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Monday, November 12, 2007

The Business of Cold War

The Times of London reports on how Vladimir Putin is destroying genuine capitalism in Russia in favor of weaponizing the nation's economic assets for renewed struggle with the West, establishing corporatized regime ("Kremlin, Inc.") which cares nothing for the interests of the people of Russia -- the same situation as in Soviet times, the same situation that brought the USSR to ruin.

WHEN one of the top directors of Gazprom, the Russian state-owned gas giant, was recently summoned to a meeting with his chairman, the billionaire executive did not go to the company’s lavish new head offices in a high-rise south of Moscow’s city centre. Instead his chauffeur-driven limousine and chase car crammed with armed bodyguards headed straight for the Kremlin. After a brief walk along the building’s eerily silent corridors, which run along sumptuous, gilded halls, he was ushered into the office of Dmitry Medvedev, Russia’s deputy prime minister and close protégé of the president, Vladimir Putin.

But what outsiders could have mistaken for an exchange between a powerful Kremlin figure and a wealthy businessman seeking to curry favour was instead a routine corporate meeting which, in Russia at least, no longer raises eyebrows. For Medvedev – who until recently was being tipped as Russia’s next president – is one of the country’s most senior government figures and chairman of Gazprom’s board of directors. As a result, the 42-year-old has three offices, one in the White House, Russia’s seat of government, another in the Kremlin, the president’s official residence, and a third at Gazprom’s headquarters.

Also on the gas giant’s board are Viktor Khristenko, Russia’s minister for industry and energy, and German Gref, who until two months ago was economic development and trade minister. Far from being an anomaly, Gazprom’s unusual boardroom lineup is the result of a deliberate policy introduced by Putin of appointing trusted Kremlin insiders to head Russia’s largest state companies. Instead of being an obstacle, the fact that they also hold senior state positions appears to have become an essential requirement.

After nearly eight years in power the policy has become so widespread that Russia’s largest companies are all controlled by bureaucrats, cabinet ministers and Kremlin bigwigs whose biographies in many cases share one thing – a KGB past. Personally appointed by Putin, they answer only to the president.

Critics have dubbed the system Kremlin Inc or Korporatsiya, the Corporation, likening the country to a multinational, the state to a boardroom and the president to its chief executive. Putin, who curbed the power of the oligarchs – in some cases by jailing them – is accused by critics of giving birth to a new breed of state tycoons. “Only in Russia are business-men also big state bureaucrats,” said Stanislav Belkovsky, a political commentator linked to Boris Berezovsky, the oligarch turned fierce Kremlin critic. “The country is not run by politicians serving the state but by a clan of business-men who often use the state’s instruments, including its security services, to make money.”

Even a partial list of state figures who officially also hold senior positions in business is bewildering. Igor Sechin, a former KGB officer who is now deputy head of Putin’s presidential administration, is chairman of Rosneft, the huge state-run oil company. Sechin’s No 2 on the board is Sergei Naryshkin, a deputy prime minister who is chairman of Channel One, one of two state television networks.

  • Viktor Ivanov, another former KGB officer and close Putin aide, heads Aeroflot, the state-owned airline. In addition, he chairs the board of directors of Almaz-An-tey, the state missile-production monopoly.
  • Sergei Ivanov, the hawkish deputy prime minister and former KGB officer widely tipped as another favourite for the presidency, heads the newly formed monopoly United Aircraft Corporation, a merger of Russian aircraft-design bureaus.
  • Alexei Kudrin, Russia’s finance minister, is the chairman of Alrosa, the world’s second-largest producer of diamonds. Until last year, Vladislav Surkov, one of Putin’s most trusted Kremlin advisers, was also on the board of Transnefteprodukt, a state oil-pipeline group.

In the case of Andrei and Dimitry Patrushev, who respectively work as an adviser to Rosneft’s board of directors, and vice-presi-dent of the state-run bank VTB, the link to Russia’s sprawling state bureaucracy is through their father, Nikolai – a close Putin loyalist who heads the FSB, the former KGB. “Frankly I don’t know of any other country where so many high-ranking state officials also head state companies,” said one Western oil-industry source.

“It’s a bizarre situation which surely leads to daily conflict of interests. Imagine a British cabinet minister moonlighting as the chief executive of a state company. Instead of properly regulating the economy, the state actually owns the economy.” Putin’s supporters – and there are many – say the policy is justified as it reestablished the state’s control in the world of big business and put an end to the chaos of the 1990s when, under Boris Yeltsin, state-owned enterprises were sold to well-con-nected tycoons for a fraction of their value.

Cabinet ministers who are at the helm of big corporations are not there to enrich themselves, say many in Russia. Instead they attend board meetings and make appointments to ensure that the state’s interests, as seen by Putin, are met. They are his eyes and ears, not oligarchs. Putin’s detractors, however, suspect – but given the lack of transparency and the Kremlin’s tight control on the media, have found little evidence – that members of the Korporatsiya have long become multimillionaires. Privately at least, few dispute that state officials are allowed to have businesses on the side. More than one is rumoured to own a villa in Sardinia.

Putin did not simply appoint state officials to head Russia’s largest corporations. In most cases he either created or turned the companies into what they are today. From the start of his presidency he has aggressively moved to bring much of Russia’s oil and gas industry back under Kremlin control, often wrestling ownership from the oligarchs.

By far the most hostile takeover was against Mikhail Khodor-kovsky, the former owner of the Yukos oil company and once Russia’s richest man. He incurred Putin’s wrath not just because he developed political ambitions. His crime in the eyes of the Kremlin was considering selling part of Yukos to an American oil company and seeking to negotiate the construction of a new pipeline without Putin’s consent. Jailed and found guilty of embezzlement and fraud in a politically motivated trial, Kho-dorkovsky is now serving an eight-year sentence in Siberia. Yukos was slapped with a £10 billion bill in unpaid back taxes, forced into bankruptcy and stripped of its main assets, which were sold to Rosneft in a process that even some Kremlin aides described as state-spon-sored theft.

Sechin, Rosneft’s chairman and a close Putin aide, has been widely described as the driving force behind the onslaught on Yukos, one in which the Russian president is said to have taken a keen and personal interest. In 2004, before the demise of Yukos, Rosneft was worth an estimated £4.5 billion. It is now valued at about £40 billion.

But Putin’s most cherished pet project by far is Gazprom. Once a Soviet behemoth, under the Russian president the company has experienced a giddy expansion. Putin, who is determined to see Russia regain some of the influence it lost with the collapse of communism by turning it into an energy superpower, has astonished aides and foreigners alike with his knowledge of minute details about Gazprom. No important company decision is taken without first consulting the president. Two years ago the state took a majority stake in the gas giant. It then purchased the oil company Sibneft from Roman Abramov-ich, Russia’s richest man and owner of Chelsea football club. Insiders say that soliciting rival bids was never considered. Gazprom, which some describe as a state within a state and a powerful tool of Russian foreign policy, is now worth more than £120 billion. Ranked by the value of its stock, the company is the fifth-largest corporation in the world. Its executives vow to make it the biggest. Putin’s hands-on interest in Gazprom is such that until recently many expected him to take over as chief executive when his second and last term ends in March – the Russian constitution bars presidents from serving more than two consecutive terms. He is now more likely to stay on as leader of United Russia, a pro-Kremlin party that could win as much as 70% in parliamentary elections next month. Either way, he will retain much influence over the huge state corporations created during his tenure.

Kremlin Inc continues to grow fast as the state is now reaching out far beyond the energy sector. Mining, shipping, the railway and airline industries as well as car manufacturing are all coming under the government’s control. Other state giants are being created and more state appa-ratchiks are being ushered in to boardrooms. Influential Russian business-men say that if the state is interested in buying out a company there is only one choice: sell. To oppose a takeover is as pointless as it is dangerous. “Private companies can make a more attractive offer to win you over,” said one Russian entrepreneur who made a fortune in the oil industry and sold out shortly after the Kremlin began to show interest in the energy sector. “The state can send in the tax police and raid your headquarters with armed officers. Best option is to accept the first offer. You make decent money instead of powerful enemies.”

Given the political power of some of Putin’s appointees, murky behind-the-scenes battles have been inevitable. Sechin’s interests as Rosneft chairman, for instance, are said to have clashed with Medvedev’s at Gazprom. A proposed merger between the two state-controlled behemoths was abandoned in 2005 due to rivalries between the two men’s power bases in the Kremlin. The two sides also clashed over the spoils of Yukos.

The byzantine power struggles, both inside and outside the boardroom, are set to intensify now that there is growing insecurity over who will rule Russia after the March presidential elections. Equally unclear is what political influence Putin will retain and, crucially, in what capacity.

“Make no mistake, if you area Kremlin insider and a member of Kremlin Inc you are far from poor,” said a Gazprom source. “And if you are up there with the big boys, your biggest fear is that the complex balances of power which have been formed over the last few years are going to be shattered with the end of Putin’s presidency. “If a new boss comes in, so do his people. And they will want a slice of the cake. “Expect turmoil and intrigue – behind the scenes, of course. Expect pit bulls fighting under a carpet, as we say in Russia.

“But, whatever the outcome, Kremlin Inc is here to stay.”

1 comment:

Anonymous said...

Hi, not a comment but a link to a great op-ed from the CBC:

http://www.cbc.ca/news/viewpoint/vp_kinsman/20071110.html