainstay of Putin’s power.The first sign of how serious the conflicts between Kremlin factions may become was the discovery on October 27 in a St. Petersburg ditch of the bodies of Konstantin Druzenko, an officer with the Federal Narcotics Control Service (FSKN), and Sergei Lomako, a former colleague, apparently victims of poisoning. The St. Petersburg-based website Fontanka.ru quoted the police as saying that the two had been at a city café where they “partied on a grand scale,” but the others at the party said the two were fine when they left them. An FSKN spokesman confirmed that the two men were poisoned and said the circumstances were “strange.”The apparent poisoning came against the backdrop of a conflict between the FSB and the FSKN that became public after the arrest, on October 2, of General Alexander Bulbov, the head of the FSKN’s operational department, and several other FSKN officers. Bulbov was accused of bribery and illegal wiretapping. He and one of the other arrested FSKN officers had been leading the agency’s investigation of Tri Kita (“Three Whales”), a Moscow furniture store accused of running a smuggling operation that evaded millions of dollars in duties on goods imported from China. Among the cofounders of the Tri Kita stores were firms belonging to the father of Yuri Zaostrovtsev, a deputy director of the FSB. Yuri Shchekochikhin, a deputy in the State Duma and deputy editor of Novaya Gazeta who had been investigating the Tri Kita affair, died in July 2003, another victim of an apparent poisoning. In an open letter, Bulbov charged that three FSB generals, whom he identified as Kupryazhkin, Feoktistov, and Kharitonov, were behind his arrest and that his problems with the FSB started a year ago when he began investigating the Tri Kita case.It is all part of a larger power struggle. On October 9, the head of the FSKN, Viktor Cherkesov, wrote an article in Kommersant stating that the arrests were evidence of “infighting among the special services” and warning, “There can be no winners in this war. There is too much at stake.” He also stated that it was impermissible for “warriors to turn into merchants,” an apparent reference to the commercial activities of high ranking officers of the FSB.Putin appears to be trying to maintain a balance between the warring sides. After Cherkesov’s article appeared in Kommersant, Putin publicly criticized him, saying it is “wrong to bring these kinds of problems to the media.” Yet the following day, Putin created a new state committee to fight illegal drugs and named Cherkesov as its chief. Unfortunately, a new leader may not be capable of this type of mediation. Under those circumstances, the possibility for violence is real. A former security service officer familiar with the circumstances surrounding the arrest of Bulbov and his fellow FSKN officers described the incident to the Moscow Times. “We nearly had a fight between two security agencies,” he said. “This time, the agents were able to keep their cool, and there was no gunfight. But if this battle continues, you can be sure they will start shooting at each other. And it would be difficult to stop.”Given all this, there are many people in the leadership who are determined to keep Putin in power no matter what. Partly under pressure from them, Putin has given indications that he is ready to continue to exercise ultimate authority in the regime. One possibility is to use his majority in parliament to amend the constitution to allow a third consecutive term and then run again for the presidency. This would evoke a negative response internationally, but despite this and Putin’s protestations that someone else will be in the Kremlin next year, it remains possible. Another possibility is that Putin will endorse a lackluster successor such as Viktor Zubkov, the present prime minister, who will then resign after a few months for health reasons, forcing new elections in which Putin could compete legally. Finally, Putin could take the job of prime minister and use his majority in parliament to pass laws that would strengthen that office. Under any circumstances, while Putin ponders his options, the internal pressures in the government can only get worse.The presidential administration is in charge of the export of seven million barrels of crude oil and oil products a day. Together with natural gas, these exports earned $190 billion last year. Each of the suggested changes at the top threatens to disrupt the informal networks that allow government officials to grow rich on the strength of this national windfall.At the same time, uncertainty about the new distribution of power stirs ambitions on all sides. Thus, government officials besides Cherkesov have started to advance their claims publicly.In late September, Sergei Chemizov, the head of Rosoboronexport, the arms-trading monopoly, and board chairman of the AvtoVAZ carmaker, who served with Putin in the KGB in Dresden, called for using the Stabilization Fund, set up in 2004 to protect Russia from a sudden downturn in energy prices, to provide credit for domestic industry. It has long been believed that Russian officials want to use the Stabilization Fund for their personal investment projects.Some of the mystery about Russia’s future may be cleared up on December 17 when United Russia meets to nominate its candidate for president. If it becomes clear that Putin really intends to step down, a massive and seriously destabilizing fight over assets on the part of government officials may ensue. If he stays on, he will very likely become a prisoner of his office, a president for life who cannot give up power without creating danger for himself. Either way, it is a very uncertain future that faces Russia–with the overwhelming endorsement last week of an indifferent electorate.David Satter is affiliated with the Hoover Institution, the Hudson Institute, and the Johns Hopkins University School of Advanced International Studies. The report of a Hudson Institute study group on U.S.-Russian relations that he directed is available at www.Hudson.org.