Category Archives: business intrigue

Germany Suckers Russia into Automotive Boondoggle

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The Wall Street Journal reports:

The German government has bound the fate of General Motors Corp.’s (GM) European business to the faltering Russian economy by selecting auto-parts supplier Magna International (MG.A.T) as a partner for Adam Opel.

{Click the link to read the rest, explaining how Russia has been suckered into a major boondoggle by the Germans}

EDITORIAL: In Russia, Winning does not Guarantee Victory

EDITORIAL

In Russia, Winning does not Guarantee Victory

In February of last year, we reported on how a Norwegian company called Telenor was locked in battle with a Russian company called Storm LLC, proxy for a Russian firm called Altimo, itself a proxy for a Russian congolmerate called Alfa Group, over control of a Ukrainian telecommunications enterprise called Kyivstar GSM.  As is the usual thing, the Russian company was playing dirty, and the Norwegians turned to the American legal system for help, notching a big victory over the Russian side.

The Russians responded by launching a billion-dollar lawsuit against Telenor in an obscure Siberian court using a proxy entity called Farimex over shares held by Telenor in the Russian telecom giant VimpelCom.

Now Telenor’s website reports the following:

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Essel on Russia vs. Zimbabwe

Russia Still Second, Zimbabwe Still Leads…

by David Essel

Russia is still a runner-up to Zimbabwe in the economic mismanagement stakes but the two countries are competing in the same league of Commie Mentality States.

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Latynina on Putin and Mechel

Other Russia translates Yulia Latynina from Yezhedevny Zhurnal:

Last week, at a meeting in Nizhny Novgorod, Prime Minister [Vladimir] Putin came down hard on a company which was damaging Russia’s economy with its work.

It turned out this company was by no means Baikalfinansgrup, which bought Yuganskneftegaz at a non-competitive auction on credit provided by the government. And it wasn’t the Gunvor group, which belongs to a friend of premier Putin and receives 70 billion dollars annual income from the export of Russian oil. And not RosUkrEnergo, whose right to deliver gas to the Ukraine using non-transparent arrangements is whole-heartedly defended by Russian bureaucrats at the highest level.

It turned out to be Mechel, condemned for selling coal abroad at prices two times lower than domestic ones. The company’s owner, Igor Zyuzin, did not appear at at the meeting, citing illness. “Of course, illness is illness,” premier [Putin] said, then recommending a speedy recovery for Mechel’s owner. “Otherwise we’ll have to send him a doctor to clear out all these problems.”

Putin’s promise to send Zyuzin a doctor cost Mr. Zyuzin 5 billion dollars — it was exactly this amount by which Mechel’s market capitalization collapsed that evening on the New York exchange.

The reason why Mechel in particular dissatisfied the premier was such: The largest Russian metallurgical giants, including the Novolipetsky [NLMK] and Magnitogorsky metallurgical complexes, buy up coal on the side, and as a consequence, are interested in long-term contracts for coal delivery during times of sharp price increases.

Mechel, which supplies them with coal, is a coal extracting company, and is accordingly interested in spot contracts for coal delivery, which allow it to maximize sales profit; And, should the opportunity arise, to use the deficit of coal as a lever to gain control over small factories (Gubakha, for instance).

It is clear that giants like NLMK and Magnitka are much closer to the Kremlin, and especially to Vice-Premier Sechin, who now oversees industry. It was precisely Sechin, who, with active participation of the metallurgical giants, prepared the report that has raised so much attention.

It sticks out like a sore thumb that this is already Premier Putin’s second attempt at direct interference in the economy. A week ago, high prices for jet fuel elicited his discontent. If earlier, during his presidency, President Putin underscored in every way that “the Yukos affair” was an exception, then now, it seems Premier Putin is making it clear to everyone that he is intent on directing the economy by hand.

Mechel, which was worth around 15 billion dollars just last week, recently laid out around 2.5 billion dollars for a controlling stake in two large coal companies –Yakutugol and Elgaugol –and in doing so, beat out the state-run ALROSA. Yakutugol has been online for a long while. Elgaugol is simply a section of taiga, and several billon dollars are needed to develop it.

It is obvious that in the near term, it will be hard for a company that paid money for non-operational assets in an open auction to raise the means to develop them. If Mechel goes bankrupt, and its assets are sold for peanuts, Mechel’s shareholders (I’ll remind you that the company had its IPO and lists its shares on the New York Stock Exchange), may well file against Premier Putin in the New York City court.

And if the Yukos shareholders, in filing their corresponding lawsuit, expect to prove that precisely Vladimir Putin or Igor Sechin are guilty for their misfortunes, then everything is available right here. It is hard to imagine George Bush, threatening to “send a doctor” to Bill Gates. One doesn’t speak to businessmen this way in the free world. Crime bosses speak this way to an out of line merchant. Usually, proof of these threats is obtained in a strategic way, wrapping oneself in microphones. Here the threats sounded right on the television.

One question –how much will this affair cost Mechel? Although in my opinion, something else is far more interesting –how much will it cost the Magnitka and Lipetsky [metallurgical plants]. What has happened comes out as the classic illustration of the proverb: don’t call a wolf to help you with the dogs. The metallurgical giants turned to Vice-Premier Sechin, to help him fight with inflation by forcing Mechel into long-term contracts. The general fall of the market has already cost Russia’s steel sector far more than the losses from spot contracts, by which Zyuzin sold coal. After all, zealous bureaucrats will now be checking everyone, not just Mechel. It is always this way with chekists and bandits: if you ask them for a favor, it’s uncertain if they will accommodate it or not. But you’re still certain to owe them.

But the most interesting part –how much will this affair cost Premier Putin? It isn’t a question of whether business will start to speak up in Mechel’s defense –no one has any illusions here. Business will be tearing chunks out of Mechel, and its mouth will be busy. But then Mechel will likely run for protection to President Medvedev, and there aren’t any reasons why President Medvedev wouldn’t provide it with protection. If nothing happens with Mechel, and prices for airline tickets don’t fall, this will mean that Premier Putin can’t regulate the prices of either jet fuel, or coking coal.

And this is very bad, when the premier sends a doctor every week, and the doctor just doesn’t arrive. This way one can quickly tumble down to the level of Premier [Mikhail] Fradkov, who every week would loudly censure [German] Gref, or [Alexei] Kudrin. But for some reason, he could never do anything to them.

Browder Speaks

The Times of London reports:

Bill Browder calls himself a value investor – it is fund manager-speak for someone who looks for latent value in stocks that are ignored, hidden gems – but value investment barely begins to describe what he does.

In common with other money managers, the chief executive of Hermitage Capital has a PowerPoint presentation that sets out his strategy, but if you know anything about Bill Browder, the rehearsed explanation is strangely unsatisfying; you wonder if you are getting the whole story.

All fund managers, barring those who follow indices and the weird ones who predict the future from lines on charts, call themselves value investors, but the Hermitage chief does something altogether different – he pursues value with a vengeance.

This is not about taking a stake in a dull family engineering company with a view to prodding the management out of slumber.

On the basis of past performance, Mr Browder’s strategy is to target a leading company with close connections to government and to conduct a forensic examination of its investments.

Upon discovering fraud and embezzlement, a very public campaign of exposure and denunciation ensues, followed by partial recovery of funds and huge stock price appreciation. It finally ends with Mr Browder being chased out of Russia.

Hermitage Capital’s campaign against fraud at Gazprom made enormous amounts of money for investors, including many who never put their money in Mr Browder’s fund.

He started with $25 million in 1996, achieving almost tenfold gains in 18 months and then raised $1billion from new investors. At one stage the pot totalled $4 billion and Hermitage became Russia’s biggest foreign portfolio investor.

However, Mr Browder offended someone with great power – he insists that he still does not know who – and in November 2005 was refused re-entry into Russia. He has not returned since.

Hermitage is shifting its focus to the Middle East, in particular the Gulf, where Mr Browder is investing the proceeds of a new fund. He raised $625 million in April last year and is targeting infrastructure companies in Kuwait and the United Arab Emirates.

His portfolio includes 15 investments at present after a lengthy selection process from a thousand companies worldwide. He reckons that the Gulf investment climate is a holiday compared with Russia. “Corporate governance is so much better [in the Gulf]. In Russia it was all about fraud. We have never seen anything like that in the Middle East.”

The parallels between Mr Browder’s Russian exit and the present rumpus at TNK-BP (the Russian affiliate of BP, where a power struggle has resulted in BP’s nominated chief executive running the company from somewhere in Central Europe) are obvious.

“If my experience is anything to go by, BP’s problems are only just beginning … They [BP] should fight back, use everything they have. It’s the only thing that these people understand.”

He ought to know. Although the visa denial put paid to his Russian strategy, it was trivial compared with what happened next.

In June 2007, while the Hermitage boss languished in London, a lieutenant-colonel in the tax unit of the Interior Ministry became aware of Mr Browder’s predicament.

Under the guise of a tax inquiry, his team raided the Moscow offices of Hermitage and its law firm, seizing documents, computer discs and corporate seals, in the process beating up a Russian lawyer who dared to protest.

Over the next six months there followed an elaborate fraud in which the ownership of several Hermitage companies was changed and new directors appointed.

A lawsuit was fabricated against the Hermitage companies, the bogus directors accepted the claim and “judgment” was awarded for $376 million.

Mr Browder has PowerPoint presentations that explain the fraud in minute detail and you almost sense that he enjoys pursuing the gangsters through the shadowy corridors of the Kremlin.

“Isn’t it amazing?” he says. It gets more amazing because the crooks failed to get the money – the Gaz-prom stock held by the companies had been transferred offshore.

Undeterred, the “police” then pursued another avenue. Having bankrupted the Hermitage companies with bogus lawsuits, they then demanded repayment from the Government of taxes legitimately paid by Hermitage, a total of $230 million, to the Russian Treasury. This was duly repaid to the crooks – a tax fraud perpetrated by tax inspectors.

Why does the Hermitage chief do it? “I went to Moscow hoping to find cheap stocks.” He was at the time a fan of Vladimir Putin, supporting the President’s programme of reform.

His first confrontation was with Vladimir Potanin, a Russian oil and metals tycoon, over shares in Sidanco, an oil company later acquired by BP. Hermitage bought 2 per cent, but the tycoon wanted to assert control.

“He decided to issue shares to a group of insiders, including himself. I had to go into battle to prevent it being diluted.”

He cuts an unlikely figure as a caped crusader for corporate governance in this cloak-and-dagger world of post-Soviet corporate gangsterism but talks about “the good guys” and “the bad guys” in a way that brushes aside the amorality of Moscow business deals.

His grandfather was Earl Browder, one of the founders of the American Communist Party, who went to Russia in 1927 and became the party’s general secretary.

During the Second World War he was expelled for arguing in favour of co-existence with capitalism and during the 1950s communist witch-hunts he was interrogated by Senator Joe McCarthy but refused to incriminate his former comrades.

The younger Browder says that he has taken on the role of family black sheep, embracing capitalism and rejecting academia, the profession of his father, who is a respected mathematician.

The black sheep initially worked for Boston Consulting Group and got a taste for investing when he was sent to Poland to sort out a failing bus factory.

The Polish Government was privatising state companies by public flotation. “I took all my savings, $4,000, and applied for all the privatisations and made ten times my money.” He joined Salomon Brothers and traded Eastern European equities. In 1995 he quit to set up Hermitage.

The rebel has a suitably apocalyptic view of the financial world. The credit crisis has a long way to go, he reckons. “There is going to be huge attrition in the world of investment. We have been in a 20-year bull market.”

The fashionable emerging markets will continue to be hit hard. “The Chinese stock market was trading at 50 times earnings. As the bubble bursts in China, there will be a knock-on effect, it will be the de-Bric-ing of the world,” he says, referring to the acronym of Brazil, Russia, India, China that has became a buzz-word for emerging market dynamism.

The Hermitage boss has his own slogan: “Get off the financial grid.” By this, he means the world of financial markets, places where capital is consumed, rather than generated. “You don’t want to be in places where capital markets are active.

If you can’t borrow money, who will do badly? Those who need to borrow money.” That logic drives Mr Browder to the Middle East, where capital is in huge surplus and there is cultural disapproval of lending for interest.

Local Middle Eastern companies have yet to excite the investment banks, he says, and money is flowing into Middle Eastern coffers. The income of the big oil exporters totals $1.3 trillion at an oil price of $100 per barrel – and it is staying in the Gulf.

“It’s the biggest wealth transfer that has ever happened in the world,” he says.

Hermitage has 18 analysts, mainly Russian, because they are “some of the smartest people in the world trained in the one of the worst business environments”. He quotes Frank Sinatra’s song about New York: if you can make it there, you’ll make it anywhere.

But he has adopted Britain as his home. He acquired British nationality when he married and is a huge fan, recalling the support he received from the British Government when was trying to regain his Russian visa. “This is a good country. I like the rule of law.”

Russia’s Stock Market in Freefall

The Russian stock market lost nearly 6% of its value last Friday as a rabid, frothing Vladimir Putin launched another one of his crazy Stalin-like diatribes against Russia’s “enemies” — this time Russian steel maker Mechel (whose shares lost nearly half their value).  An editorial in the Times of London:

Russian stocks are in freefall, spooked by threats of anti-trust inquiries by Vladimir Putin, the Prime Minister, falling oil prices and the chicanery over TNK-BP. Foreign investors have been patient optimists, preferring to turn a blind eye to the mounting chaos in Moscow while keeping a steady gaze on commodity price indices. Yesterday, they lost their bottle and began to sell – and the selling may continue. It is a reminder that reputations built over several years can be lost in a day.

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Russia’s Crony Statism

An editorial in the Wall Street Journal:

By now, the jilted investor in Russia is a bear-bites-man story. No one who puts serious cash in Vladimir Putin’s realm, not least in its flush gas and oil fields, can be surprised to find himself fleeced, run out of town, jailed in a Siberian gulag or worse.

So let’s not shed many tears for the latest oil major brought low in Russia, BP. The British company got into TNK-BP—a 50-50 $7.6 billion joint venture with four Russian oligarchs—presumably, with eyes wide open. The initial blessing of Mr. Putin—then president, today prime minister—made the obvious risks easier to swallow. For a while, business was gangbusters, with profit in 2006 alone at $6.6 billion. Then the same old thing happened: Someone in Russia wondered, Why share the spoils with foreigners? And BP found itself defenseless in the wild east.

To make a long story short, BP is losing TNK-BP to another Kremlin-backed forced expropriation. The usual tricks were used. The tax and labor authorities, the police and the courts launched no less than 14 probes of BP, forcing out its expatriate staff from the country. The last man left—TNK-BP’s CEO Robert Dudley—had his work visa pulled and on Thursday fled Russia for an undisclosed location, citing “sustained harassment of the company and myself.” He says he’ll run the company from abroad. Sure. BP officials pretty much admit the game is over.

If the past is a guide, BP will be forced to cede control of TNK-BP to a Kremlin-owned energy giant such as Gazprom or Rosneft. Mr. Putin has pushed aside other big players once considered untouchable, in his quest to Kremlinize oil and gas wealth. Mikhail Khodorkovsky’s Yukos—then Russia’s biggest and best-run oil company—was broken and its founder sent to Siberia. BP’s Russian misery has good company abroad, too; Total, Royal Dutch Shell, ExxonMobil and Amoco, before BP’s acquisition of it, all stumbled in Russia.

Mr. Putin coined the phrase, “dictatorship of the law,” and in the early days many investors endorsed his authoritarian policies as a path to stability. It turns out that something other than mere “stability” is emerging in Russia.

Local tax authorities and health inspectors are a power unto themselves, extorting large businesses (as in BP’s case, directed from above) or free-lancing on their own against the medium and small. Their victims are mostly Russians, who won’t be able as easily to conclude their property isn’t safe and pack up and take their businesses, and jobs, elsewhere. No matter how much money there is to be made in Russia these days, it ultimately doesn’t count for much the day a boyar or simple chinovnik decides to take it away.

The steady erosion of the rule of law in Russia is a distressing sign of the times there. Mr. Putin complains of not getting proper respect from the West. Forcing the president of a major Western oil company to literally flee Russia earns respect in no one’s land.

The Sunday Scandal

Harpers reports:

Back in January of 2007, the House Ethics Committee (“Press 1 if you are a member of Congress covering up a criminal offense. Press 2 if…”) released a statement saying that it had reviewed a foreign trip by Congressman Curt Weldon and determined that he had violated the gift rule ban. Weldon, said the statement–which was signed by Republican Doc Hastings, then the Committee chairman, and Howard Berman, then the ranking Democrat–had traveled in January 2003 with “several” unnamed family members. “Donors,” who were also not identified, picked up the tab for much of the trip, said the committee. The statement also failed to disclose where precisely Weldon & Co. had traveled, but did say that Weldon had been told to reimburse the trip’s financial sponsors for some $23,000 in expenses.

So where did Curt Weldon go? I’ve learned that he traveled to Eastern Europe (stops included Moscow and Vienna) with 10 family members and acquaintances, including one son’s girlfriend and a daughter’s boyfriend. The trip was paid for by three private foreign groups, including a Russian aerospace manufacturer and members of a controversial Serbian family that were barred from entering the United States due to their alleged ties to accused war criminal Slobodan Milosevic. Very soon after the trip the Russian firm and the Serbian family retained Karen Weldon, the congressman’s young, politically inexperienced daughter, to be their Washington lobbyist–which led to charges about whether her father was steering business to her that are currently the subject of a federal investigation.

This was all known to the Ethics Committee when it released its statement in January of 2007. As is inevitably the case, the committee opted to cover up for one of its own as opposed to holding members of congress accountable.

According to the Committee’s statement and other evidence I have obtained, prior to traveling Weldon had disclosed his trip and sought a waiver from the gift-rule provisions that at the time permitted a member of Congress to accept “travel and other benefits resulting from outside activities that are unrelated to official duties.” Weldon argued that his trip was unrelated to official duties, because the invitation to travel to Eastern Europe (to give a speech) was made on the basis of his membership in the Russian Academy of Sciences–not because he was a member of Congress. Even the typically lame Ethics Committee rejected that argument, recognizing (for obvious reasons we’ll soon see) that the trip was connected to Weldon’s position as a member of Congress. So Weldon, according to the January 2007 statement, “then sought a gift rule waiver from the Committee, but withdrew his request prior to receiving a formal written response from the Committee.”

In other words, Weldon apparently didn’t get the answer he wanted so he simply ignored the committee’s advice and ethics rules and went anyway, with the tab being picked up by outside sponsors.

In January of 2003, the Weldon clan headed to Eastern Europe. In addition to the congressman, the travelers included his wife, his three daughters, two sons, one son-in-law, a niece and two other people, whose identities were apparently known to the committee but were not revealed. I’ve learned that those two people were the girlfriend of son Andrew Weldon and the boyfriend of daughter Karen Weldon, who at the time was embarking on a lucrative career as a lobbyist (though a short-lived career, interrupted in October of 2006 by a federal raid on her offices).

So the Weldon clan departed to Moscow, and the Moscow International Petroleum Club, “a non-profit international organization, with membership of over 25 leading Russian, European, and American oil and gas production and service companies committed to doing business in Russia,” picked up about $12,000 in planes fares and hotel lodging.

Other stops in Russia included the Saratov Aviation Plant, a company building a flying saucer, whose technology Congressman Weldon was aggressively pushing in Washington. Saratov paid for roughly $4,000 of airfare, which included flights from Moscow to the plant and then from the plant to Belgrade. Soon after this visit, Karen Weldon closed a deal with Saratov to lobby for the firm in Washington.

In Belgrade, the Weldon family stayed at a private residence owned by the controversial Karic family. As I wrote in the Los Angeles Times in 2004:

Because of evidence that the Karics had supported Milosevic, the Treasury Department placed them on a list of Serbians banned from doing business in the United States. They all had been removed from the list by last year, as the United States normalized relations with Serbia, but they still cannot get visas.

In a written statement, a spokesman for the Karics said, “Regarding the alleged links of the Karic Group or family to the Milosevic regime, we can only reiterate that these allegations are the product of groups or individuals from our country who have been themselves profiting from ties with the former regime.” Rep. Weldon came to adopt the view that the Karics, whose businesses thrived under Milosevic, were being unfairly portrayed as sympathizers of the former leader.

From Belgrade, the Weldon clan traveled to Vienna. The roughly $7,000 in airfare was picked up by the Karic Group. In March 2003, two months after this trip, the Karic Foundation hired Karen Weldon’s firm on a renewable one-year contract paying $240,000 to help it in “establishing and developing a U.S. presence.”

The Ethics Committee’s limp, pathetic response to this egregiousness came in January 2007–two months after Weldon had lost his House seat. The Committee essentially protected one of their own up until the point that it was irrelevant. Furthermore, Weldon had during the campaign claimed–falsely, as the statement shows–that he had been fully investigated and cleared of any wrongdoing by the committee. By not releasing the statement until months after he had lost his House seat, the committee allowed then-Congressman Weldon to lie.

Finally, the Committee had determined that it would not take any action over charges that Weldon had steered business to daughter Karen’s firm. But, as is customary, the committee’s investigation was largely limited to reviewing information submitted by Weldon’s own office. Imagine how many convictions we’d get if the police limited their investigations to data provided by suspects, yet that’s the way our Congress works.

(This also makes it easy to understand this story from today’s Washington Post, “House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) said yesterday that he would welcome an ethics committee investigation into his fundraising efforts for an academic center that bears his name.” Yes, I can imagine the propsect of a committee investigation doesn’t keep Rangel up at night.)

Weldon’s attorney, William Winning, did not reply to a request for comment about the trip, nor to a question about whether Weldon ever in fact paid the money back. If he does reply, I will update this story immediately.


Russia is Closed for Business, America is Wide Open

Joshua Keating of Foreign Policy says that Russia is “closed for business” and blames Dmitri Medvedev:

Last month, Dmitry Medvedev assured a group of international CEOs that he would work to enforce the rule of law and establish “absolutely independent modern courts that comply with the country’s economic development level.” But if the assembled corporate leaders were hoping that the new Russian president would be true to his word, and the corruption and politically motivated prosecutions of the Putin era would end, this has not been an encouraging couple of days.

Yesterday, most of the expatriate staff of TNK-BP, an oil venture co-owned by British Petroleum, were denied extensions of their work visas. CEO Robert Dudley e-mailed employees this morning telling them to prepare for relocation as early as next week. The standoff between BP and its Russian partners has been escalating for months but after today, it appears that that the Russian shareholders have effectively wrestled the company away from the departing Brits. (Medvedev has denied accusations that the government is intervening on behalf of the Russian oligarchs on TNK-BP’s board as well as the rumors that his old company Gazprom plans to take control of what’s left of the company.)

Also today, new charges were filed against Mikhail Khodorkovsky. Once Russia’s richest man, the former CEO of oil company Yukos has languished in a Siberian prison since a tax-evasion conviction in 2003 that was widely seen as punishment for the tycoon’s political ambitions. Khodorkovsky has now been charged with embezzling more than $28 billion and stealing 350 million tons of oil. Kohodorkovsky’s lawyers had hoped he could be released early after having served more than half his original sentence, but the new charges could keep him behind bars for another 20 years. One of his lawyers, Robert Amsterdam, told Bloomberg: “I don’t think they’re even trying to make these new charges look real.”

Russia’s leaders have created a legal system in which it’s essentially impossible for a business to operate legally, making anyone who does business there subject to arbitrary prosecution. It’s an arrangement that’s well-suited to protecting state power, but not very effective at promoting economic growth. If Medvedev really wants to make Russia the world’s fifth largest economy by 2020, he’s going to need to try a littler harder.

Keating continues:

While President Bush is spending his birthday week with “smart guy” Dmitry Medvedev, his secretary of state is embarking on you might call a tour of the front lines of Western-Russia tension. Tomorrow, Secretary Rice travels to Prague to formally sign an agreement on the construction of a U.S. missile-defense radar system in the Czech Republic. Later in the week, she heads to Georgia, an American ally locked in a standoff with Russia over its increasingly violent breakaway provinces.

Russia strongly opposes the building of the missile-defense shield and the Foreign Ministry has warned that “appropriate steps” will be taken to punish the Czechs. Since the Russians’ amped-up support for the Georgian provinces began as retaliation for Western recognition of Kosovo, it’s safe to assume they don’t make such threats idly. But compared with historically unstable Geogia, there’s not much Russia could do to push around the Czech Republic, a country where Moscow hasn’t held much sway since the Velvet Revolution of 1989.

In fact, it’s clear Czech leaders are excited to be under the U.S. military’s protective wing, and the same goes for Georgia’s efforts to join NATO. Poland, which the U.S. hopes will also host part of the missile defense system, is still holding out, but that seems to be mostly about the Poles negotiating a better deal.

These countries, even if purely for cynical reasons, see cooperating with the U.S. as a strategic advantage. Russia, on the other hand, only seems to influence other nations by undermining their governments or shutting off their energy supplies. This can work in bordering countries like Georgia or Ukraine, but places like the Czech Republic and Poland no longer have to fear Russian tanks rolling down the street.

There’s a lesson here: For all the talk of the Putin/Medvedev tandem’s international assertiveness, they seem to lose a lot more battles than they win. And despite everything that has gone wrong in the last eight years, the United States still seems to be much better at making and keeping friends than the Russians.

A Russophile’s Mea Culpa

John Gapper, Chief Business Commentator for the Financial Times, writing on his blog:

Whatever expectations one has of the Russian government and civil institutions, they always disappoint. The abuse of tax and visa laws to eliminate BP’s hold on its Russian oil joint venture TNK-BP is the latest in a long line of doleful examples.

It has been obvious for some time that the rule of law does not apply in Russia to the international investors and companies which venture into the market in the hope of profiting from its natural resources.

Now comes news that the Moscow authorities, petitioned by BP’s Russian partners, with whom it has fallen out, are squeezing out BP executives by refusing them visas. It calls to mind the way in which Hermitage Capital Management and its founder William Browder have been harassed using visa and tax laws.


I feel a pang about BP because I wrote a column once asking whether it was wise to trust in its Russian joint venture and concluding that it was taking a reasonable chance. With hindsight, even my guarded optimism now looks naive.

It certainly does not seem that the ascension of Dmitry Medvedev to the Russian presidency and Vladimir Putin’s sideways move to become prime minister has improved matters.

Russia has always used as an excuse for its behaviour that the way in which the oligarchs gained control of many of its natural resources was unjust and it was justified in seizing them back. But as time passes, and the authorities show no evidence of becoming less arbitrary, that justification is wearing thin.

The question, of course, is whether economic self-interest will eventually lead to Russia’s government abandoning such legal abuses, for fear of sacrificing foreign investment. It may do, but it seems unlikely to happen as long as the boom in commodities continues.

There is so much wealth tied up in Russian oil and minerals now that the country is financially strong enough to disregard the international outcry at its tactics. It will probably continue to find foreign investors willing to take the risk of having their assets stripped from them if they become inconvenient.

I wish it were otherwise, but pessimism seems the most logical attitude to Russia’s business environment at the moment.

Russia: Richest Government, Poorest People

Forbes reports on the shocking wealth accumulated by Russia’s new oligarchy, unsettlingly reminiscent of the concentration of privilege that occurred in, and destroyed, the former Russian monarchy and the Bolshevik regime.

Russia had the second-highest number of billionaires in the world this year, but when it comes to wealth in government, the former Soviet Union is clearly No. 1. Twelve billionaires now hold seats in the country’s parliament, with a total net worth of $41 billion, sitting alongside the less wealthy lawmakers, worth merely in the hundreds of millions. Russian billionaires don’t limit themselves to legislative seats; there’s at least one billionaire governor, and the mayor of Moscow is married to another.

At the top of the heap: Suleiman Kerimov, 42. Young and brash, this stock market mogul (worth a staggering $17.5 billion) served eight years in the parliament’s lower house after Vladimir Putin announced he wanted no more billionaires in the Duma. There were also fears his wealth would attract the attention of the tax authorities–thus possible scandal.

Then there’s Gleb Fetisov, 41. Worth an estimated $3.9 billion, he was appointed to parliament in 2005. He built his wealth trading commodities in the Alfa Group business empire and is now affiliated with Alfa’s telecom holding company, Altimo. As a lawmaker, he’s fought for less government regulation of large enterprises and was considered one of Alfa Group’s key contacts for lobbying the federal government until a recent deterioration in his relationship with Alfa.

Others include: Sergei Pugachev, 45, a former banker worth $2 billion; Farkhad Akhmedov, 52, the feisty and outspoken founder of Northgas, worth $1.4 billion; and Dmitry Ananyev, 41, who made his $2.3 billion selling ERP software. And the list goes on.

Of course, wealth and political power are as old as the institution of government. But the scale of wealth in Russia’s government is unparalleled anywhere else on Earth. These men, mostly entrepreneurs, often swear their motives are altruistic, but the overriding factor is likely the personal benefit they enjoy from being closer to the center of power. Most are affiliated with Vladimir Putin’s United Russia party–compared by some political pundits with the old Communist Party: Membership has many privileges.

Russia’s legislature is like the U.K.’s, with a lower and upper house. The lower house (the Duma), has 450 seats. Seats are distributed proportionally among parties that get more than 7% of the vote. The upper house (the Federation Council) has 168 senators who are appointed by the governors and local legislatures of each of the 84 regions.

In the upper house, especially, this system allows governors to appoint their friends and allies to represent their regions. The system is cozy, but it can work out for local constituents: Senators in the upper house are expected to corral federal tax revenues for their district. They’re also supposed to lobby for businesses to move there.

But it’s really a win-win for the senator and the region. “If a big guy represents a small region, even a small part of his fortune is good for the region,” says Nikolay Petrov, a scholar at the Carnegie Center in Moscow. “These guys get a certain position and respect, which makes it easier to deal with the authorities on a certain level. This helps their own business.”

Some legislators from the lower house have been moved to the upper house for being seen as too wealthy–possibly creating controversy. Vladimir Putin recently made comments suggesting that billionaires shouldn’t be in the Duma, which is why Gazprom and Aeroflot investor Alexander Lebedev ($3 billion) didn’t return this year.

Senators can also move around to different regions. Corporate raider Sergei Gordeyev–merely wealthy, not a billionaire– reportedly didn’t hit it off with the governor of the tiny Ust-Ordyn Buryat Autonomous District (which was also merged with a nearby region); he’s now a senator for Perm.

Complicating matters further, Russian law prohibits legislators (or any government official) from running a business. So how come so many billionaire lawmakers make our list? Many get around the law by “assigning” or “giving” shares of their companies to friends and family members. At least on paper.

It may all sound rather wacky, but give the Russians this: In the czars’ days, with government service reserved for the aristocracy, the newly rich had no chance of attaining government positions. Today, government is open to all–though a net worth of a few hundred million dollars sure doesn’t hurt.

The Sunday Scam: Russia is a Sucker Play

Thinking of investing in Russia? Think again, the Times of London says:

The attempted fraud against Hermitage Capital, the leading foreign portfolio investor in Russia, is another reminder of the risks in doing business in one of the world’s fastest-growing economies. Hermitage alleges that individuals connected with the Russian Interior Ministry, were involved in a scheme to extort $367 million (£184 million) from three subsidiaries of the Hermitage Fund it manages. The plot failed only because the assets held by the companies had already been moved offshore. The attack on the fund comes after a long campaign against Hermitage Capital and its chief executive, William Browder. In 2005, the authorities refused to renew Mr Browder’s visa after his attempts to expose corruption in Gazprom, the Russian energy giant. Outspoken though he was, even Mr Browder never suggested that the rule of law was so flimsy that ownership of companies in Russia could be lost at the stroke of a bureaucrat’s pen. That appears to be what was attempted last year by people using documents seized by Interior Ministry officials. Western business executives who are bullish about Russia tend to dismiss such examples as special cases. The Yukos affair, in which a successful company was dismembered and its assets sold at bogus auctions, was a “political” battle, a row between the President and a powerful opponent. The forced sale of a majority stake in Shell’s Sakhalin project was a “special situation”, relating to Russia’s sensitivity over key natural resources. BP’s Russian affiliate is being harassed by various government organisations because . . . well it’s really not clear. The Hermitage case adds to the growing evidence that the Russian Government has lost control of parts of its administration that are pursuing their own agendas. Russia’s incoming president has hinted that he wants an end to the culture of “raids”. Western businesses should be hoping it becomes more than a hint.

The Sunday Shakedown

An editorial from the Wall Street Journal:

A senior executive at TNK-BP told us a few months ago that the oil company was “a poster child” for foreign investment in Russia. So it is turning out to be, only not in the way that he intended.

Blessed by Vladimir Putin at its creation in 2003, BP’s Russian joint venture is now getting the standard Kremlin treatment. Yesterday a “bureaucratic” visa problem forced the British company to send home 148 expatriate workers. Meanwhile, the Interior Ministry launched a “tax evasion” probe into a TNK-BP unit. And last week, the (renamed) KGB raided the oil company’s Moscow offices and arrested a Russian employee for “industrial espionage.”

How subtle. Whatever is behind the shakedown of the only large oil company partly owned by foreigners, recent history suggests that visa snafus, back taxes and “espionage” have nothing to do with it. Maybe the Kremlin wants TNK-BP to lower the price on the large Siberian gas field the company was pressured last year to sell to state monopolist Gazprom. Or perhaps it’s escalating a diplomatic war with Britain dating back to the 2006 assassination of Kremlin critic Alexander Litvinenko.

The likelier explanation is that Mr. Putin is kneecapping another private oil company to secure the goodies for his cronies. Kremlin wolves swallowed whole Russia’s largest major, Yukos, and sent its boss Mikhail Khodorkovsky to rot in a Siberian jail. “Tax evasion” was the excuse. A year ago, Royal Dutch Shell got into trouble for “environmental” infractions and was forced to sell half its oil development on Sakhalin Island to Gazprom. TNK-BP, Russia’s fourth-largest oil producer, is a tasty prize.

In six weeks, Gazprom Chairman Dmitry Medvedev takes over the nation’s presidency from mentor Mr. Putin, who’ll become Prime Minister. The TNK-BP case sends a useful reminder: Nothing is likely to change.

The Sunday Shell Game


The Economist reports:

THE drama surrounding Norilsk Nickel, the world’s largest nickel producer, has all the elements of an airport thriller: billionaire oligarchs invading the French resort of Courchevel; models flown in from Moscow; wads of cash flying like confetti; all-night discos, magnums of champagne and buckets of caviar; and the whole thing topped off with a police raid. The scene then shifts to the Arctic city of Norilsk, built by slave labour under Stalin, and the nickel giant that generated all this wealth, now at the centre of a takeover battle. The Norilsk saga is being closely watched because it is a test of how the rules of business in Russia are changing.

Norilsk Nickel was one of many firms sold at a knock-down price in the 1990s in Russia’s infamous loans-for-shares privatisation scheme. Vladimir Potanin, one of the original set of Yeltsin-era oligarchs, was partly responsible for the scheme, which gave him and Mikhail Prokhorov, his young business partner, control of the firm for a song. The privatisation was indefensible from almost any point of view—but it worked. Today Norilsk Nickel is more transparent, efficient and profitable than it has ever been. It has a proper board of directors, professional managers and is worth nearly $60 billion.

The pair made a good team: Mr Prokhorov ran the business and Mr Potanin handled the politics. Between them they owned 54% of the firm. Tall, handsome and outrageously rich, Mr Prokhorov became Russia’s most eligible bachelor. He worked hard, but he played even harder. In January 2007 he was arrested by French police after his antics in Courchevel on suspicion of running a prostitution ring, but a few days later he was released without charge. Nobody can be sure if he was set up or if his outrageous behaviour simply went too far. “Senior people in the Kremlin told Mr Potanin to tell his friend to tone it down, but Prokhorov would not listen,” says a businessman familiar with the situation. After the incident Mr Potanin, who holidayed with Mr Prokhorov in Courchevel, distanced himself from his partner and condemned his behaviour.

Their split was, perhaps, inevitable. Mr Prokhorov ran the show, but all the credit went to Mr Potanin. Having transformed Norilsk Nickel, Mr Prokhorov faced the far less exciting prospect of having to run it. So he made a symbolic offer to sell his 25% stake to Mr Potanin for $15 billion. When Mr Potanin refused (some say he could not raise the money, others claim he did not even try), Mr Prokhorov turned to Oleg Deripaska, Russia’s richest man and one of the most aggressive oligarchs. Mr Deripaska owns 66% of privately held RUSAL, the largest aluminium producer in the world. For the stake in Norilsk, he has offered Mr Prokhorov 11% of RUSAL‘s stock and an estimated $6 billion in cash (the exact sum is unknown). And if RUSAL does not go ahead with its planned flotation within the next year, Mr Deripaska has promised to buy Mr Prokhorov’s stake.

The deal could reshape Russia’s metals industry. RUSAL sees the purchase of Mr Prokhorov’s 25% stake in Norilsk as the first step towards a full merger or takeover, and has loudly declared its intentions to the media, though not to Norilsk itself. Alexander Bulygin, RUSAL‘s boss, justifies the takeover on the basis that it would enable his firm to diversify into other metals, in keeping with a global trend for such deals.

Even if the industrial logic is sound, however, Norilsk Nickel’s managers are irked that RUSAL has not made a formal approach and has not explained how it could possibly execute a merger. Given that RUSAL is a private company registered in Jersey, Norilsk’s minority investors are unlikely to be interested in a share-swap. And RUSAL does not have the cash to buy them out: it is thought to be heavily indebted, even before borrowing $4.5 billion to help it pay for Mr Prokhorov’s stake. The worry in Mr Potanin’s camp is that RUSAL has its eye on Norilsk’s cashflow and plans to sneak an extra person or two onto its board of directors, install new management and then milk the company. Many Russian oligarchs did this in the 1990s to the detriment of minority investors.

The plot thickens

So Mr Potanin has brought in another metals magnate, Alisher Usmanov, who owns iron-ore mines and has links to Gazprom, Russia’s state-controlled gas giant. Mr Usmanov’s private company, Gazmetall, has made a formal approach, through a foreign bank, to Norilsk. A merger with Gazmetall would certainly make it harder for RUSAL to take over Norilsk. But it could also pave the way for a merger of all three firms.

The management of Norilsk Nickel stresses that its job is to act in the interest of all its shareholders. So far it has managed to resist the pressure from its two biggest shareholders. And it has asked its minority investors to attend a shareholder meeting on April 8th and to vote in a co-ordinated way in order to protect their interests. What will happen before or after that date is hard to predict. But already the Norilsk saga holds some lessons.

The most striking thing about the affair is that a set of business tycoons have, so far, behaved in a way that is a lot more civilised than anything seen from the Russian state. When state firms want a private asset, they send in the tax police, the security services and a few health and safety inspectors, before making an offer. Here, big private firms are dealing with each other mostly using bankers and lawyers.

Admittedly, all of the oligarchs squabbling over Norilsk have powerful friends in the Kremlin, which may be why it has not sided with any of them. Yet if Mr Prokhorov manages to sell his stake in Norilsk, it will strengthen property rights. He will be almost the only tycoon to have cashed out assets privatised in the 1990s. To date, the Kremlin has treated oligarchs like renters rather than owners and no significant sale has been possible without its blessing, even when no foreigners are involved.

The Kremlin certainly wishes to see a large national mining and metals champion, but it does not seem to mind about its exact form. Many combinations are possible and the very fact that the outcome is unknown, and is not being dictated by the state, is a sign of progress.

What matters, in the end, is not just the outcome, but also how it comes about. It is heartening to see a Russian company with professional managers who no longer treat minority shareholders as just an obstacle. When the rule of law is non-existent and the Kremlin often acts like a gangster, it falls to business leaders to work out the rules and abide by them. If they can manage this, they will take Russia forward. If they fail, they will reinforce the worst clichés about its business practices.

Annals of Oleg Shvartsman


Reuters reports:

Russia’s state arms exporter has filed a lawsuit against a businessman who said it was seeking to grab private assets, the latest salvo in what analysts have said is a turf war raging behind the scenes between Kremlin clans. The dispute between fund manager Oleg Shvartsman and arms exporter Rosoboronexport offered a rare public glimpse into infighting between the opaque groups around President Vladimir Putin as he prepares to hand over to a favored successor. The row began when Shvartsman said in a newspaper interview in November that he was planning to act as a corporate raider on behalf of Kremlin-linked interests that included Rosoboronexport and Igor Sechin, Putin’s media-shy deputy chief of staff. The arms exporter denied it had any links to Shvartsman or his businesses, or that it planned to work with him.

Observers interpreted his claim as part of an orchestrated attack on the “siloviki– a loose grouping of Putin associates with security backgrounds in which Sechin and Rosoboronexport’s overall boss Sergei Chemezov are key figures. Shvartsman’s newspaper interview sent shockwaves through Russia’s political and business elite because any claim that top officials have business interests is considered taboo. In the latest move, Rosoboronexport on Friday filed a case in the Moscow Arbitration Court against Shvartsman and Kommersant, the business newspaper which published his interview, the court said on its web site http://www.msk.arbitr.ru. The court said the arms exporter had filed the case because it was “seeking to protect its business reputation.” Neither Rosoboronexport nor Shvartsman could be reached immediately for comment. Kommersant editor Andrei Vasilyev told Reuters he knew nothing of the lawsuit because he was on holiday outside Russia. Shvartsman previously said the newspaper quoted him out of context.

The hugely popular Putin is to step down next year and he has endorsed his close ally Dmitry Medvedev to succeed him, virtually assuring Medvedev victory in a presidential election in March. The biggest threat to a smooth handover is an outbreak of infighting inside the Kremlin as rival clans jostle for influence after Putin leaves office. Some observers saw Putin’s endorsement of Medvedev, a former law professor with no security background, as a blow to the “siloviki” and a victory for rival groups. But analysts say the “siloviki” could still hit back by trying to derail a handover of power to Medvedev. Commentators speculated that a Kremlin group was behind the initiative to publish the interview and that its aim had been to discredit the “siloviki” and weaken their influence.

Shvartsman Speaks

The Financial Times reports:

Oleg Shvartsman, a fund manager, claims he is a hero of Russia’s new times. Operating out of an office which shares the same Red Square address as the Kremlin’s property department, he says he wants to lead a “velvet reprivatisation” drive of assets “illegally” won in Russia’s 1990s privatisations: not just the strategic assets that have already become a target for the state but small and medium enterprises in the regions too.

“These enterprises were built by our fathers and our grandfathers, and all of a sudden in one moment these enterprises became owned by individuals by the decision of one official who was paid cash. This is not just. This is not supported by the people,” Mr Shvartsman told the Financial Times.

Russian business daily Kommersant published an interview earlier this month with Mr Shvartsman in which he said he was leading a reprivatisation drive to “hoover up” assets via “voluntary-coercive methods” with the backing of Kremlin officials. Mr Shvartsman became a political bogeyman and a new player in a growing war between Kremlin clans overnight.

He also used the interview to say he was managing some $3.2bn (€2.2bn, £1.6bn) in assets for unnamed “political figures” connected to the Kremlin’s hardline “power bloc”. Soon after its publication, the European Bank for Reconstruction and Development and Tamir Fishman, an Israeli investment bank, said they were pulling out of plans to create a Russian venture fund in which Mr Shvartsman was to be a minority partner.

In his first interview with the western press, Mr Shvartsman backed off from assertions that his fund was tied to the Kremlin and insisted that Kommersant had “distorted” his words. But he stood by his calls for a state-backed “reprivatisation” drive. When pressed over the potential Kremlin ties of the backers of his company, Finans-Group, which has accumulated stakes in strategic industries, he added: “We are not going to check whether [investors] are relatives of administration officials.”

He added: “I have partners who enter either on the condition that they bring money or possibilities.”

It is difficult to tell whether – as some Russian observers have claimed – Mr Shvartsman is just a pawn in a complex political chess game between Russia’s warring elite. He says Kommersant portrayed him as a victim of the political infighting that broke out as Russia prepares for a transfer of power next year.

“This is an element of an internal clan battle,” he said of the Kommersant interview, which came after the arrest of Sergei Storchak, deputy finance minister, in an alleged embezzlement case widely seen as an attack on more liberal factions by hardliners led by Igor Sechin, Kremlin deputy chief of staff . “The situation has been used to discredit the ‘power’ ministries among others and in a certain way they have achieved this . . . I have become a hostage of this situation.”

But others, including several former senior government officials, say there is a large grain of truth in the Kommersant interview. The newspaper has published documents that show he signed off on every page of the interview, as well as audio files of extracts.

He is representative of a growing political class of mid-level managers working for the state, with ties to the security services, who believe it is time for Russia’s nascent class of business owners to hand their property back to the state, former government officials said. “This was a manifesto for state raiding,” said Alexander Temerko, a former vice-president of Yukos, the defunct oil group once run by jailed oligarch Mikhail Khodorkovsky. “There are a lot of companies like his, and now there are so many of them they are a force.”

The state’s attack on Yukos – led by Mr Sechin, who is also chairman of Rosneft, the state-owned energy group that has swallowed most of Yukos’s assets – began the process of using tax charges and other alleged infractions to retake property for the state. Mr Shvartsman says he wants to continue that process on a regional level, only this time with compensation for business owners who sell their shares back to the state.

Businessmen are preparing for the worst. A recent opinion poll by the Union of Industrialists and Entrepreneurs, Russia’s big business lobby, found 58 per cent of businessmen questioned believed there should be a partial review of privatisation results. The Communist party this weekend reverted to past calls to overturn 1990s privatisations.

Against that backdrop, Mr Shvartsman intends to announce today the creation of his own political movement, called For a Transparent Russia.

Vladimir Putin, Russian president, even weighed in unexpectedly to the debate, calling last week for limits on the power of new state corporations to make sure they did not encroach on other enterprises.

But Mr Shvartsman said he was working on contracts with the government’s federal property fund to consolidate control of mid-sized businesses that were ignoring the state’s property rights and paying insufficient tax.

But he denied his company could use law enforcement structures to coerce owners into handing over their holdings. “Every entrepreneur uses the legal system to defend his interests. I am no exception. The only difference is that I act in the interests of the state.” He said he was calling on the west not to fear the idea of a “velvet reprivatisation”. Western companies would be offered stakes as a way of bringing in much needed technology and expertise once state consolidation was completed, he said.

Mr Shvartsman said a key idea of his business was to support law enforcement organisations and army veterans via donations through a fund known as SSSR, the Union for Social Justice in Russia. Valentin Varennikov, a former army general and member of parliament, is the head of its supervisory council.

But Yevgeny Shakhov, the head of the SSSR, says he has known Mr Shvartsman for years but says he still cannot understand his comments. “I don’t know what got into his head,” Mr Shakhov said. “He got into politics and then I don’t understand what happened.”

Clan wars

Oct 1 2007 – General Alexander Bulbov of Russia’s Federal Anti-Drugs Service, who was investigating a corruption case alleged to involve members of the FSB, or KGB’s successor, is arrested

Oct 9 – Viktor Cherkesov, head of the anti-drugs service, warns in an open letter to Kommersant newspaper of a “war” between different wings of the security services

Nov 23 – Sergei Storchak, deputy finance minister, is arrested and charged with attempted embezzlement of $43m (€30m, £21.5m) of state funds in what is seen as a possible attack by Kremlin hardliners. His boss, liberal finance minister Alexei Kudrin, defends him

Nov 30 – Fund manager Oleg Shvartsman tells Kommersant he is leading a “velvet reprivatisation” drive linked to Kremlin officials. He later disowns part of the interview and says it was used as part of clan battles

Dec 2 – The pro-Kremlin United Russia party wins 64 per cent of the vote in parliamentary elections

Dec 6 – Prosecutors say they have dropped a second legal case against Mr Storchak, but a rival investigative agency presses for the case to be pursued and says $1m in cash was found in Mr Storchak’s apartment

Dec 10 – Vladimir Putin, Russian president, anoints Dmitry Medvedev, a relative liberal, as his presidential successor, seen as a defeat for Kremlin hardliners

Russia’s New Oligarchy

Writing in Human Events Dr. Rachel Ehrenfeld, author of Funding Evil: How Terrorism is Financed and How to Stop It, and director of American Center for Democracy and member of the Committee on the Present Danger, exposes the details of the new oligarchy being erected by Vladimir Putin in Russia, Putin being the man who was supposed to right the wrongs of the oligarchy.

The landslide victory of President Vladimir Putin’s United Russia party in December’s parliamentary election and Putin’s nomination of Dmitry Medvedev to succeed him cements Putin’s position as Russia’s Leader. Now, he can freely accelerate the state’s takeover and consolidation of Russia’s remaining heavy industries.

Putin relies on a handful of carefully selected former Soviet apparatchiks, military officers and Federal Security Service (FSB) members (mostly from St. Petersburg’s FSB Directorate), to hold key positions in the nation’s strategic companies and energy ministries. Putin trusts them to execute his vision for “great Russia.”

Russians seems generally comfortable under Putin’s regime, partly because Communist denial of individual wealth accumulation rights, for the last decade-plus, has evaporated. Nevertheless, owning critical Russian assets deemed important by the State is no longer wise — or safe — unless the holder is chosen and approved by the Kremlin. And what the Kremlin gives — it can take away.

To ensure Russia’s “re–privatization” of natural resources and basic industries and assets — really to retain Kremlin control –a little known financier with close ties to the security forces, Oleg Shvartsman, announced the formation of new $3.8-billion investment company on December 3. .

Shvartzman last week told Kremlin-controlled Kommersant business daily, “our colleagues from FSB decided there should appear an organization which would bend, bow, torture, and impose social responsibility on all sorts of Khodorkovskys…” (the unfortunate former owner of Youkos). That can be achieved, Shvartzman suggests, through “velvet re- privatization… …new voluntary coercive ways of consolidating assets in the state’s hands.”

Putin began consolidating Russia’s natural resources industries in 2005. The utterly corrupt Russian legal and tax systems were used by Putin and his Administration to separate Yeltzin-era oligarchs from their vast accumulations of individualized holdings, while he leveraged environmental laws to challenge foreign investors until they forfeited their assets for a song.

Putin charged Yukos, in 2005 Russia’s biggest oil company, and its owner and Putin-opponent Mikhail Khodorkovsky, with tax evasion, forcing Yukos into bankruptcy and liquidation. Gazprom and Rosneft, Russia’s state-owned gas and oil companies, grabbed Yukos assets and Khodorkovsky now serves his eight- year prison sentence in a maximum-security facility in Siberia’s city of Chita. Earlier this year, Russia’s federal prosecutor also issued embezzlement and money laundering charges that could keep Khodorkovsky for prison an additional 15 years.

American Yukos shareholders seeking compensation may never see a penny. Earlier this month, the US District Court of the District of Columbia ruled that Russia enjoys “sovereign immunity and therefore could not be tried in an American court.” Desperate shareholders may now either appeal, or rely on the U.S. government to intervene on their behalf–neither option very promising.

To further Russian energy-industry control, the Kremlin forced international oil giant BP to relinquish its license to develop the world’s largest natural gas field in Kovykta. BP relented on June 22, 2007, after Putin angrily shouted, “how much longer do we have to tolerate this?” Threatening BP with serious Russian federal pollution charges, the Kremlin forced the company to abandon its controlling stake–worth some $20 billion–to Gazprom, for only $700 to $900 million.

In June 2007, Russia’s Federal Tax Service also accused the RussNeft oil company and its owner Mikhail Gutseriyev of perpetrating a 20 billion Ruble tax fraud. Gutseriyev fled Russia before the state issued an arrest warrant for him on August 30, but RussNeft’s assets were seized. Shortly thereafter, Putin’s favored oligarch, Oleg Deripaska, emerged as a suitor of RussNeft’s assets.

Deripaska, rumored as Russia’s wealthiest man ($21.1 billion). is a major Yeltsin-era economic operative, married the daughter of the former President’s chief of staff, and now claims ownership of United Company Rusal, the world’s second largest aluminum producer. His modus opernadi is a model of Russia’s condoned business strategies.

Soon after Putin’s presidential election, Deripaska openly solicited Kremlin favors. Moreover, to ensure Putin’s continued protection, Deripaska funds the National Leader’s pet projects. He recently committed $1.5 billion to complete construction of an international airport and Winter Olympic village in the Caucasus Mountain resort, Sochi, by 2014.

Deripaska claims to have acquired foreign natural resources and industries, not to enrich himself, but to strengthen Russia’s global political influence. On July 12, 2007, the Financial Times asked Deripaska “if he would transfer Rusal back to the [Russian] state.” He replied, “If the state says we need to give it up, we’ll give it up…”

That would be easy, since Deripaska apparently acquired his fortune by bilking domestic and international partners and investors. A long trail of court battles follows him from the former Soviet Republics to Europe, the U.S. and Africa.

Deripaska’s Rusal is suspected of resorting to bribery in 2004 to obtain the Aluminum Smelter Company of Nigeria (Alscon) for the lowest bid. Now, the Los Angeles-based Bancorp Financial Investment Group (BFIG) is also suing Rusal in Nigerian and U.S. courts for abusing Nigeria’s privatization process in winning its bid for Alscon. The U.S. government publicly sides with Nigeria and BFIG.

In neighboring Guinea, Rusal also allegedly engaged in bribery to obtain concessions for an alumina refinery, and a bauxite mine. It’s no coincidence that Guinea has the world’s largest bauxite reserves.

In addition to disputes over questionable alleged business practices, Germany’s Stuttgart Prosecutor Office accuses Deripaska of involvement with Russia’s Izmailovo mob in laundering 8 million Euros — and, most damningly, contracting the murders of several competitors.

In Israel, police charge that Deripaska instigated illegal telephone-tapping of Deputy-Prime Minister and Minister of Strategic Affairs Avigdor Lieberman, whose main focuses is the Iranian threat. The eavesdropping allegedly occurred soon after Israeli Prime Minister Ehud Olmert returned to Jerusalem from Moscow, where he discussed Iran’s threat to the region. The tapes were apparently sent to Moscow. Clearly, such activities illustrate the extent to which the subservient Deripaska will go to service the Kremlin.

Last year, the FBI revoked Deripaska’s entry visa to the U.S., reportedly for suspected links to criminal organizations. Earlier, Deripaska had been denied entry to the U.S. for over 10 years. But in 2005, after he paid $560,000 to the law firm of former Senator Robert Dole, Alston & Bird, Deripaska obtained a multiple-entry U.S. visa.

Deripaska’s visits to the U.S. ended abruptly in July 2006 after the U.S. government again revoked his visa. But for $500,000 monthly, Washington D.C.’s risk management and investigative firm, Dilligence LLC–whose advisory board includes former President Clinton chief of staff Thomas F. McLarty–continues pursuing Deripaska’s interests and visa quest. Possibly encouraged by the Clintons’ apparent acceptance of gifts and their subsequent eagerness to whitewash criminal records, Deripaska hopes Hillary Clinton wins the 2008 U.S. presidential elections. Last month, he told Canada’s Financial Post, he is confidant the new Administration will ”lift” his travel ban.

According to Transparency International latest report, corruption in Russia is worse than in most former Soviet republics. Putin’s nomination of Dmitry Medvedev, promises more of the same. On June 2, 2006 proposing that Russia should retain control over strategic companies, according to Itar-Tass, Medvedev (then First Deputy Prime Minister) admitted the government is “not the most efficient proprietor.” However, he insisted that Russia should control companies “vital for the country. “

That does not seem to worry former chief of Britain’s intelligence agency, the Government Communications Headquarters (GCHQ), Sir Francis Richards, from joining the Advisory Board of Altimo, a controversial telecom holding company controlled by the much disputed Russian Alfa Group, headed by yet another Kremlin loyalist Mikhail Fridman.

Russia’s nationalistic business strategy does not seem to worry U.S. officials, either. They now invite further Russian U.S. investments and joint ventures with U.S. companies. On June 18, U.S. Deputy Treasury Secretary Robert Kimmitt said, “We want to be sure they consider investment opportunities in the United States.” That’s exactly what Deriaska and his Kremlin bosses wish forHundreds of billions in unreported oil revenues are ready for investments. And if the past is any indication, most of this wealth will be spent outside Russia.

Buyers, bankers and regulators, however, would be wise to investigate the provenance of Russian assets offered by state-owned companies and subservient Kremlin businessmen — and ask how long Russia will take before “legally” confiscating their potential investments.

Bovt on Shvartsman

Writing in the Moscow Times, columnist Georgy Bovt takes on the Shvartsman affair:

The recent interview in Kommersant with Oleg Shvartsman, head of the little-known FinansGroup, caused quite a storm.

Shvartsman said the firm operated on behalf of the siloviki headed up by Kremlin deputy chief of staff Igor Sechin. This group conducts “velvet reprivatization,” which means raiding oligarchs’ assets with the goal of expropriating them. Among those mentioned as FinansGroup partners were a Russian venture capital company and Israeli finance group Tamir Fishman, both of which are involved in major projects involving an enormous amount of money.

Following the article’s publication, the Tamir Fishman group and military brass immediately suspended relations with FinansGroup. Shvartsman responded quickly by saying that Kommersant had gotten it wrong and that the editing of his interview led to some distortion of the facts. People who saw him before his public refutation on an Ekho Moskvy radio show said he looked nervous and frightened and arrived at the station carrying a prepared text.

The picture Shvartsman painted of shady dealings underscores the current trend among Russian business to have a “patron” in the security services protecting their interests. And for their part, the security services feel they have control over the country’s economy. Even if Shvartsman threw a single party for siloviki veterans and invited General Valentin Varennikov, a former Soviet deputy defense minister who is famous for his role in the putsch attempt against Gorbachev in 1991, he would have bragging rights to say, “I have influential friends at the upper levels of the security services.”

You can develop informal but good connections from these kinds of meetings, which sometimes lead to business deals worth billions of dollars. Russian businesses of every stripe now look for “protection” from the security services, which in turn are also looking to provide their own form of “services” to various commercial clients.

But what motivated Shvartsman to say these things in the first place? He’s not such a fool as to drop Sechin’s name and the names of various people close to the Kremlin without a definite purpose in mind.

One possible explanation is that Shvartsman was trying to inflate his own importance in the hopes of landing a major contract. That might be the case, but in today’s Russia, the opposite rule usually applies: The more secrecy is maintained, the easier it is to strike a deal.

Another possible scenario: Executives within a major conglomerate hire an operative like Shvartsman to gather a packet of the company’s shares and securities, and then turn a profit with them by using various illegal transactions. In order to carry out his task, the operative is given access to all of the company’s deepest financial secrets. He becomes privy to information so sensitive, that were it divulged, it could destroy the reputations or the fortunes of those who hired him.

At the same time, the operative keeps a low profile and is not known to anyone outside his immediate circle. Once he completes his task, if he and the inside information he holds somehow becomes a liability to those who hired him, he is at risk of falling victim to an “unfortunate accident.” His name would appear publicly only once — in the crime section of the paper or in the obituaries.

According to this logic, Shvartsman gave the interview to avoid any “unpleasantness” in the future. Or else he simply wanted to extricate himself safely from the deal, which was either nearing its end or had gone sour for some reason.

These are just some of the possible explanations, however, and they are purely hypothetical. So much of Russian business and politics is bizarre and unexplainable, and the Shvartsman affair is just one more manifestation of this.

Aslund Rips Putin Another New One

Writing in the Washington Post Anders Aslund, a senior fellow at the Peterson Institute for International Economics and the author most recently of “Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed,” exposes Russia’s fundamental systemic corruption:

The news that Dmitry Medvedev, Vladimir Putin’s nominee to succeed him as president, wants Putin to become prime minister of Russia next year opens one option for Putin to retain power after his term ends. Putin has little choice but to stay in power as long as he can.

A year ago, a famous Russian journalist asked me: “Is it true that Putin has a net fortune of $35 to 40 billion?” (This journalist, of course, has long been excluded from Kremlin-controlled media.) This fall, the respected Polish magazine Wprost published its annual response to Forbes, its list of the richest people in Eastern Europe. Besides the well-known business executives, there is Gennady Timchenko, a little-known character with a purported fortune of $20 billion. A small oil trader who resides in Geneva, Timchenko is from St. Petersburg, where he belongs to the same luxurious dacha collective as Putin.

I first heard of Timchenko in February 2004. Ivan Rybkin, a Russian politician who audaciously opposed Putin in the presidential election that year, claimed that Putin was “one of Russia’s biggest oligarchs” and that he operated through three middlemen, including Timchenko. Rybkin charged that the Putin-Timchenko group was gobbling up the embattled oil giant Yukos. He swiftly disappeared under mysterious circumstances and, after he reemerged, was forced to suspend his campaign.

Indeed, the privately owned Yukos oil company has been devoured by the state-dominated Rosneft, whose chairman is Igor Sechin, Putin’s closest adviser and collaborator. The confiscation, which began in 2003, was publicly justified with not-very-credible citations of tax violations. Rosneft’s gain was probably about $100 billion in Yukos assets. U.S. investors in Yukos have lost at least $7 billion; some claim the figure is as much as $12 billion. In October, the House Financial Services Committee’s subcommittee on domestic and international monetary policy held a hearing on this, at which I testified.

The Bush administration, however, has not protested this outrageous confiscation of private American property. Then-Secretary of State Colin Powell expressed strong support for Putin in October 2004: “The Russian people came out of the post-Soviet Union era in a state of total chaos — a great deal of freedom, but it was freedom to steal from the state and President Putin took over and restored a sense of order in the country and moved in a democratic way.” Putin appreciated — and might have been encouraged by — these words. Two months later, Yukos’s main oil field was sold to Rosneft in an auction that Putin’s economic adviser, Andrei Illarionov, called “the scam of the year” (for which he was sacked). U.S. shareholders in Yukos have come to realize that the United States has no single valid agreement that safeguards their property rights; European investors, though, can sue the Russian state under three treaties.
The Yukos confiscation has not cost Putin anything. In fact, he unleashed a great wave of renationalization in the post-communist world. His chums from St. Petersburg are taking over one big, well-run private company after another, turning them into less efficient state-owned firms. One of Putin’s close friends from the KGB, Leonid Reiman, is his minister of communications. Last year, an independent arbitration court in Zurich ruled that Reiman, despite his denials, was the real owner of Russian telecommunications assets currently valued at no less than $6 billion. Reiman has amassed this extraordinary fortune as a state official, partly through beneficial privatizations, partly through privileged licenses issued to his companies. A government with any standards would fire such an official, but Putin suppressed this negative information within Russia and kept Reiman on, showing that he accepts corruption.

The Russian daily Kommersant published a long interview with Russian businessman Oleg Shvartsman on the eve of the recent Duma elections. Sensationally, he described how he raided private enterprises to the benefit of KGB officials and described his activity as “velvet reprivatization.” Kremlin spokesmen have denied the report.

Even more striking was an interview last month with the Kremlin-connected Russian political observer Stanislav Belkovsky in the German daily Die Welt. Belkovsky, who initiated the Kremlin attack on Yukos, claimed that Putin controlled specific shares of three companies (Surgutneftegaz; Gazprom; and Gunvor, Timchenko’s company) worth some $40 billion. Putin has not commented on this allegation.

According to Transparency International, Russia is growing more corrupt even as most other post-communist countries are controlling their corruption. The fundamental dilemma for Russia, and Putin, is that a system so corrupt cannot be very stable. It’s less clear why President Bush does not call Putin out on this or even defend the interests of U.S. citizens and corporations.

Lifestyles of the Rich and Russian

The BBC reports:

Many of Russia’s rich and powerful seem to be nervous. President Vladimir Putin is due to leave office in the spring. Just months away from the end of the final term which the Russian constitution allows him, it is far from clear who comes next. Even when the apparent successor is known, there will be concerns over how Russia might or might not change under a new ruler. That is causing apprehension among those who have prospered during Mr Putin’s time in office. Those who suspect they will not hang on to power seem to be trying to ensure they will not need to worry about money. There have already been suggestions of a struggle between competing branches of the security forces, each apparently having ties to different clans of Kremlin insiders.

Financial conflict

In October, a rare and intriguing incident shed some light on this jockeying. Viktor Cherkesov, a former KGB officer who now heads the federal anti-narcotics agency, broke the silence which is so often the Russian secret policemen’s rule. At the time, the FSB – the main successor agency to the KGB – had detained several officers in General Cherkesov’s service. “Already experts and journalists are talking about a ‘war of groups’ inside the secret services,” he wrote in an open letter to the business newspaper, Kommersant. “In this war, there can be no winners. A war like this -everyone against everyone – will end in the complete collapse of the corporation.” What was so remarkable about this letter was that it was a public acknowledgement of what to outsiders was only rumour. A member of the network of ex-secret policemen, who hold so much sway in Russia today, had admitted that battle had been joined.

Financial interests lay at the heart of the conflict which General Cherkesov described. He had this warning for his fellow “Chekists”, as the Russian secret police in their various incarnations are known. The name comes from the Russian initials for the “Extraordinary Commission” set up by the Bolsheviks in 1917. “Anyone who finds out that his main vocation is business should go into another area. Don’t try to be a trader and a warrior at the same time,” he wrote.

‘Velvet re-privatisation’


Oleg Shvartsman
Mr Shvartsman says the interview in Kommersant was distorted

Now comes the story of a fund manager called Oleg Shvartsman. Kommersant printed an interview with Mr Shvartsman. In the reported conversation, Mr Shvartsman is quoted as saying that plans are under way for what he allegedly terms a “velvet re-privatisation” to “acquire strategic assets” which would then be held by a state corporation. The suggestion is that the plan has the backing of senior figures in politics and business. In Russia, they are often the same people. They would stand to benefit – thereby ensuring their continuing influence after the end of President Putin’s second term. Mr Shvartsman subsequently dismissed the published version of the interview. Kommersant stands by its story. It was enough to set alarm bells ringing at the European Bank for Reconstruction and Development. Following the publication of the article, the EBRD announced that it would not go ahead with plans for an investment fund “following statements by a minority shareholder in the fund’s management company”.

Then there is the case of the Deputy Finance Minister, Sergei Storchak. He has been charged with trying to embezzle $43m (29.5m euros). Mr Storchak has denied any wrongdoing. The investigation is seen as having damaged the reputation of his boss, Alexei Kudrin. Its progress is being closely watched for any political consequences it might have. No-one in Russia today comes close to President Putin in terms of political profile. The whole system revolves around one man. The uncertainty over what happens next seems to be sending shockwaves through the political establishment.

A reader writes:

I am hearing that the Shvartsman story may be quite significant. He now denies it but Kommersant are sticking by their story and have a photocopy of the transcript of the interview. It is significant that Kommersant carried the story not some lesser paper. Moreover Shvartsman has a reputation for integrity. Don’t know why he gave the interview. Maybe some of your other contacts have some insight. I noted your recent post about Putin not getting the overwhelming % he hoped for. Are the first cracks appearing even when everyone is celebrating that all has gone well? Some people who are saying this are not just street radicals who have to keep themselves buoyed up with fabricated optimism. We shall see. Maybe it is not all so gloomy. I keep on thinking that if they just knew about his $41bn and could see how he has totally surpassed the likes of public enemies such as Berezovsky, then the edifice would crumble. Is that too naive? Well, we live in hope

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.”

How Russians "Think"

AFP reports a classic example of how Russian “think” — like the mafia. Russia wants the German airline Lufthansa to use a Russian airport instead of one in Kazakhstan as its Asian hub. But instead of making a sales pitch, improving the target facility to make it more attractive and finding out about Lufthansa’s needs and satisfying them, Russia simply takes out a gun. It tells Lufthansa that it can’t use Russian airspace to access the hub in Kazakhstan, vastly increasing the carrier’s fuel and time costs. We’ve seen exactly the same thing in regard to Russia’s inflation crisis: the crude Russian thug thinks he can “solve” the problem by brute force, simply telling producers they can’t raise prices. Childish, self-destructive lunacy. Classic Russia.

Russia is trying to force the German airline Lufthansa to move its Asian cargo hub from Kazakstan to Siberia, the Financial Times Deutschland reported Friday after cargo flights were banned from Russian airspace. “We wrote to our German colleagues on October 22, proposing that they use Krasnoyarsk in Siberia as a future hub,” Russian transport ministry spokesman Timur Chikmatov told the newspaper. Lufthansa Cargo, one of the world’s biggest air cargo carriers, now uses Astana, Kazakhstan as its base for Asian services, but was barred from entering Russian airspace on Sunday, adding several hours to flights headed there. “The Russian government would like to see our hub in Siberia,” a Lufthansa Cargo spokesman told AFP, adding that Novosibirsk was another airport that had been suggested. The detours have increased the carrier’s fuel costs by about 400,000 dollars (280,000 euros) per week, and Lufthansa warned its profits could be affected. Talks between Germany and Russia have begun on the issue, and the airline spokesman said: “We are waiting for politicians to find a solution.” But the government has also said it could turn to the European Union for help if nothing is worked out soon. German press reports had said previously that the dispute centered over new overflight tariffs that had taken effect with a winter schedule on Sunday. According to the Financial Times report, Lufthansa Cargo also has doubts about safety at Siberian airfields. Krasnoyarsk, which lies around 1,500 kilometers (940 miles) to the east of Astana, reportedly lacks guides for fog-bound landings, the newspaper said. A Lufthansa spokesman told the online edition of Der Spiegel magazine: “Russia’s ban is causing us huge losses, because it means that we have to reroute flights to Japan, China, North Korea and Singapore. It takes a lot longer and costs a lot of money.” The German transport ministry spokesman said Thursday: “We would like to know if other countries have problems, and if necessary we will go to the European Union.”

Annals of Kremlin Inc.

Radio Free Europe reports on the corporatization of Russia under Vladimir Putin (now that Russia has been re-Tsarized, one can’t help but wonder how long it will take until it is re-Bolshevized, and how long after that Russia goes the way of the USSR, and what will take Russia’s place, and whether it will be anything more than a desert).

The domination of the siloviki — people who emerged from the KGB or its successor organizations — in Russian political and economic life is an accomplished fact. Over the seven years of President Vladimir Putin’s administration, a core group of some 6,000 siloviki has moved into key controlling positions throughout government and business. But the question remains: for what purpose have these products of the country’s totalitarian past taken over and what can we expect to see in Russia’s domestic and foreign policies?

Conspiracy Theory?

Along the lines of this thinking, apn.ru, a website run by the conservative National Strategy Institute, ran several publications this month arguing that the talk of “silovik power” is just “a conspiracy theory,” a figment of the imagination of “liberals” who are only scaring themselves and others. The articles argue that Russian policies are irrational and opaque and that power in the country remains concentrated in the hands of the “raw-materials oligarchs.” Putin and the siloviki have neither a long-term strategy nor a coherent ideology.

Some observers have argued that the siloviki of today’s Russia differ substantially from the monolith of the Soviet KGB that kept a huge swath of the world in terror for decades. They argue that today’s siloviki have no consolidating center, espouse no common ideology, and are riven into viciously competing factions. Sometimes this competition breaks out into open conflict, sometimes even leading to kidnappings or killings. In at least one case, Putin was compelled to intervene and reshuffle part of the community.

Many analysts, however, are inclined to disagree. The Institute of Social Planning, a Moscow think tank, issued a study this year that found the influence of the siloviki in politics and the economy is “enormous,” while that of the purported oligarch is “negligibly small.” The aggregate opinion of the 670 experts surveyed for the study is that the siloviki influence on Russian policy manifests itself primarily via the networked influence of their representatives in the regions on policies in their regions.

At the federal level, Putin and the siloviki have acted in ways that betray their sense that the upcoming legislative and presidential elections don’t matter much. Putin has initiated several ambitious national programs operating on a timetable extending for years into the future, while Sergei Ivanov, then a first deputy prime minister and a leading contender to succeed Putin in March 2008, presented to the St. Petersburg International Economic Forum in February a plan to push Russia into the ranks of the world’s five most developed economies by 2020.

The state budget adopted this year covered not the usual 12 months, but the entire period until 2010. At the same time, Russia has been acting in a consistently aggressive manner in the international arena, particularly on global energy markets. These facts and others seem to indicate that the silovik-based community that has come to monopolize power in Russia is implementing a coherent, long-term strategy. Many elements of this plan have been incorporated into the campaign program of the pro-Kremlin Unified Russia party, which is called “Putin’s Plan.” And recently published books, memoirs, and available KGB documents may offer insight into the nature of their ambitions.

Putin’s Plan

Putin’s rise to power in 1999 and 2000 marked the second time in recent history that a state-security chief became the country’s supreme leader. The first was Yury Andropov, a KGB chairman who was much admired by Putin and who was elected general secretary of the Soviet Communist Party in November 1982. Although Andropov only ruled the Soviet Union for 15 months before his death, he had an ambitious vision for reforming the Soviet economy and making it competitive with the West. Andropov had a keen understanding of the weaknesses of the Soviet system both because of the information at his disposal when he ran the KGB and because of his experience at the KGB itself. Interestingly, the KGB and the Soviet military-industrial complex were the only two Soviet entities that functioned successfully — precisely because, like Soviet Olympic athletes, they had to perform in constant competition with the best counterparts that the outside world had to offer.

Author and journalist Maksim Kalashnikov (real name: Vladimir Kucherenko) in 2003 wrote a book called “Forward To The USSR-2″ in which he laid out what he claimed to be Andropov’s reform plan. Its essence was to combine the strengths of the military-industrial complex and the KGB by carrying out an authoritarian modernization plan that would result in a modern corporate state. Kalashnikov’s has collaborated on other books with banker Sergei Kugushev, who in 1983 was a young economist working in an analytical group studying modernization proposals under Andropov. He claims he personally helped draft this version, which he calls the “Red Star Corporation.”

A key part of the purported Andropov plan was to be played by the KGB’s Sixth Directorate, which was concerned with economic-intelligence gathering. This directorate had accumulated masses of classified technologies taken from Soviet innovators and stolen from the West by KGB operatives. This information would be used to spark a scientific-technical revolution that would drive the country’s modernization.

‘Best And Brightest’

The plan also envisions the cultivation of the Soviet Union’s “best and brightest,” who would be recruited into the KGB. Many KGB officers had an intimate knowledge of the strengths and weaknesses of market-based economies and open, muliparty political systems. Interestingly, the main reservoir of cadres for the KGB was the Komsomol Soviet youth organization, from which many of the post-Soviet Russian oligarchs also emerged.

Andropov, though, died after just over a year in office and, beginning in 1986, Soviet leader Mikhail Gorbachev attempted a different reform plan that led to the collapse of the Soviet Union.

Many critics blame President Boris Yeltsin and his circle for failing to dismantle the KGB after they came to power in 1991. Many of those who were in power at the time failed to understand the strength and resilience of the KGB, while others had less excusable reasons for failing to act. At any rate, it would have been Herculean task to dismantle completely an organization that had controlled so much of Soviet life for decades and that numbered more than 500,000 uniformed officers and uncounted millions of secret informers.

Nevertheless, Yeltsin was wary of the KGB and succeeded in breaking up its monolithic structure into a number of successor agencies. He made efforts to reform the state-security apparatus and to institute some oversight mechanisms. One result of these half-hearted and incomplete reforms, though, was a mass exodus of KGB officers out of state service and into the private sector. By some estimates, some 100,000 former KGB officers took up jobs in business.

During the mid-1990s, when the process of the privatization of Russia’s natural-resources sectors was in full swing, Yeltsin made the mistake of instructing hundreds of state-security officers to monitor the handover of state entities and strategic resources and reserves. The Yeltsin administration felt the former KGB officers could prevent the process from descending into chaos and help identify desirable new owners. The budding oligarchs themselves made the mistake of trying to “privatize” the KGB by bringing hundreds of former officers into their own organizations as analysts, consultants, and security personnel. Looking with hindsight at the fates of former oligarchs like Boris Berezovsky, Vladimir Gusinsky, and Mikhail Khodorkovsky, it is less than certain who used whom.

In 2005, a book called “Project Russia,” by unnamed authors, appeared on the website of a state-security veterans organization in St. Petersburg. The book describes the role that KGB veterans played in selecting and molding the aggressive young entrepreneurs who by the mid-1990s had come to be known as the Russian oligarchs.

The book claims that the emerging siloviki viewed privatization as a temporary process from the outset and, therefore, took pains to select new owners whose main trait was not their managerial genius but their controllability. “Project Russia” refers to them dismissively as “toy oligarchs.” Although the siloviki tried to eliminate people with “large-scale thinking and political ambitions,” some of the finalists did “cross the line.” “But today all these ‘politicians’ have either fled the country, are serving time, or died under obscure circumstances,” the book declares.

The dispossession of the oligarchs has accelerated the shift of power in Russia toward the siloviki, and the remaining so-called oligarchs are notable primarily for their docility. Kremlin-friendly billionaire Oleg Deripaska recently affirmed that he is ready to “return” all his assets to the state at a moment’s notice, and he and fellow billionaire Roman Abramovich fall all over themselves to make generous donations to Kremlin-backed projects like the 2014 Winter Olympics in Sochi. “Kommersant-Dengi” this month published an impressive list of the industrial and financial enterprises that have been renationalized since 2002.

But the property of the oligarchs was never the end goal of the siloviki effort. They are seeking total, state control of the national economy. A distinguishing characteristic of the siloviki — unlike the old oligarchs — is that, with very few exceptions, there are no billionaires among them. They are content to control property rather than own it, and prefer to exercise that control from the boardrooms of state megacorporations that dominate major sectors of the economy and that are tied together in an informal network. They envision a corporate state.

Many Western analysts resist applying the term “corporate state” to Russia because of its associations with Italy under Benito Mussilini, Spain under Francisco Franco, and Portugal under Antonio Salazar. Russian analysts, politicians, and officials, however, use the term freely. Central Election Commission Chairman Aleksei Churov told NTV on August 31, for example, that Russia has formed “a corporate state.” “We have a state corporation and we are electing the top management of our state corporation,” he said.

It remains unclear how far the siloviki intend to and will be able to carry out this reform vision. But Kalashnikov’s “Forward To The USSR-2″ gives one ominous vision:

“It is a clandestine state, operating covertly under a seal of secrecy. It is invisible to the West and the majority of Russia. It is a hybrid of the special services, a nearly religious order (a group of people who passionately want to create a Russian miracle), a network of high-technology projects, financial-investment structures, and a web of propaganda…. Figures from this secret state say where to invest money. They choose projects and technologies. They direct investments and plan operations to take over whole branches of industry both on the territory of the late USSR-1 and right up to Europe and the United States. A transnational business network is being built — the USSR-2.”

Latynina on the Horror of Russian Corporatism

Writing in the Moscow Times, hero journalist Yulia Latynina exposes the horror of creeping Russian corporatism, a venal bacterial sapping the nation’s already feeble blood supply like million toxic leeches:

The parties are all ready for the upcoming campaign season. I’m not talking about those running in the elections made official by President Vladimir Putin’s decree in Rossiiskaya Gazeta. I mean the more important parties in the endless campaigns to win money and influence.

Moscow’s Tverskoi District Court, for example, froze the assets of oil company Russneft on Aug. 9. Why? Two people were trying to get hold of Russneft — Igor Sechin, deputy chief of the presidential administration and chairman of state-owned oil major Rosneft, and Oleg Deripaska, the Kremlin-friendly tycoon who heads the holding company Basic Element. With Putin’s blessing, Deripaska wants to buy Russneft.

Deripaska would likely sell Russneft to the state later. So why arrest the shares?

One reason may have been concern that, should either of the first deputy prime ministers, Dmitry Medvedev or Sergei Ivanov, become president, Deripaska might turn around and sell Russneft to a company controlled by Sechin. Preventing Deripaska from selling after the elections could diminish Sechin’s political clout.

This analysis suggests that the battle for Russneft is not just commercial in nature: At stake is the political influence of people within Putin’s political circle — influence measured in the billions of dollars.

There was also the arrest of Vladimir Barsukov, a wealthy businessman and reputed former crime boss, in August in St. Petersburg. The city deserves the epithet “the criminal capital” not because it is full of bandits, but because bandits comprise the city’s business and political elite. Judging by the composition of the group that orchestrated Barsukov’s arrest, it looks like a major victory for Sechin’s siloviki over those of his enemies’ clan.

Not just businesses but entire regions are being snapped up: Putin installed a governor with connections to Gazprom in the Sakhalin region and one with ties to state monopoly arms exporter Rosoboronexport in the Samara region.

New state corporations are hastily being created, complete with generous perks and privileges for their managers. Putin is handing state corporations to his friends at about the same pace that Catherine the Great handed out estates.

This is the real campaign where the battle is not for votes but for billions. Nobody knows who Putin’s successor will be, but everybody understands that under any successor there will be a fundamental change in the way property and influence are distributed. Ahead of this, each Kremlin clan is trying to pocket as many assets from state and private sources as possible, acquiring those seized by the government in the hope that they will add to their political clout –measured in billions of dollars. Thus, regardless of who the next president is, he will have to reckon with this imposing force capable of squashing, buying and even destroying.

And the leaders of the official political parties, like A Just Russia’s Sergei Mironov and United Russia’s Boris Gryzlov, have no more place in this high-stakes campaign than the gaudily dressed women of 19th-century palace balls had in the Battle of Austerlitz. What has to be understood is that the State Duma has become a cipher: not because it does not include any opposition parties, but because powerful clans don’t do business there. Having accrued their wealth and status clandestinely, they despise publicity — even in the form of operating through the political parties they have in their pockets. Whether Rosneft gains control of Russneft will not be decided by United Russia. Similary, Mironov will not determine if Rosoboronexport acquires the Magnitogorsk Iron and Steel Works.

If you want to know the real political lay of the land, don’t look at the Duma. Better to look at who was recently jailed in Lefortovo prison or the verdicts passed down by Moscow’s Basmanny District Court.

Russia’s Economic War on the West

The Financial Post of Canada reports on Vladimir Putin’s continuing neo-Soviet efforts to undermine the economies of the West. When will we meet this threat with the appropriately aggressive response? Perhaps not until Putin soul-gazer George Bush is out of power, which would explain Putin’s aggressive scrambling to take advantage now:

Frank Stronach’s deal, approved yesterday by shareholders, to sell 42% of his voting control in Magna International Inc. to 39-year-old Russian oligarch Oleg Deripaska will be either a home run or go down as one of the most naive business transactions ever. Keep in mind the plan was sparked by the introduction of the two men by Barrick Gold Corp.’ s chairman, Peter Munk. His endorsement is why Barrick’s chief executive, Greg Wilkins, joined Magna’s board this month. “It’s Frank’s best deal ever,” Peter said in a recent interview. “[Russian President Vladmir] Putin wants to build an auto industry in Russia and will use oil to sell cars. He will force the Indians and Japanese to buy Russian cars in return for oil.” Well, good luck, Moscow.

That’s a worrisome strategy and not the way markets outside of Russia work. It’s also a geopolitical agenda that could be at odds with the best interests of Magna shareholders. But it will take years to find out and shareholders who don’t like the way things are going can cash out, and employees are free to leave, too. When I first heard about it, I remembered a story that Frank told me about his first transaction when he was a young boy in Austria involving a horse and some Russians. “After the war the Russians invaded us. Thousands came with tanks and horses. I was only 12 and watched two Russians fix an abandoned car by the side of the road and get it started. When the car worked, they gave me their horse. I put it in a barn,” he said. “The next day it was gone.”

Now it’s 2007, and not war-torn Europe, and Frank needed a succession plan and another market. This is a succession and marketing plan because Frank has decided to sell half of his control to a Russian with a potential upside rather than give it all to his children, Belinda and Andrew. It’s a bold, risky move. It will require all the talent that Frank Stronach and his managers possess, and then some, to essentially pull off the transformation of Russia’s auto industry. Mr. Deripaska, a relative of Boris Yeltsin’s and buddy of the current Russian President, has never done a turnaround or even run a business for very long.

His skill set is the acquisition of assets in a country without the rule of law. On the other hand, Frank is no fool, nor is Peter Munk, who has no interest in this deal but does mining business with Deripaska. “Oleg’s a friend and I’ve known him for years,” Peter said. “He’s a fabulous businessman. He’s a scientist and very brilliant. He’s part of Russia’s younger generation and has credibility and contacts which you need in Russia. He has the backing of its government.”

“Barrick is partners with him in gold mining and we’re very comfortable with him. [Deripaska] has been checked 100 different ways. He wants to keep Magna and turn it into a global champion,” he said. I think the deal represents a creeping foreign takeover by Russians of Canada’s sixth-largest corporation. So if Deripaska succeeds, the company Frank Stronach founded will be a Russian global champion, not a Canadian one.