THE REGIME AND THE OLIGARCHS: WHO WILL TAKE OVER AFTER PUTIN?

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The past week has seen an announcement of the merger of the YUKOS and Sibneft oil companies, as well as widespread anticipation of changes in the structure and membership of the Cabinet. This has prompted a new wave of media discussion about the relationship between business and government.

Kommersant-Vlast magazine was quick to do the math: YUKOSSibneft, formed as a result of the merger, could well claim the title of a state within a state. Although this new “sovereign state” would only rank 172nd internationally on population (YUKOS has 110,000 employees, Sibneft has 90,000), its GDP would rank 77th (the combined total revenues of $13 billion a year would put it somwhere between Bulgaria and Equador). And in terms of GDP per capita ($65,000 a year), the oil empire would be far ahead of any nation in the world, including the current leader, Luxemburg ($43,000 a year). This is not surprising: the YUKOSSibneft “state” would rank twelfth on oil reserves (2.64 billion tons), ahead of Algeria and slightly behind Nigeria.

Actually, even in its present capacity the company holds a place of honor: ranking first internationally in terms of oil reserves, and fourth on oil production. Moreover, says Nezavisimaya Gazeta, the product of the merger has every chance of becoming the world’s largest oil company on both these indicators in future.

Leonid Mirzoian, an analyst with Deutsche Bank, told Nezavisimaya Gazeta that YUKOSSibneft will stand out among the world’s other leading oil companies primarily because of its double-figure growth rate (around 20% a year).

Obviously, this giant has now taken the lead in the Russian oil sector. It owns six refineries in Russia, the Mazeikiu Nafta refinery in Lithuania, stakes in the Moscow and Yaroslav refineries, a stake in the Mozyr refinery in Belarus, and 2,500 gas stations.

Nezavisimaya Gazeta reports that the president of British Petroleum-TNK described the formation of YUKOSSibneft as an outstanding event: “The creation of such a company is evidence that Russia is entering the global economy.”

The Vremya Novostei newspaper reports that once the deal is complete, the new company will account for 29% of Russia’s total oil production. The new company’s president – “Mikhail Khodorkovsky, who couldn’t stop smiling throughout the presentation” – says that “the new industrial giant, with its substantial production and financial capacities, will be able to operate even more efficiently”; and this, in turn, will facilitate “the achievement of our strategic goal – to become a leader in the global energy market.”

However, Vremya Novostei cautions that there’s a long way to go until the merger is complete, and it’s hard to say whether that will ever take place. Even back in 1998, during the first attempt to unite these companies (under the name of YUKSI), much was said about the “different ways of thinking” among the teams of Mikhail Khodorkovsky and Roman Abramovich. Back then, “a source close to Boris Yeltsin” explained to Vremya Novostei: “Abramovich and Shvidler are aiming for financial effectiveness, while Khodorkovsky focuses on industrial performance. They’ve tried to work together, and have come to understand that it’s impossible.”

Vremya Novostei goes on to note that as yet it’s hard to say whether the present Kremlin administration will move to exacerbate potential differences between participants in the deal. One thing is clear: “This trend of oligarchs selling their businesses (the TNK-BP deal, the YUKOS-Sibneft deal), within a year of the elections, cannot fail to cause concern in the Kremlin.” Needless to say, this gain in strength for Mikhail Khodorkovsky clearly disrupts the “balance of equidistance” which Vladimir Putin has worked so hard to keep in place.

Yulia Latynina, an observer with Novaya Gazeta, writes: “At the deposit auction in 1995, Sibneft was bought on behalf of Boris Berezovsky. Now it belongs to Roman Abramovich.” However, many believe that Boris Berezovsky still remains the company’s co-owner. Rumor has it that “one of the influential St. Petersburg groups” even approached the president, asking him to prevent the YUKOS-Sibneft deal from going through. Latynina asks: What really happened to Berezovsky’s stake in Sibneft?

There are three possibilities. Berezovsky might have sold his shares: “At least he would have received some money – otherwise, he would have lost everything.” According to another theory, the shares might have been transferred to a dummy figure. A recent demonstration of this kind of thing was seen at the “Novye Izvestia” newspaper, when Oleg Mitvol suddenly declared that he was the sole owner of the company, rather than managing a stake on behalf of Berezovsky. Something similar may have happened in the case of Sibneft.

Finally, the third possible version of events – the one maintained by the St. Petersburg people and Berezovsky himself: Berezovsky still remains a co-owner of Sibneft.

In any event, says Latynina, this incident is clear evidence that “the ‘maturing Russian business community’ does indeed wish to focus on business as such, rather than politics.”

This was once the issue of contention betwen Abramovich and Berezovsky: Abramovich wanted to focus on business, while Berezovsky clamed that “politics is business”. According to Latynina, “subsequent events have shown that Abramovich was right”. As a rule, those who play poker with the state come to a bad end. The shares owned by the once-omnipotent Berezovsky in Sibneft, the company he created, vanished from the register of shareholders “as if they had been recorded in invisible ink”.

According to Yezhenedelnyi Zhurnal, what sets Mikhail Khodorkovsky apart from other major players in Russian business is one important detail: “He has never been involved in the media industry.” Not even when “most of his fellow oligarchs failed to resist that temptation”.

In the 1990s, major finanical-industrial groups acquired media assets in the hope of “corresponding with the regime” via those media. That was indeed the case during the Yeltsin era, says Yezhenedelnyi Zhurnal. However, the situation changed on December 31, 1999. Nowadays, the media-owning oligarchs can only count on having some “general influence”.

Mikhail Khodorkovsky himself considers that the business community is far more influential now than it was in the Yeltsin era.

In an interview with Yezhenedelnyi Zhurnal, Khodorkovsky said: “We – business leaders, I mean – have a better understanding with Putin, since we belong to the same generation. For Yeltsin, we were like children – he cared about us, but he didn’t really understand what we needed. Putin, on the other hand, clearly understands that the nation’s prosperity depends on how well the economy functions, and recognizes our right to uphold what we view as advantageous for the national economy.”

The opinions of the head of YUKOS have now become even more important. Regardless of the merger’s economic significance, media commentary has noted the importance of its political aspects.

Sergei Korchagin, an analyst with Prospekt, told the Gazeta newspaper: “The new company will be worth over $35 billion. Neither the $20 billion Gazprom nor the $5.8 billion Russian Joint Energy Systems can compete. As a result of this merger, Khodorkovsky is gaining sove vast financial resources, enabling him to become a prominent figure in politics.”

This view is shared by another expert interviewed by Gazeta – Sergei Suverov, chief analyst with Zenit Bank. He said: “By uniting the administrative resources of Sibneft shareholders, who are known for their lobbying power with the government, Mikhail Khodorkovsky could pursue some fairly ambitious long-term goals. Of late, there has been much talk of his future career in politics.”

Some evidence of this may be found in the YUKOS decision to fund various political parties which have a chance of winning a substantial number of Duma seats.

Fuel has been added to the fire by media reports that Khodorkovsky intends to retire from business four years from now (just before the first post-Putin presidential election).

Khodorkovsky confirmed this in his Yezhenedelnyi Zhurnal interview: “Indeed, I would like to move away from day-to-day corporate management when I’m 45. That will be in 2007. By that time, I will have been working for 30 years – and I hope the company’s growth will be stable enough to permit me to spend more time with my family.”

Yezhenedelnyi Zhurnal ponders the question of what Khodorkovsky might really do if he quits business. Social and political activities? “But he is already directing tens of millions of dollars into promoting online education in Russia’s schools, without much publicity.” Charity work? “But he already supports Russia’s largest charity foundation.”

Mikhail Berger, editor-in-chief of Yezhenedelnyi Zhurnal, writes: “In principle, at his age, with his experience and his resources, he can do anything he likes. Presumably, that is exactly what is bothering people.”

Khodorkovsky’s confidence that his business will continue to grow through to 2007 cannot fail to elicit respect. Most analysts these days are predicting an inevitable collapse of oil prices due to the outcome of the war in Iraq, and a consequent crisis not only in the oil sector, but in federal budget policy.

If this collapse does happen, the government will be forced to give up on many social programs paid for by what is called “state spending other than interest payments”. It’s easy to imagine what the public response to that would be; and it wouldn’t be favorable for the political prospects of any oil oligarch.

Even now, radical left papers like Zavtra are by no means the only media talking about the need for a state policy on industry, and the redistribution of “natural resources rent”, and even a review of the outcomes of privatization.

The Konservator weekly says: “Remember what the electorate hoped for when Putin became president. The first point was Chechnya. The second was the fate of the oligarchs and lesser thieves.” Konservator discusses the possibility of destroying “the caste system which has taken shape in Russia over the past 15 years or so, whereby a thief who has stolen billions becomes immune to any form of punishment.”

Konservator takes issue with a statement by Gleb Pavlovsky, head of the Effective Policy Foundation: “We need reforms, not arrests.”

Armen Asrian, author of the Konservator article, says it’s hard to deny the first part of that statement – and that is precisely why it’s impossible to agree with its second part.

According to Asrian, reforms are impossible without restoring equality of all citizens before the law. And that, in turn, would inevitably lead to arrests: “Arrests among those who over the past 15 years have come to genuinely believe themselves to be above the law.”

Asrian says Russia’s major problem is that the people don’t trust the government. In order to restore that trust, the regime must inevitably return to the results of privatization.

This is primarily because “real market liberalism (as opposed to Komsomol-style liberalism) means that privatization has to be preceded by a process of denationalization.” In other words, former “national assets” must be bought back from the people. “No one is likely to claim that Chubais’s vouchers fulfilled this function.”

Moreover, it must be determined which state officials were to blame for privatization taking the “Komsomol-style” path (a clear reference to the “Komsomol business” of Khodorkovsky himself in the 1980s, which enabled the present oil magnate to make his first fortune). And it must be determined which of the new property-owners have been guilty of systematic tax evasion.

Asrian notes: “Quite possibly, the current regime won’t have time to accumulate enough strength to carry out such a dangerous and labor-intensive operation. Then the next administration will do it. But one way or another, it will have to be done.”

Implementing such a radical program would be likely to lead to civil war in Russia. And, as it frequently happens, the interests of the real participants in the conflict would be far removed from scrupulous pre-election assurances about concern for the fate of “ordinary citizens”.

In fact, this conflict – between state bureaucracy and free enterprise – has existed in Russia from the very start of the reforms, and has now reached a peak – fortunately, not in the form of all-out persecution of anyone and everyone.

Liubov Tsukanova writes in Novoe Vremya magazine: “The processes currently underway among the bureaucratic class are described by many analysts as a catastrophe.”

When the package of laws on economic deregulation was being developed in 2000, it was assumed that the measures contained therein would be quite sufficient to ensure industrial growth and make the free-market economy “a guarantee that democratic institutions would grow stronger”.

However, the economic deregulation measures failed to work: research has shown that bureaucrats succeeded in fully retaining (even expanding) their opportunities to receive “status-based administrative rent” – in other words, bribes.

The latest studies indicate that Russian bureaucrats make around $5-8 billion a year unlawfully. Their main revenue sources are registering companies, issuing licenses, and carrying out state inspections and oversight measures.

Novoe Vremya says that all the major barriers to business development remain as they were; and if any barriers have been removed, new ones have been invented in their place.

Big business is forced to pay up. Small and medium-sized enterprises are threatened with ruin. Taking legal action is futile – the courts are run on the same principles.

Moreover, says Novoe Vremya, some new negative trends have arisen: “In the past, those who set out on the warpath against the system faced the risk of bankruptcy; now the bureaucrats take over the businesses of their opponents.”

In short, the bureaucracy has now completely become the ruling class, and has no intention of surrendering power.

Novoe Vremya says that most observers have fallen into deep pessimism over this phenomenon, and some have even taken up “pseudoscience fiction”: proposals range from setting up special agencies for “civilized lobbying”, to big business and the regime joining forces as a special alliance in the name of fighting the bureaucracy. Novoe Vremya calls the second option “the last hope of the liberals.”

In an article written for the Moskovskie Novosti weekly, Duma deputy speaker Irina Khakamada invites readers to compare the number of government bodies engaged in social services, health care, and welfare with the number of bodies focusing on “intervention in the economy”. “The latter outnumber the former by an order of magnitude.”

Khakamada says: “At long last, we need to make a decision to get rid of ‘excess government’ – in other words, non-essential functions should be taken away from the bureaucracy.”

However, Khakamada believes that this cannot be done without special infrastructure to absorb the displaced bureaucrats. “These could be some sort of foundations, public councils, or lobby groups, for which society would find the resources.” Unless this is done, the reforms will fail, says Irina Khakamada: “Resistance to them would be too great.”

According to Khakamada, Russia’s problem is not that its bureaucrats are exceptionally bad; the problem is that they hold power. “In the West, the rules are set by civil society. And the bureaucracy only becomes harmful if it goes beyond the limits set for it. But in Russia, the bureaucrats make all the rules.”

What’s more, as Khakamada emphasizes, the administrative reforms themselves are being held hostage by the bureaucracy – which has absolutely no interest in seeing them succeed, of course. Therefore, rather than reforms, we are seeing “institutionalized sabotage at all levels of government, and individual sabotage at the level of specific state officials.”

Khakamada says that fighting all that, at this stage, is futile. “All we can do now is shape public opinion in an appropriate way, keep up the pressure on the bureaucratic class, and make waves.” Khakamada says these “waves” could prove to be the salvation of society: “We are approaching a period of low oil prices, so there is once again a threat of an economic crisis. Therefore, ineffective administration becomes a serious challenge.”

Yegor Gaidar – a co-leader of the Union of Right Forces, like Khakamada – considers that the impending oil crisis could even be beneficial for Russia, in a way.

In an interview with Argumenty i Fakty, Gaidar, head of the Transition Economy Institute, said: “Russia doesn’t need oil prices to be at $30 a barrel. That would even be dangerous for Russia. It’s dangerous for an entire economy to be dependent on unpredictable prices.”

Gaidar points out that the collapse of “Brezhnev-era prosperity”, followed by the collapse of the USSR, was primarily connected with abnormally high oil prices – three times higher than they were before the war in Iraq. “What happened? Just at that time, we were competing with the United States in defense spending, planning to change the course of rivers, exporting Soviet-style government to Afghanistan. And then, when oil prices fell in the mid-1980s, it turned out that we couldn’t afford to feed our own people.”

According to Gaidar, something similar has been taking place in Russia recently. “Forms of business other than the oil sector have been becoming unprofitable. Oil has been corrupting the economy, destroying its main support – secondary industry.” The flood of petro-dollars has also led to heightened expectations among the populace and legislators; there have been arguments over how the mega-profits should be distributed.

Yegor Gaidar says that a decline in oil prices should help Russia sober up: “It would make foolish populism during the election campaign impossible.” This would be good for the economy, and for politics. In Gaidar’s view, it’s more sensible to base policies on pessimistic scenarios.

According to Gaidar, current grivances against the government (as expressed by the Yabloko faction, ally of the Union of Right Forces in the Duma) is entirely justified: indeed, there has been an obvious slow-down in reforms since the end of 2001.

At the same time, Gaidar says the present brutal criticism of the government is due to simple pre-election populism, characteristic of Duma members: “They can’t criticize Putin, after all. So it’s off with Kasianov’s head!”

Many other papers share this view of Yabloko’s motion for a vote of no confidence in the government.

Kommersant notes that until now, such motions have been the hobby-horse of the Communists – but with elections approaching, all the Duma’s parties have stepped up their criticism of the Cabinet. And yet Yabloko has been the first to raise the issue of a vote of no confidence.

Of course, Yabloko needs to collect the signatures of 90 Duma members in order for the vote of no confidence to go ahead. And there’s not much chance of that.

The Gazeta newspaper says: “Yavlinsky can only count on the leftists. The centrists haven’t received any orders from the Kremlin to topple the government.”

Kommersant points out that Yavlinsky, unlike the Communists, has not confined himself to specific complaints against the government; he has accused it of having a flawed overall strategy. More precisely, he is accusing the government of being incapable of “resolving strategic questions connected with the nation’s post-industrial development,” of “neglecting security issues,” of lacking “substantial decisions in the fields of taxation, small business, and natural monopolies,” of creating an abnormal investment climate, and so on.

Worst of all, according to the Yabloko leader, the government has turned into a kind of “mini-parliament” – where clans are engaged in power-struggles with each other, thus “lacking the energy to get anything else done”.

“Even the United Russia party isn’t satisfied with the government’s performance,” says Grigori Yavlinsky. He believes there is a fairly high chance that other parties will support the vote of no confidence: “Let’s find out how the Duma majority behaves in relation to the government which it is criticizing so enthusiastically.”

Another prominent Yabloko member, Vladimir Lukin, put it even more succinctly: “We request all Duma members who are fully satisfied with the government’s performance not to join us.”

However, according to Kommersant, Yabloko’s hopes are unlikely to be borne out; even if it does get the support of the left, this still won’t ensure that a vote of no confidence motion is carried. “But the Yabloko party will gain at least two months of high publicity,” Kommersant concludes.

Yabloko is working closely with the presidential administration these days, so “no one in the goverment has any doubt that this chill wind is blowing from the Kremlin walls,” says Nezavisimaya Gazeta.

This became all too obvious once United Russia started criticizing the government.

However, there was no talk of a vote of no confidence, especially not a mere eight months before elections. Indeed, as Nezavisimaya Gazeta points out: “If a new government takes office in June, whom can United Russia criticize between June and December?”

This is by no means a rhetorical question. Indeed, who could be offered as a target for the anger of voters who aren’t happy with the existing state of affairs? Yavlinsky has clearly jumped the gun, “due to an ambitious desire to be first”.

Meanwhile, United Russia has found itself in an embarrassing situation: as previously noted, it can’t support Yabloko. But if it opposes Yabloko’s initiative, voters will come to believe that all the anti-government rhetoric of the centrists has been no more than a pre-election propaganda bluff.

Moreover, according to Nezavisimaya Gazeta, Yavlinsky approached the Kremlin with more than the vote of no confidence idea; he also had some proposals about who might be included in the next Cabinet (these ideas, however, found no support).

Apparently, the post of defense minister was requested for Alexei Arbatov, and the post of foreign minister for Vladimir Lukin. Yavlinsky himself is said to have been willing to accept the post of deputy prime minister in charge of the economy, while the post of prime minister was proposed for “another Yabloko representative associated with the private sector”.

Gazeta was even more specific: according to its sources, the post of prime minister could have been taken by “one of the senior executives of YUKOS”.

Whoever might that person be?

In any event, despite all assurances from YUKOS that Yabloko – a party sponsored by the oil company – made this anti-government move all on its own, the regime may well take advantage of the situation.

This reckless proposal for a vote of no confidence is unlikely to have any consequences for the government. However, according to experts consulted by Gazeta, the Kremlin could well accuse Mikhail Khodorkovsky – who funds the Communist Party as well as Yaboko – of destabilizing the situation.

Gazeta comments: “In the wake of the Sibneft-YUKOS merger, Khodorkovsky’s positions have strengthened a great deal, and he has ceased to conceal his political ambitions. Under the circumstances, having this kind of leverage over him is very useful.”

Indeed, the elections – with all their party battles and publicity stunts – will come and go, and be forgotten. But Khodorkovsky will be around for a long time as head of YUKOSSibneft. At any rate, he will be there until 2007…

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