2012 Presidential Campaign Launches in Russian Style – Part II

[TRM’s second installment on recent events in Russia]

Medvedev made quite a few headlines two weeks ago with a series of moves that signaled a renewed push to ‘improve the investment climate’ in Russia.  This is, of course, not a new issue for Medvedev, and I have criticized him in the past for his administration’s highly technical, legalistic approach to bringing about change.  But this time Medvedev appears to be thinking big and is aimed at practical goals.  Medvedev summarized ten of these goals at the Commission on Modernization and Economic Development.  And while these measures do not threaten the ‘power vertical’ structure of the Russian state, some do strike at the intertwining of state and capital also known as “Kremlin, Inc.” 

The ten steps are:

  1. Lower compulsory social insurance payments by January 1, 2012
  2. Creation of procedure to examine complaints on state agencies’ action/inaction that include allegations of corruption
  3. New powers to the Ministry of Economy to review regulations and provide the Ministry of Justice with a list of overly burdensome regulations for repeal
  4. By May 2011 each federal district will receive a ‘special investment ombudsman’
  5. Privatization of large government shareholdings and removal of government ministers responsible for regulation in particular sectors from sitting on boards of directors of companies operating in a competitive (i.e., non-monopoly) environment
  6. Increase rights of minority shareholders of public companies to access to information
  7. Establishment of a Russian investment fund by mid-summer with the purpose of attracting foreign direct investment (note: previously reported that it would attract portfolio investment as well)
  8. Submit a draft law by May 15 to narrow the jurisdiction of the Commission on Foreign Investments in Strategic Sectors
  9. Appoint Deputy Prime Ministers to ‘process’ agencies like customs, registration offices, work permit providers, etc.  If the quality of an agency’s work does not improve, the head of the agency will be replaced
  10. Establishment by beginning of May 2011 of mobile reception offices of the President of the Russian Federation in every region of Russia to receive and review complaints about the authorities

Medvedev discussing his 10 steps:

Liberal Vertical

One notable characteristic of many of the steps is that they are wholly consistent with the ‘power vertical’ structure that Putin established and then perfected during his second term in the wake of the Beslan Hostage Crisis.  Then, the threat was from foreigners coming into Russia.  Now, the threat is from foreigners who don’t want to come into Russia.  The strategy is the same – establish more top-down control over the regional and federal structure.  Granted, Medvedev is not cancelling elections of governors or anything else that infringes on ‘local sovereignty’.  Rather, he is betting that a lot of investors’ problems stem from having nobody to contact when they have a problem.  There is some precedent for this – the Kaluga Region is widely known as the best investment destination in Russia, with investors explaining that Gov. Artamonov gives them his personal cell number.  So in short, this does not represent a serious departure from the current structure of government in Russia.

The Money – Kremlin, Inc. Under Threat?

Many observers in the Russian and international media have concluded that the privatization of government shareholdings in major companies and, most important, removing Ministers from government boards of directors constitute a direct attack on Kremlin, Inc. generally and Dep. Prime Minister Igor Sechin in particular, who sits on the boards of Rosneft, Rosneftegaz, and INTER RAO UES.  Some people smarter than me have argued that weakening Sechin is actually Putin’s initiative, because has never quite been comfortable with the silovik horse to which he hitched his presidential cart (he did quit the KGB to work for Sobchak, after all).

My own view is that these actions do not, on their own, constitute an existential threat to the system of Kremlin, Inc.  Indeed, the ‘privatization’ of most of these government companies is with the caveat that a ‘golden share’ will remain with the state.  And when it comes to companies, control is all that matters.  These aggressive moves by Medvedev do, however, seem to be a shakeup at the individual or group level of the beneficiaries of Kremlin, Inc.  Indeed, a lot of Sechin’s power comes from his role in INTER RAO and Rosneft.  Foreign firms wishing to do business on these companies’ ‘turf’ usually find themselves having to broker deals directly with Mr. Sechin, because his dual-role as board-member and minister make him the de factor primary stakeholder.  As a mere deputy PM, Sechin will have a lot less reasons to be conducting such business meetings.

The Tandem – Putin Power Under Threat?

An additional, stranger conclusion was made out of Medvedev’s speech: that he undercut the power of PM Putin ‘without asking’.  A Vedomosti article last week claimed that Medvedev’s proposal regarding the Strategic Sectors Law (step #8 above) had this effect.  Specifically, the article states that Medvedev proposal is aimed at narrowing the law’s coverage so that it does not include deals by offshore entities that are de facto controlled by Russian citizens/companies.  I have two interpretations of this issue.

First, is that Medvedev’s handlers mistakenly included a ‘reform’ that is already included in the draft amendments pending in the Duma.  In particular, I am referring to the loophole in the current legislation that expands the Strategic Sectors Law’s jurisdiction to any ‘group of companies’ to which a foreign investor belongs (which I have covered here and here).  The pending correction to this loophole seems to fit within Medvedev’s statement, especially because it was mentioned in the same breath as ‘deals in which international financial organizations are participating’ (another ‘reform’ in the pending amendments).  So it could just be a big screw-up (kind of liking VVP getting the FDI numbers wrong over and over), and I really don’t think we can overestimate the incompetence of the people running Russia.  But what if Vedomosti got it right, and Medvedev meant excluding offshore companies that are ‘de facto’ owned by Russian companies?

The second interpretation is that perhaps Putin wants to distance himself from these sorts of transactions, but doesn’t want to be the one responsible for doing so (leaving no fingerprints, so to speak).  The problem is that investments via Russian oligarchs’ Cypriot, BVI, etc. offshore entities (offshorki) have become one of the most common kinds of deals occupying the Commission’s time.  Aside from the embarrassing fact that such deals do not represent real FDI but rather repatriated Russian capital, Putin may have another reason to not want these deals to receive such public treatment.

For example, at the most recent meeting of the Commission, Putin approved Omirico Ltd.’s (Cyprus) purchase of Novoport Ltd. (BVI).  Both of these companies are the worst kind of offshorki – so-called ‘one-day companies’ (odnodnevki) that compliance lawyers warn their Western clients about.  So who’s behind Omirico?  State-owned Transneft and Summa Capital.  Behind Novoport?  Kadina Ltd., which is owned by none other than Putin judo buddies Aleksandr Ponomarev and Arkady Rotenberg, and LDPR deputy Aleksandr Skorobogatko (which literally translated means ‘quickly rich’ – you cannot make this stuff up!).  The object of the deal was the Novorossiysk Commercial Sea Port (NMTP).  NMTP was owned by Novoport (50.1%), Rosimushchestvo (20%), Sberbank (18.63%), and an LSE float.

Transneft/Summa, via Omirico, wanted to purchase a controlling stake in NMTP (via Novoport).  But the deal was structured somewhat strangely.  First, a condition precedent of the deal was that Omirico sell the Primorsk Commercial Port (PTP) to NMTP – yes, sell an asset to the asset which it is acquiring.  This was done for just over $2 billion, and Sberbank was even nice enough to finance a large portion of the purchase.  Second, Omirico purchased (likely with the proceeds of the sale of PTP) Novoport for [reportedly] $2.5 bln, far above the holdings’ value of $1.38 bln.  So Transneft sells PTP to NMTP for $2 bln, and then buys a controlling stake in NMTP for $2.5 bln.  If you take a step back, which you can do with the handy chart I made (click image below), you can see that this is essentially the transfer of over $1 bln in Russian taxpayer funds to Putin’s judo buddies, without any business/market explanation.
Obviously, these are not the kinds of deals that Putin wants to give his personal blessing to, especially with sharks like Aleksey Navalny swimming around Transneft’s financial records (kind of surprised Navalny hasn’t pursued this story).  Thus, if Vedomosti interpreted Medvedev’s words correctly, the goal may be to insulate the premier from deals that hit a little too close to home.

This entry was posted in Business, clans, compliance, corruption, Foreign direct investment, foreign investment, goskorporatsii, Government of Russia, Kremlinology, ldpr, Medvedev, oligarchs, PM Putin, power vertical, President Medvedev, Putin, Putin's Plan, rule of law, russia, Russian economy, siloviki, state corporations, strategic industries, tandemocracy, Vedomosti, Vladimir Putin and tagged , , , , , , . Bookmark the permalink.

3 Responses to 2012 Presidential Campaign Launches in Russian Style – Part II

  1. Jesse, thanks for this excellent post. I have a (potentially stupid) question:

    Do you think, from Putin’s perspective, the gains of “no fingerprints” outweigh the loss of power here? If Sechin loses the authority to broker deals for INTER RAO and Rosneft, it’s a “shakeup” and a blow to his stakeholder status. When Putin’s role in the Strategic Sectors brokering process is reduced/removed, it’s a self-defense scheme to conceal his links to dirty deals?

    Is this a double standard, or am I missing something?

    • jesseheath says:

      That’s why I think scenario 1 is more likely – that Medvedev’s folks screwed up his talking points. There is going to be a second package of amendments that ‘limit the coverage’ of the Strategic Sectors Law, most likely by excluding certain sectors from the list of those that are deemed strategic. Instead, they accidentally included two of the reforms that are pending. It should have been “We have already limited the scope of the law by doing ABC, but we need to go further by doing XYZ.” It will be interesting to see what is submitted to the Duma on May 15.

      My scenario 2 is just a hypothesis for what could explain Medvedev’s statement, assuming he did mean what he Vedomosti thought he meant. Still, I think it is different from Sechin because:

      1) Sechin is not Putin – if Medvedev were limiting Putin’s power by law, it is bigger news than Sechin. In limiting Sechin’s power, the big news was the Putin was noticeably silent.

      2) Reforms are different – it’s one thing to say all ministers must remove themselves from corporate boards. This just happens to affect Sechin. It’s another thing to say that the PM’s Commission will no longer look at this category deals, especially because this law was a pet project of Putin’s since 2005. Thus, I think it’s hard to believe that any reforms to this law would come about without Putin’s approval, which imposes the need to explain why he would want his power limited in these situations.

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