September 11, 2008 By James Kimer

The Siloviki Seizure of Russia’s Economy

siloviki091108.jpgBill Powell at Fortune magazine has a very interesting piece running about the methods and tactics used by Vladimir Putin’s inner circle of former KGB officers to seize control of the economy. With the markets in free fall after the diplomatic blunders surrounding the war in Georgia, it finally seems to be becoming apparent that managing security and spies really doesn’t translate well into managing an economy.

Yet for all the talk of prosperity and stability under Putin & Co., foreign companies operating in today’s Russia – especially those in Russia’s valuable energy and natural-gas sectors – have suddenly started getting nervous. Stories of Russian power plays have grown too numerous to dismiss: of business leaders thrown in jail on bogus charges, assets taken by dubious lawsuits, partnerships with Russian companies suddenly turning into struggles over control. Aggravated by the invasion of Georgia, those concerns have sent the Russian stock market plunging more than 30% since May. Unless Russia can moderate its growing reputation as a strong-armed economic regime, its appeal as an emerging market may be coming to a close. Says Renaissance’s Nash: “There’s no question the outside investment community is watching this now very, very closely.” Lately the PR has been disastrous. Consider the case of BP (BP), which thought its partnership with a group of Russian billionaires, TNK-BP, was a textbook joint venture. Instead, the British oil company finds itself under attack: Its Russia-based employees have been hit with dubious charges of industrial espionage, the CFO of the venture recently stepped down, and the CEO has publicly complained of “sustained harassment of the company and myself” by Russian authorities. Industry analysts believe they’ve seen this scenario before – last year Royal Dutch Shell (RDS-B) was forced to cede control over its Sakhalin oilfield to Russian companies (see “Shell Shakedown”) – and predict BP will eventually pull out in frustration, followed by a state-controlled energy giant taking over the business.