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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.

The BP case raises vexing questions for an economy now bathing in the luxury of $115-per-barrel oil. Bill Browder, who had been one of Russia’s biggest foreign portfolio managers until his visa suddenly was revoked without explanation in 2005, wonders whether the current crop of CEOs and government leaders have “any serious commitment to property rights.” The fact that so many people sitting atop corporate Russia were schooled not at Harvard or Stanford but at a notorious espionage and security agency does not reassure Browder, whose Hermitage Capital Management has been raided repeatedly by Russian authorities in the past year for a variety of alleged improprieties (none of which have been proven). “This happens every day, all day long,” Browder told Fortune. “If you own a piece of property [that the government wants], you can be the target of this type of raid.”Foreigners aren’t the only targets of the government’s escalating land grab. An early warning came with the 2003 prosecution of billionaire Mikhail Khodorkovsky, CEO of Russia’s oil company Yukos, who is now serving an eight-year prison term in Siberia on a questionable tax-evasion and fraud conviction – an effort led by Igor Sechin, who was then Putin’s deputy chief of staff. Sechin, who declined to be interviewed, then folded Yukos into state-owned Rosneft and a year later became chairman of the state-owned oil company (all the while maintaining his position as Putin’s right-hand man). The addition of Yukos helped transform Rosneft from a lackluster state business to a strong performer, with $36.2 billion in revenues last year. Khodorkovsky now awaits another trial on fresh charges of embezzlement and money-laundering. “As soon as one sentence is over, they’ll add another,” he told the Times of London in May, alleging that Sechin plundered his company “out of greed.” A Russian government spokesman says Khodorkovsky was lawfully convicted.

Full article here.