The Future of Russia

Night of the Long Trousers

2011-09-27T03:34:00.000-07:00

This was quite a performance by Medvedev - managed to look like a little boy who's just been let out in public in long trousers for the first time, while invoking the powers of the President of the Russian Federation. Reminds me of the "Who's Queen?" scene in Blackadder. When you have to remind people of your authority, it means you don't have any.

Clearly, Kudrin wanted to be fired, or he would not have spoken out in public.
Why did he want to be fired? One view has it that he wanted to go into public politics earlier this year, and head up Pravoe Delo, instead of Prokhorov. I have no idea why he would want to do this – the only real perk that I can see is that as a deputy you get immunity from prosecution. But even this can be taken away if the authorities really want to get you. Possibly he saw it as a semi-retirement job – you get a blue light, no one bothers you, and he gets to spend more time with his mistress.

Anyway, Kudrin was apparently dissuaded from doing this, and Putin promised him that if he stayed on as Finance Minister another year, Putin would make him Prime Minister when he became President. So basically Putin screwed Kudrin, hence the outburst on Saturday – it was a signal to force Putin to fire him. I imagine that when you want to leave a lucrative job like Finance Minister, you have to pay people in order to get it done, just as you have to pay people to get appointed. Forcing Putin to fire him means that Kudrin doesn’t have to share any of his gains with anyone. In this way Kudrin gets to spend more time with his loved ones (his money and his mistress) – it’s really quite an elegant exit ticket.

Medvedev signed his political suicide note yesterday – his public petulance makes him look weak to any Russian who holds a rank higher than secretary. It’s reminiscent of the boss’s son trying to impose his authority over the harmless department that his dad has given him to run. It also means that Medvedev will now have to fire anyone who disagrees with him publicly, so he could end up without a team quite soon. I think Putin’s plan is to keep him in place until the first minor economic crisis, and then fire him. Or possibly force Medvedev to put his name to an austerity budget in 2013, and then fire him when people protest.

For the record, I got it wrong on Putin – I thought he would keep Medvedev as President, but perhaps Medvedev was letting the power go to his head, and threatened to run against Putin. I had also thought that Putin was getting tired of running Russia and was happy doing butch photo-opportunities, but I guess he has realized that whatever stooge he appoints President will eventually begin to believe that he is worthy of the job.

Is there anything that Putin doesn't do?

2011-01-04T06:46:00.000-08:00

On New Year's Day we were treated to a report of Putin dressing down Boris Gromov, for failing to restore electricity to some villages in Moscow oblast by the deadline of 1800 on New Year's Eve. Gromov stammered that not everything depended on him, but Putin's short answer was that this is no excuse, and ordered Gromov to spend New Year's Eve (the most important family holiday in Russia) in one of the villages that has no electricity. Today (4 January) we saw Putin picking up the phone and talking to the captain of an ice-bound ship, checking that the crew had enough food and water.

Can you imagine Obama doing the same to one of his governors? Well, of course, in the USA, governors are chosen by the people, not by central government, so the governors don't report to the Federal Executive in the same way. But it takes a major disaster for the Commander-in-Chief to be so publicly involved. In Russia, it's taken for granted that Putin will be involved from the word go, as in the case of the stranded freighter. Of course, in stickier situations like the Kursk sinking, or Beslan, or even the Nord-Ost siege, senior management stay away until things are more clear. Of course, this skill of knowing when to be present or absent is basic for any politician in any organisation in the world. In fact the two core skills in any political organisation from a Parliament to a corporation are the ability to take credit for other people's successes, and to be able to blame others for one's own failure. But in Russia, it's not just politics.

If Obama were so directly involved, it would probably be seen as a sign of failure - he was unable to appoint competent deputies or to establish structures of power to ensure that things are dealt with. No, everything has to run through him, and be seen to run through him, and it's a sign of how weak he feels his power to be. If anyone else gets the credit for something, there is the fear that they will get the credit, and become a threat to him. Still, in the final analysis, it's mostly PR, designed to create the impression that the country can't function without Putin.

Thoughts on the Khodorkovsky verdict

2010-12-31T02:13:00.000-08:00

There was genuine hope that justice might prevail in the second YUKOS trial - after all, if the aim was just to put Khodorkovsky away for another 6 years, why go to the expense and waste of a long trial? The fact that the process was so drawn out suggested that there was a real disagreement within the elite. Towards the end of the trial, it seemed that the prosecutors were actively trying to drag out the process, implying that their bosses did not have enough political support for a guilty verdict. But in the end, the result was what the pessimists expected - Khodorkovsky and Lebedev got the maximum sentence, and there really is no semblance of justice being done. Also, the trial seems to have established the precedent that any transfers inside a corporate group can be construed as theft, and that you can infringe on the rights of minority shareholders even if you own 100% of a company. This puts the rest of corporate Russia on watch that anyone can be jailed, if the elite wills it.

What happens next? There will be an appeal, presumably, and this should allow greater clarity on the absurdity of the charges. There was some merit in the first jail sentence - I remember a comment on the Johnson Russia List by a senior lawyer at RenCap who had gone through the charges, and it did seem that Khodorkovsky and YUKOS had indulged in tax evasion. The fact that everyone else had been doing it, and the schemes had been signed off on by the Tax Inspectorate doesn't constitute an adequate defense. This time there were numerous procedural violations, and the judge even concluded that Khodorkovsky and Lebedev had stolen more oil than Yuganskneftegaz had produced. The prosecutors tried to amend this fact late in the day, but the judge seems to have decided that they nonetheless proved the impossible. So there are grounds to appeal, although it's unlikely that this will work on legal grounds, as it would imply that there is something wrong with the Russian legal system, and we all know that this is not the case, as Putin, Lavrov, and Medvedev have repeatedly told us how independent the courts are. But if the political ground does shift in the meantime, then presumably they could use one of the many procedural violations as grounds to declare a mistrial.

There's not much hope that the political ground will shift much before 2012. I still think that Medvedev will stay President, because the status quo suits Putin, as he can shift a lot of ceremonial duties off on to Medvedev, without ceding any real power. On the other hand, a six year term could embolden Medvedev to broaden his power base, and Putin could pre-empt this by taking back the Presidency. Medvedev clearly has not built his own power base, and those few ministers who have shifted towards his camp could shift back quite fast. The only thing that could really undermine Putin would some sort of corruption scandal in the areas under his control, and perhaps this is why the elite are so worried about Bout and what he might reveal about who controls Russia's arms exports, and where the money goes.

In the meantime, what's the conclusion for the future of Russia? Russia's rulers stay firmly in the autocratic camp - the executive is in control of the judiciary and the legislature, so the only checks and balances are those generated by internal politics, and the budget constraint. So the prognosis is that nothing will really change until there's an economic crisis, and Putin's government has proved very adept at staying on just the right side of a budgetary crisis, while increasing transfers from commodity producers to the various social groups that live off the state budget. As long as the budget has revenues from commodity income, Russia won't change.

The Khodorkovsky trial - an Unfinished Symphony.

2010-12-28T23:04:00.000-08:00

Most comments on the Khodorkovsky trial start with the inevitability of a guilty verdict. Yet there were whispers from serious people that a not guilty verdict might be possible, that the trial is an embarrassment to Medvedev and his people. One enterprising bank economist said that there was a 40% chance that Khodorkovsky would be acquitted. This a clever position that allowed him to claim to have been the most optimistic about a not-guilty verdict, if this were the outcome, but also not wrong about a guilty verdict. But clever fence-sitting will never actually tell you how to bet.

Khodorkovsky and Lebedev have been pronounced guilty, but the trial still drags on while the judge reads the conclusion. No doubt the judges will claim the maximum possible recess while considering sentencing. And then there will be an appeal. This story will not be closed for some time, which to my mind reflects that fact that there is no clear political view on Khodorkovsky, and so the decision hangs in limbo. In a way this is good news - if the forces of darkness really were in the ascendant in Russia, then the trial would have been quick, and Khodorkovsky back in Siberia, freeing up prosecutorial manpower to harrass some other unwilling-to-share oligarch.

The trial balloon about swapping Bout for Khodorkovsky was a sign of the Russian leadership's lack of options. They know that there is no real benefit to keeping Khodorkovsky in jail, as no oligarch will again try to gain the sort of power that he claimed, and the proceeds of Russia's mineral wealth will mostly accrue to the State. On the other hand, once Khodorkovsky is out, his enemies fear him, as all bullies fear anyone who might fight back. So Putin and his team need to keep Khodorkovsky in jail, even though Medvedev and the people around him would like to let him out.

The main issue here is that investment in Russia is woefully low, below 20% of GDP (China is around 40%), and letting Khodorkovsky out would greatly help the economic authorities to persuade foreign and domestic investors that Russia is a good place to put their money. At the moment, it's telling that if you look at the various public filings, not one Russian oligarch holds his wealth onshore, whether in his own name or via a corporate entity. All of them, without exception hold their wealth in offshore jurisdictions. So if the most connected people with the best lawyers don't trust the Russian legal system, why should any other investor?

There is another issue, which is that if you ask just about any ordinary Russian, they are well aware that most murderers get let out after 10 years or so. So the Khodorkovsky sentence is getting harder and harder to justify, and Putin is painting himself into a corner. It's not enough to throw mud at Khodorkovsky, and say that his associates were responsible for murder. Does that mean that Putin or Medevedev should take responsibility for everything that their subordinates do?

The Bout-Khodorkovsky swap is an elegant tactical move, which is why it appeals to the securocrats - it makes them feel clever. They are concerned that Bout, unlike Khodorkovsky, will happily agree terms with his captors in order to avoid jail. And Bout knows a lot about which senior Russian officials have taken which payoffs in regards to Russian illegal arms shipments and other trades, and can probably direct the CIA to the relevant bank accounts. Why else would the Russians exert such massive pressure on the Thai government in order to prevent the extradition of a private individual who has not really lived in Russia for the past two decades?

The problem for the Russians is that Khodorkovsky does not mean a lot to the Americans, and if anything, he is worth more to them in jail, because he’s a stick with which to beat Medvedev. And also a symbol of Medvedev’s impotence. YUKOS did pay a lot of money to Washington lobbyists, and there probably is some residual goodwill, but there is no political capital to be made in the US by supporting a Russian oligarch. Post-crisis, and post-Macondo, rich foreigners from oil companies are not so popular in America. Furthermore, Bout must have some useful information about sales to Al-Quaeda and similar groups, and that's obviously a big priority for the US.

And of course Khodorkovsky would have to agree to any deal, which is also not that likely. It would be tantamount to admitting that he was an American agent, and probably any deal would require his exile. He might have accepted exile in return for avoiding jail, but now that he's done his time, why pay the price twice? This is how the Russian elite are good at tactics, and bad at strategy. They scored a massive tactical victory by putting Khodorkovsky away, but now they are in a strategic corner. They fear Khodorkovsky out of jail, but to keep him in jail, they have to abandon the myth that Russia has an independent or fair legal system. Once he is out of jail, he no longer has anything to fear, and he has plenty of resources to fight back.

When the South Africans jailed Mandela, they had no idea they were creating a martyr (and Mandela was not a very attractive character back in the 1960s, head of the Soviet sponsored Stalinist wing of the ANC). By the end, the Botha regime were desperate to let him out, which meant that it was Mandela who dictated the terms of his own release, even delaying the time he walked out of jail, to show that it was he, not the regime, who was in control. It's the same with Khodorkovsky, the longer he stays in jail, the more people will remember him for the injustices that were done to him, than for the injustices that he did to others. The regime knows this, which is why there will be no final decision until after the 2012 election.

Medvedev is trying, but no one really believes it

2010-03-26T06:54:00.000-07:00

Medvedev really does seem to be trying to establish himself as independent political figure from Putin, but the picture in the mainstream Russian media comes across that it's still Putin who is in charge. Last night we saw a huge ceremonial meeting in Volgograd, ahead of Victory day on May 9th. The President was there, with a load of senior ministers, governors, and a lot of discussions about things like veterans' housing and Medvedev was making tough talk about chasing regions which were not following through on promises to provide housing to veterans. He really did seem presidential.

The only problem was that at the same time, Putin was in Moscow, in heavy discussions with the Ukrainian prime minister about gas prices and gas transit, and it all just seemed more serious. Not just because the Ukraine gas situation allows you to steal billions, whereas there are only millions at stake with veterans' housing. It was just that it seemed clear that Putin has retained control of the really big issues in Russian government, and Medvedev does not really seem to impinge on them.

For instance, there was a big meeting last week about modernisation and technology, two of Medvedev's favourite topics. It now seems clear that a lot of criticism of the Federal Migration Service (FMS) came out of that meeting. The new national technopark is to be based near Skolkovo, a new, modern business school that is to breed national champions, and its associated technopark will be Russia's Silicon Valley. Only the business school has pointed out that it's virtually impossible for them to hire Western talent because of Russia's migration laws. One administrator says: "Once the candidates start to see what is required of them to start coming to work here, they start looking at opportunities in Brazil and India."

A sure sign of this criticism was a big photo event two days later, where Putin visited the FMS, and they proudly showed off a new database. The thing is, the FMS is Putin's sphere of influence, because it relates to security, the border and, most importantly customs. Control of this allows him and his allies to skim off billions (just look at the quality of buildings that the State Customs Committee works in) and he isn't letting this go. So this was Putin saying: "This is my area, it's all fine, don't criticise me."

Today in Vedomosti there is a lead article saying that the rules for migration need to change, and the FMS has promised to put together new rules that will start working from the beginning of 2011. But no one has been fired at the FMS, and presumably the new rules are a concession that are designed to ward off criticism, and make sure that there is no increased oversight of the FMS. Because oversight could mean that Putin starts to lose control. Medvedev's problem is that he has no leverage - he could use the courts, or the prosecutors, like Putin did when he came to power, but they are already controlled by Putin. Essentially, Medvedev needs a Praetorian Guard (although maybe Saddam's Imperial Guard is a better analogy), and that is just not his style.

The Political Consequences of the Magnitsky Affair

2009-12-14T06:15:00.000-08:00

Thoughts on the Magnitsky affair, and the current state of government in Russia

We seem to have an ongoing rush of scandals and disasters, and Medvedev's response to them is different from Putin's. Firstly, Medvedev at least acknowledges that something bad has happened - the Magnitsky affair got prime time coverage a week after the lawyer's death. It also got oblique coverage almost in real time - the day after Magnitsky died in custody, Medvedev had a meeting with the Minister of Justice . At the time, I thought this was a very good sign, because it implied to me that the prison department would not be made to carry the can for the lawyer's death, and that Medvedev would go after the officials at the Ministry of Internal Affairs (MVD) who had really been calling the shots.

However, last Friday, the Ministry of Justice confirmed that it had fired 20 senior officials, including a deputy Minister, and the Director of Butyrka prison, where Magnitsky died. So the official spin is that there is no problem outside the prison system, and although the seniority of the firings at least implies an understanding that this is not an isolated incident, it falls short of what Magnitsky's supporters hoped for. (See Jamison Firestone's op-ed in Moscow Times). It's not realistic to expect that this would lead to a wide-ranging reform of the criminal justice system (there are very few countries where you would get 1 year's pre-trial detention for a tax case), but there was some hope that this case would at least lead to some serious investigation of why Magnitsky was in prison.

For instance, there is no investigation of Magnitsky's allegation that he was told that he would be freed if he withdrew his testimony against a senior MVD officer on charges of embezzlement. That same officer had got himself appointed to the investigative team, and presumably was pushing for Magnitsky to be kept in pre-trial detention, and to receive minimal medical treatment. This should be a national scandal, and it isn't. Actually, it's worth noting that there was barely any mention of these dismissals on Russian TV over the weekend. Clearly the official line has not filtered its way down to the TV editors, so they kept it out of the headlines. Anywhere else, of course, it would be the single biggest scandal of the week.

The sad thing is that, probably, behind the scenes, there is a huge battle being waged. No doubt Kudrin is on the warpath, because someone in the Ministry of Finance signed off on the disbursement of the tax refund that was essentially stolen through a complex fraud scheme that was discovered by Magnitsky. Or if Kudrin himself signed off on it (not impossible given the size of the transaction), then presumably his enemies are going after him. Big, well-connected companies need to fight tooth and nail to get much more legitimate tax refunds from the government. It's very rare for the Ministry of Finance to pay out within two days of the first court decision. There would be at least one appeal, if not more. But my guess is that Kudrin would not put his name to something so corrupt, but one of his deputy Ministers almost certainly did.

So Kudrin is probably complaining to Medvedev and Putin that the theft was approved by some deputy Minister who was forced on him by some other deputy Prime Minister as part of the endless power games inside the Russian government. And Putin and Medvedev are looking at the situation, and working out the political angles - can they move against whoever is behind this theft, and if not, can they claim a cut of the money? My guess is that the whole scheme was initiated by some senior security minister, probably in the Ministry of Internal Affairs, given that it seems to be an MVD colonel who seems to be running the scheme.

And this is where the politics starts. There was a comment on RFL discussing the Magnitsky affair, and praising the response, but suggesting that any real changes would be minimal, and that any actions would be more the result of political fights, than any genuine improvement in either transparence or accountability. Tantalisingly, though, they did not say anything about what the fight might be. The main battle at the moment seems to surround the MVD, Rashid Nurgaliyev. He has been under fire since a police officer went on the rampage in Moscow, and the attacks intensified when a public protest against local corruption in Krasnodar became a YouTube hit. This even led to a senior Edinstvo party official suggesting that the MVD should be disbanded, and all policemen asked to reapply for their jobs, as in Ukraine and Georgia. No one is taking this seriously, of course, but it's telling that the idea was even aired.

Control of the MVD is very important in Russia. It gives you the muscle on the street that you need in order to shake down businesses - nothing frightens an owner more than a gang of masked policemen turning up for a "search". The FSB can do this, although they are on shaky ground when they do so, and so can the drug police, but it's the police that can do it with impunity, so there are plenty of earning opportunities. Similarly, the police can basically arrest anyone they like, and keep them in "pre-trial detention" for up to a year, which is a strong deterrent to critics. Obviously other agencies and power centres are jealous of this power, so the Minister of Internal Affairs is often under attack, and there's been quite a lot of turnover in the post. The post is rarely a stepping stone to higher things - the Minister is normally put there by a senior political figure, and allowed to occupy the post for long enough to earn his way out, and then is replaced by another figure who reflects the balance of political power at that time.

There's an article in today's RBK daily talking about these sorts of issues. The head of the investigative committee of the MVD is past retirement age. He's a former classmate of Putin's, and there is talk of his being replaced by a former classmate of Medvedev's. The investigative committee is key, because they are the people who start investigations into corruption, or into businesses, or whatever is required. For instance, the investigative committee of the General Prosecutor's office is currently working on a review of municipal construction in Moscow. This is seen in the press as an attempt by the Federal Government to gain controls of the cash flows associated with construction in Moscow, which of course are huge. Two former senior managers of the Moscow City Government are under arrest, and clearly this is a big deal, because of the sums involved.

Is it a real clean-up, or just a diversion from one corrupt group to another? Probably a bit of both, and generally in Russia, it's more likely to be the latter than the former. But you need a blunt weapon like the investigative committee to start the process, which is why control of these is so important. One of the more regrettable aspects of Putin's presidency was the proliferation of investigative committees. In addition to the MVD, and the FSB, who have always had a free hand to do whatever they want, you had the creation of another investigative committee in the General Prosecutor's office. Also, there was a Federal anti-Drugs Committee, which was headed by a close Putin ally, and started poking its nose into all sorts of thing. The logical conclusion of this is a proliferation of private armies, although no one is saying it's going to go that far. There is endless talk of reform, but instead of reform abolishing the old, bad structures, they seem to remain, and some new group acquires overlapping powers, and becomes another unknown in the system of simultaneous equations that is the Russian government.

In this system, each new scandal becomes a weapon to be used by one clan against another. So the corruption in the MVD can be used by the General Prosecutor's office to attack the MVD, and possibly gain more power. The problem is that there is never enough force to say, completely disband the MVD, as was suggested by one Duma deputy. The old MVD still has enough weight, and presumably compromat, to keep its old position, and still cause problems, and the new guys only have enough strength to start up their own competing structure. This means an extravagant duplication of functions, so more government spending, and also a new set of corrupt officials, who buy their positions, and have to find a new way to generate money, which means more attacks on business. This cycle will repeat itself, as long as Russia has plenty of natural resources to finance it all, and only really comes under threat when there's an economic collapse, which seems to come along every 10 years or so.

Some Thoughts About Bill Browder

2009-10-11T23:01:00.000-07:00

Bill Browder was a client of mine when I was a broker, and a number of friends have worked at Hermitage, and he is a good friend of a good friend of mine. He used to be a major Russian success story, a Salomon banker who took a small amount of seed money from some investors, and turned it into a $3 bln fund. His presentations were always fascinating, because they were sure to include some data analysis that you had not seen anywhere else, and which gave you something new and interesting to think about.

He spent a lot of time and money to improve corporate governance in the biggest Russian companies. This was partly a business move - normally when you don't like a company's practices you just vote with your feet and sell the stock. This wasn't really an option for Hermitage because they were so big - they had to try to change the way that companies were managed because they had no choice but to own them. Actually, it would be good for the economy if shareholders the world over were to follow his example - portfolio investors have had woefully little input into the boards of the world's largest companies and this has undoubtedly weakened management.

This preamble is intended to show that Bill Browder and Hermitage have, by and large, been a force for good on the Russian market. They have acted toughly in their own interests, and I'd be willing to believe that if management of a company offered them, say, a buyout on terms that were not available to other shareholders, they would take it. I have been in a meeting with them where they made it clear they expected to trade on inside information. They are not saints, but as activist shareholders they have worked tirelessly to improve Russian corporate governance. Yes, their primary motivation for this is that it will help make money for their investors and themselves, but the beauty of the free market is that it aligns the greater good with individuals pursuing their self interest.

The background to the story is that Bill Browder lost his Russian visa back in 2007 - my general feeling back then was that he had been a little too vigorous in his investigations of Surgut, and that this had threatened the incomes of some well-connected people. There was no official explanation for the denial of the visa, and Browder has been a little coy about the subject, but this is understandable - the last thing you want to do in these situations is to go public, as this only makes things worse.

Fast forward to this year, and it turns out that in the aftermath of the visa denial, Hermitage were investigated for tax evasion, and during this investigation, documents for some of their shell companies were confiscated. It then turned out that those shell companies were used to defraud the Russian tax ministry of hundreds of millions of dollars. The fraud was complicated, but the basic idea was that the shell companies had been quite profitable, because they had held Gazprom and Sberbank over a long period of time. Hermitage had paid taxes on those profits. The confiscated documents were used to make fictitious transactions that nullified the profits, and on the basis of this, the people who now controlled these companies demanded tax refunds from the government, which they duly got.

Anyone who lives and works here will tell you that it's virtually impossible to get tax refunds. It's a sore point with exporters, who must pay VAT on everything that they make, and can then claim that VAT back when they show that the goods have been exported. It takes months and months, and often ends up in court. In this case, the tax claims were paid within a week, according to Hermitage - there have to be some questions about this, because although the court cases that underlay the tax refunds are relatively easy to get, I'd be interested to know how they got hold of information that the claims were actually paid.

Taking the Hermitage view of the story at face value, it's clear that very senior people must be involved in this - you couldn't get that kind of tax refund without senior ministerial approval - I wouldn't be surprised if it required ministerial approval. Of course these revelations have merely provoked more backlash - here's an article on the aftermath.

I don't think that this is showing corruption at the very top of Russian power. What it shows is that there are people embarrassingly close to the Russian leadership who have been caught stealing, and they are backpedalling furiously to fight back. Interestingly, the story was initially broken in Vedomosti, which gave chapter and verse - this suggests that there are people in the leadership who want there to be questions raised about it. I wouldn't be surprised if the Kudrin finance bloc, for instance, is very unhappy at the rampant corruption of the security services leaders who are close to Putin, is behind this sort of disclosure.

How does it play through? Russia has put out an extradition request for Browder. Interestingly the justification for this request is tax evasion, using a scheme that is used by just about every Russian finance house - certainly two of my former employers used it, and although it's wrong, it's perfectly legal. Browder's lawyers should have no problems in fending off this one, especially since no one has a particularly high opinion of the Russian court system and its independence. And Browder will continue to ensure that this keeps a high profile, and who knows what else he may be able to disclose - he recently opened a court case that will allow him to subpoena documents from the offshore domains where the tax refund money was transferred. He's happy to name names, and presumably those names have enemies, who will use this to go after them. It's times like these when you start to worry about a person's personal safety, although one protection is that although no one really went to town about the Litvinenko case, because the victim was a Russian, Medvedev would get some very tough questions about any assassination of Bill Browder. It's not so much that the perpetrators would be worried about being brought to justice, it's just that they would probably have to pay away most of their ill-gotten gains to avoid this.

What does this mean for the future of Russia? Nothing good - the criminals who did this are very very sophisticated. I had a feeling of some admiration for the ingenuity of the scheme, and they are clearly very financially literate. These are not thugs with umbrellas. The original motivation for the attack on Browder was to stop revelations about theft from an oil company. Yet they were smart enough to check all the documents that they confiscated as part of the intimidation, and used that to steal more money. This suggests that the new generation of Russians who have reached adulthood since the fall of communism are not a new generation that will abandon the ways of their parents, but are doing much the same thing, only in much more modern ways. And they have no interest in making the government more transparent and accountable.

A Walk On The Valdai Side

2009-09-13T22:39:00.000-07:00

Putin said last Thursday, speaking to the great and good of the Valdai conference, that there was no competition between him and Medvedev, in response to a question about whether he would run for President in 2012. It's probably worth seeing the whole account of the statement, given about halfway down the page in a RussiaToday interview here. I couldn't find any mention of it on Putin's own website's account of the meeting. The basic gist is that, in deciding whether or not he would run for President in 2012, Putin would sit down with Medvedev and discuss the situation in the country and in the United Russia Party, and he and Medvedev would agree which of them would stand for the Presidency.

This has been intepreted as a sign of Russia's political stagnation and lack of political pluralism - the two leaders agreeing on who runs for President, giving the population little choice in the matter. It's reminiscent of ancient Rome, when the leading families would agree amongst themselves who would be consul that year. But to my mind this is a sign of some real fracturing in the leadership, and signs of a rift between Medvedev and Putin. My interpretation of Putin's statements is that they are an answer to Medvedev's programmatic interview, available here on his website. Interestingly, it's described as a speech rather than an article.

It's not a great document, and is in my opinion less impressive than Putin's own efforts early in his presidency. But it does seem to be an attempt to establish some individual ideas and directions for Russia. For instance, it's more critical of the Soviet legacy than Putin has been recently (although it still preserves the narrative that the nineties were a time of chaos). By implying new energy to some fairly well established goals (like lower reliance on raw materials exports) there is an implied criticism of the previous administration, although he can't do this too much, as he was part of that administration, and also because it's too soon to break decisively with Putin. Again, this has been criticised as a rather empty document, and a wishy-washy one, but the key is not the content but that it exists at all. We can now start to talk about a Medvedev plan, in opposition to the Putin plan.

As Vladimir Ryzhkov points out in the Moscow Times, there is not much different between the problems and solutions identified by Putin, and those put forward by Medvedev. And he (and many other commentators) are probably right to suggest that there is little chance of success. But for me, the main thing is that it's being put forward as an alternative to Putin, and is being widely discussed in the press as such. For instance, there was a whole televised debate on NTV (the Gazprom-owned, no. 3 state channel) last night, devoted entirely to Medvedev's article, which to my mind suggests that the instructions have gone out from the Presidential Administration that this was a programmatic article that needs to be widely disseminated. In the old days this was done via the Communist Party, but the Russian mass media is just about as effective.

Speaking of the mass media, the other thing that I wanted to point out is that political satire is making a return to TV. Putin pretty much banned this - like all totalitarians, he realised that his lack of legitimacy made him vulnerable to humour, and he was probably very unhappy with his tiny doll on Kukly. For the last seven years ago, it's been amazing how toothless political humour was in Russia. They can be very sharp and incisive when commenting on Western politicians, of course, but Russians are off limits. Or they were. This last weekend, some prime time, very popular shows have attacked over-privileged Duma deputies (ProektorPerezHilton), Gennady Onishchenko (chief sanitary doctor), and corrupt local officials (KVN).

The attack on Onishchenko was interesting because his main activities have been the banning of Georgian wine, Belarussian milk, and Latvian sprats. Everyone knows that these bannings were mainly political, and more associated with Putin, and the program made it all look ridiculous, with Russia's chief sanitary doctor singing a parody of a song by Dima Bilan, a teen heartthrob. I would be spitting mad if I were him - senior Russians really don't have a sense of humour about this sort of thing. The commentary about over-privileged deputies was fairly old hat, but the commentary about corrupt local officials was interesting, because it was done at a special concert where Medvedev was present, and he was shown laughing loud at this particular joke.

Now, maybe I'm grasping at straws here, but in the Soviet Union, this would have all been very significant. These sorts of jokes are unimportant in the West, but they are very important in the Soviet context. I've never forgotten the press conference given by the Emergency Committee in 1991, where state TV showed the journalists laughing at the Committee's attempts to defend their actions. Kundera never forgot the importance of laughter as a weapon against totalitarianism, and neither should we.

Do I think that this marks the start of the Moscow Spring? Not really - Medvedev doesn't really seem to be a liberal, since he thinks that he can create a modern economy via the state, instead of by destroying the state. In that, he follows a long line of Gorbachev-style reformers. But, like Gorbachev, he might open the way for a more interesting reformer, so perhaps we should start looking for the person who will be Yeltsin to Medvedev's Gorbachev.

2009-09-10T00:17:00.000-07:00

I've been quiet for the last few days, because there have been no momentous events that seemed to warrant comment. Putin and Medvedev both seem to be focussed on housekeeping affairs like the budget and the banking system. The holiday period is over, and September is normally a key time for approving the next year's budget before it's sent to the Duma, so that it can get three readings in the Duma before year end. The Duma are apparently complaining that they have less time this year, which presumably reflects the fact that the government has spent a lot more time arguing over how much money there is to spend, and how it will be spent.

Revenues are unpredictable next year, because commodity prices are unpredictable. Kudrin is no doubt hawkish on revenues, and on borrowing. This was played out in a public meeting, where Putin asked Kudrin about the IMF, and how much Russia could borrow, and Putin forced Kudrin to say publicly that they did not need to borrow from the Fund. Apparently Kudrin has been suggesting that it might be a good idea to borrow from the Fund, because it's a cheaper source of borrowing. Putin is against it, because the Fund has heavy conditionality in terms of fiscal policy, and he no doubt thinks that it's humiliating to have US agents (in his mind) telling the Ministry of Finance and Central Bank of Russia what to do.

In general, though, one of the few unquestionably good things that Putin has done for Russia is to instil a hard budget constraint on the government. He hated the lack of freedom that Russia's debt imposed on him when he first became Prime Minister. So Russia was quick to repay its debts, when the oil price allowed it, and he has presided over the building of reserves that have protected Russia during the credit crunch of 2008. The flipside to this is that he can be relied upon to be more hawkish on government spending than most authoritarian leaders tend to be. Given that it's his natural allies in the army, security services, and military industrial complex who are the ones calling for more spending, this means that the political environment favours a rational budget policy, which by and large is good news for Russia.

In general, over the last couple of years, the pragmatic view has tended to win out in the economic debates. The government could have handled the rouble slide a lot worse last year, given that they had to stop it crashing so as to avoid the population panicking, while preserving reserves. Some commentators still claim that Russia spent all its reserves defending the roubles, while in fact they only spent the reserves that they had accumulated in preventing the rouble from strengthening too much when oil was high. There is a point when reserves get too big, as the Chinese have discovered. Yes, there is a lot wrong with Russia's government, but its fiscal policy is not too bad.

What does this mean for the future of Russia? Well, hopefully the current crisis will serve as an example to future leaders, and Russia will continue to accumulate reserves when times are good, and spend them when times are bad, using them as stabilisers. The likelihood is that future leaders won't be as tough on spending as Putin, and eventually the reserves will be spent, and Russia will have a good old-fashioned emerging markets budget crisis, run on the banks, devaluation, etc, which is normally a catalyst to clean out the government, as in many Latin American countries. An alternative scenario is for Russia to be like a Gulf State, but this would require the ruling families to occasionally lend money to the State, and I'm not sure that this would be an option.

Chichvarkin

2009-09-03T23:17:00.000-07:00

The MVD was crowing in public yesterday about how the Westminster court had given an order for the arrest of Yevgeny Chichvarkin, the former owner of Evroset, Russia's largest mobile phone retailer. In the Soviet lexicon, this would mean that Mr Chichvarkin could kiss his freedom goodbye, as the court would of course do everything that the police want. As Chichvarkin pointed out, a British court will require "something that has long disappeared from Russian jurisprudence, namely evidence." No doubt at some point Mr Chichvarkin will have to appear in court to acknowledge the extradition request, and then the court will start to consider the evidence.

I haven't looked deeply into this one, but as far as I can make out, the accusation against Mr Chichvarkin is that he caused the police to arrest one of his former employees, on the accusation that the employee had stolen from him. This is described by the MVD as "kidnapping" although the actual "kidnapping" was done by policemen, who may or may not have been paid off by Evroset. To be honest, it would be almost impossible for a rich company like Evroset to get the police to press charges without paying - the MVD thinks that it's impolite for rich people not to "share" with them. Anyway the upshot was that the accused was let off, after he had in some way paid back the money that he was accused of stealing. Probably not a very savoury episode, but it's hard to see exactly where the egregious crime was. I'm sure that the "evidence" presented will be hearsay confessions beaten out of Mr Chichvarkin's former colleagues.

The backdrop to all this is our old friends in the Customs Committee - after all, Evroset was a major importer of foreign electronics. This is an area that is full of contraband, but it's not clear exactly who is doing the smuggling, as the retailers buy from wholesalers, and there are various links in the chain where Customs officials get paid off. So Evroset may well have bought its phones with clean customs documents, because the person selling the phones had paid off the appropriate officials. Or it might have been Evroset doing the paying. The total amount paid by all phone importers must have been in the hundreds of millions - there have been well in excess of 100 million mobile phones imported into Russia in the last ten years or so.

So this is a nice little harvest, and there was a turf war over it, about 3 years ago, when the General Prosecutor raided some of Evroset's competitors. This is always a sure sign that some part of the law enforcement apparatus sees that one of its rivals is making money, and they want in on it. Evroset was spared these raids, but then sold out to VimpelCom, which is part of the Alfa group. If memory serves correctly, the deal was mediated by Alexander Mamut, who is often a trusted middleman for ensuring that the proceeds of high profile transactions are properly allocated. My interpretation of this is that Chichvarkin saw that he needed to cash out, and the deal was done in such a way that a number of government officials got a slice of the proceeds and VimpelCom got an excellent retail network.

Chichvarkin's problems began after he collected his money, and this means one of two things to me. Either he was meant to sell it to someone else, at a lower price, or someone just saw that he had just had a big payday, and decided to shake him down. The latter is quite possible - I've heard a story of the owner of a decent size bank who sold out to a bigger bank. The day after this appeared in the press, he was called up by someone who presented themselves at being from the Alfa group, and informed him that he was in fact going to sell the bank to him, for a much lower price. The caller mentioned that he knew where to find the bank owner's wife and children. Happily for the bank owner, he had his own connections, and the deal went ahead as planned. In the same way, it's perfectly possible that Chichvarkin was called and told that he had to sell to someone else, who would then sell to Alfa - he chose not to, and is now suffering the consequences.

The second alternative is that this is a simple extortion operation, organised via the MVD. Chichvarkin is publicly in posession of a lot of money and a number of senior police officers feel that he should share it with them, so they threaten him with jail, and hold a number of his colleagues hostage. Don't forget that Chichvarkin is a legitimate businessman who built up his business from nothing, into something very successful. He didn't privatise any natural resources cheaply - he built a proper modern business, and sold it in the normal way. While you feel some sympathy for the view that the oligarchs who stole state resources should get their comeuppance, Chichvarkin's only real sin was that he was rich and successful in public. This is repeated all over the country - if the law enforcement agencies get wind of the fact that you are making a lot of money, they will immediately try to attach themselves to it. If you're a successful local business, you'll get attacked at a local level.

This situation seems to be getting worse. It existed under Yeltsin, and Putin's arrival in power seemed to make things worse, because he had a lot of old friends in the security services, who now had direct access to the Kremlin. The only way of getting rid of this is to create a genuinely independent court system, something that Putin and Medvedev have acknowledged. In fact, I think Putin is on record as having claimed that he created one. But this is about as realistic saying that Britain needs a better climate in order to become a destination for beach tourism.

Customs Ministry Feeling The Pinch

2009-09-02T22:45:00.000-07:00

Yesterday, the Customs Committee (in a joint operation with the MVD) arrested a group of people from a yacht importer, including the head of the group that imports Aston Martins into Russia(Moscow Times link). What's surprising is the ferocity of the arrest, breaking windows, and the fact that it was done in public. Even in Russia, these things are normally more civilised, and it doesn't look like the suspects were a flight risk, given that they were just about to take part in a press conference relating to the start of a yacht exhibition in Moscow. So clearly there was a desire to send a signal. The Moscow Times article suggests that it's because there has been criticism of the Customs Committee, which is now trying to show, as publicly as possible, what a good job it's doing. There has also been a suggestion that it's for internal Russian PR, to show that they are squeezing the rich for taxes.

The Customs Committee has been a huge battleground since the fall of Communism. It generates huge cash flows, so it's important for the state, but more importantly, it's a place where people can attach themselves to cash flows and get rich. One of the ways that the Onexim people (Potanin and Prokhorov) made their money was to purchase privatised state assets using funds placed on deposit with them by the Customs Committee. There is a whole industry of expeditors that make money by helping importers and exporters get past the Customs Committee (I've been told unofficially by World Bank officials that each separate export license costs $250,000, which formed the basis of the initial capital for a different oligarch group). One of the most bitter fights of the early Putin era was the "Tri Kita" episode, which was ostensibly over the investigation of a furniture importer, but in reality was between two branches of the security services for control of the Customs Committee.

Once you are in place in the Customs Committee, then you have to pay a fair amount of money upwards in order to keep your place. This is fine as long as the sector is awash in cash, but these cash flows have been severely restricted by the fall in the price of oil - the Customs Committee collects all of the difference between the export price received and about $32. So the fall in the price of oil from $150 to $75 will have hurt. And of course the general decline in exports will have caused problems. But I doubt that the cost of maintaining your position has fallen. So the guys in charge need to seek more revenue opportunities. This is why they have gone after the Cherkizovo market, which sold cheap Chinese imports, which were cheap because someone was paying off the appropriate customs inspector.

The rake-off from yachts and Aston Martins is probably not that big. But presumably the arrested suspects have already paid off one customs inspector, and this is a way for a different customs inspector to make his way on to their turf. The Russian word is razborka which translates as a sort of "working out of differences". The guys in charge are letting their subordinates fight it out amongst themselves, using whatever allies they can muster (hence the presence of heavies from the MVD), and will happily collect their baksheesh from the victor. In the meantime, some poor businessman who thought he had sorted his problems by paying a large amount of money to a senior official, suddenly finds that he's in jail, for having backed the wrong horse, when he wasn't even aware that there was a race going on.

Putin, Poland and WWII

2009-09-01T01:53:00.000-07:00

A couple of articles in today's Moscow times, one by Vladimir Ryzhkov and another by Stefan Wagstyl (no link on the MT site, but here is the FT original article). Both very good articles and highly recommended, but I think that they miss the key point about why WWII is so important to Russia's current leadership.

The key thing to understand is that the victory over Germany was one of the few things for which the Soviet government could really claim credit. They knew, and the people knew, that living standards in the Soviet Union were way lower than in the West, and that in general, accepting to live under the Soviet government meant that its citizens denied themselves material and spiritual benefits. There had to be something to justify this sacrifice. Yes, there was the promise of building Communism, and the bright future, but no one really believed in it. The key to the legitimacy of the Soviet State was victory over Fascism. The Soviet State was a retired war hero who felt that the world owed him a living because of what he had done in the past - while that works at the level of the individual, it doesn't really extend to the State. But that was all they had, and they milked it for all they were worth.

This was key, because it justified all the abuses that the Soviet State heaped on its citizens. Any KGB or MVD thug could justify, in a twisted way, their corrupt practices as being somehow necessary for the defence of the People. This was particuarly extant in the case of Beslan, which happened five years ago today - there could not be any investigation or questioning of what the Army did then, and it had to be claimed as a victory, or suddenly the government would have to answer a lot of difficult questions and calls for compensation. If the Security apparatus is not shown to be providing basic security to its citizens, then the State is not really providing much to its people. This was all quite easy during the Cold War, when there was a nice comfortable enemy who was perfectly happy to stay on the other side of the Atlantic. Putin and his securocrat friends know that they need to maintain this rehtoric, or the legitimacy of the Soviet security apparatus will come under question, and so by extension will the legitimacy of its successor. So it's important to maintain the legend of what the Soviet State achieved in WWII.

George Orwell got this right in Animal Farm - totalitarian states need an external enemy to maintain their legitimacy. And given that the foundations of the Russian State are the Soviet State, then that knee-jerk reflex is still there. This is an issue for the future of Russia, of course, because eventually the last veteran will die, and so will their children, and there will be a generation who really don't remember or care about the war. That's why Medvedev took time out in his address to schoolchildren today (the official first day of school across the nation) to remind them of Georgia's egregious attack on South Ossetia. The Russian State is in desperate need of a new enemy, but to cast Georgia in this role is really grasping at straws.

Thoughts About The Markets

2009-08-30T22:26:00.000-07:00

The above graph shows the RTS since September 1st, 2004. As you can see, we touched on the lows of late 2004 (trying to cast my mind back, but I think it was weak commodities and post-YUKOS unhappiness that drove the market down), and now have rebounded strongly, seen some retrenchment, and are now just off the highs of 2009. The fact that we've come back from the retrenchment is encouraging - my interpretation is that the hot money took its profits in June, but there was longer term money available to come in and buy from them.

And there is good reason to buy - the RTS is trading at a historic high discount to the MSCI EM index, in terms of P/E. This is not a perfect measure, but there is not a lot else to guide yourself by. At least we can say that Russia is relatively cheap. Of course, this discount could be closed by the MSCI EM P/E ratio falling faster than Russia's - at this point a short MSCI/long RTS trade looks like a good bet, even if China has already come off sharply. I like the idea of this sort of pair trade at this point in the recovery. Yes, we have come off the bottom, but at some point the market has to take a breather, and a pair trade will help insure you against the risk that we are in fact in 1930, and the bear market and the recession has only just started. Yes, pumping liquidity and government spending into the system has brought us back from the abyss, but no one has convinced me that a combination of higher US unemployment and the need for the US consumer to save more will not drive us into a deflationary spiral.

Putin Calls For More Inspections Of Hydro Plants

2009-08-23T22:58:00.000-07:00

Although Putin's call to inspect the facilities at all other hydro power stations, in the wake of the disaster at Sayano-Sushchenskaya, smacks of shutting the stable door after the horse has bolted, what else could he do? My immediate opinion was that the accident was the result of under-maintained and out of date machinery, but I've seen reports on the blogosphere that say different. Apparently it's not unusual for there to be 30-year old equipment in this line of business, but on the other hand, there should be significant fail-safe systems to prevent this happening. So it may be that we had a repeat of the Chernobyl accident, where the engineers switched off the safety systems to perform a routine task, and then something bad happened.

The problem is, as I am sure Putin is aware, that the inspectors and the hydro plants work hand in hand - and neither has an interest in reporting any problems. The inspector will negotiate a price for giving a favourable report, maybe with a few problems and criticisms to show that he's done his job, and the hydro plant will avoid any difficult questions. The inspector gets a miserly salary from the government for his inspections, but he gets paid well by the plant, so it's clear where his loyalties lie. And his bosses know that, because he is paying them on the side for his job. And everyone is happy in this system, until something goes wrong. Maybe some inspector will lose his job as a result of the investigation, but most likely the blame will be put on a dead shift manager.

What does this mean for the future of Russia? Lots more accidents of this type in Russia, with increasing frequency as time goes by. There is a Darwinian process at work here, though. Private sector companies won't be doing this - they are motivated to keep a much closer eye on the quality of their plant. Compare and contrast the quality of the plant at Domodedovo and Sheremetevo international airports in Moscow. The former was taken over by a private business group (*cough* Mafia *cough*), but is far superior to Sheremetevo, which is still part of the State. So on the one hand you can despair of Russia, because of the corruption that is so ingrained in the system, but at least you know that the corruption contains the seeds of its own destruction. It's a parasite that will eventually eat away at its host. The big question is how much of Russia will be left, after this collapse has happened - in general, Russia has endured over the years, and so I still believe that it will endure, even after the parasite has eaten away completely at its food base.

State Disintegration: Is The Caucasus A Model For The Rest Of Russia?

2009-08-23T22:24:00.000-07:00

The general expectation was that this summer's disaster would be a repeat of last year's conflict in Georgia. In fact all of the conflict seems to have been in Russia's Caucasian republics, and it's taken the form of separate terrorist incidents, which don't really seem linked. Of course, the Russians have interpreted them as part of an orchestrated campaign by Wahabbist sects, aiming to bring down the Russian state, and install a Muslim state. I don't see it that way - if it were really a war of independence, then we'd see more attacks in Moscow. When the Catholics wanted more more power in Northern Ireland, they attacked England and London - you go for the target with the greatest political impact. The only Caucasus-related violence in Moscow is leaders of rival Chechen gangs killing each other.

So if it's not separatists, then who is it? My belief is that these incidents are more like the Boston Tea Party - acts of anger against an occupying government, that may or may not be coordinated. Over time, they will become more coordinated. Why is this happening? Because ordinary people see terrorism as the best form of defence against corrupt officials. The courts are part of the State, and civil society is snuffed out by the State, who, rightly, see it as a form of resistance against them. So there is no outlet for dissatisfaction, apart from terrorism.

It's getting worse now, because State officials in the Caucasus are having a harder time of it. Before, they could just steal money that came from Moscow, and there was a lot of it. In a way, they wanted attacks, because that would justify their request for more funds. They tolerated a few low-level incidents and the loss of a few footsoldiers, because that gave them a pretext to go to Moscow and demand more funds. The problem is that Moscow has less money to give now, and so these corrupt officials have to steal from their own people, like they did before.

Take a typical mid-level Chechen, who used to be a bandit, making money by kidnapping people, and then became legit, part of the local government, and able to skim money off from the funds allocated by Moscow for "reconstruction", and who is now using his role as head of the local police, or whatever, to skim money off the local shopkeepers, or market, or whatever. Only there is less money from these targets, because they are also fuelled by cash injections from Moscow. So the police chief/former bandit has to squeeze harder. Remember, they are not just driven by greed - they have to pay money upwards to the bosses who gave them the job, and they have to pay money downwards to the people who do their dirty work. They have to run just to stand still. It almost makes you feel sorry for them.

But just as the State starts to squeeze harder, there is less money to go around. Partly because the squeezing drives more business underground, partly because it stifles business growth. So these tactics are counter-productive, but the result is that the population becomes more angry, and the tougher-minded of them start to fight back. And this is why it's insane for Medvedev to suggest that tougher sentencing will have any effect on terrorism in the Caucasus. It will be powerless against suicide bombers, and it will just be used by corrupt local officials to threaten people, who will be forced to fight back harder.

The worrying thing about this is that this course of events could be repeated elsewhere in Russia. Driving around town yesterday (a Sunday) there were many more traffic police officers on the road than normal. The usual interpretation of this is that some official is going to drive down that road, so there are lots of police around to close it off, and ensure that some deputy prime minister won't have to endure the traffic jams that the rest of us live with. But these traffic officers were stopping cars for infringements and doing their normal work - they weren't surveying the roads left and right, listening intently to their radios, which is normally what they look like, when there's a motorcade on the way. My feeling is that it's the end of the month, they have quotas to fill (in terms of money collected as bribes) so they are all out harvesting on a Sunday. And presumably, because times are tough, there are fewer cars on the road, and motorists are less inclined to offer bribes just to save a couple of hours' hassle at the police station, so the pickings are fewer. What will the officers do? They will crack down harder, because that's the only tool at their disposal. They can't miraculously improve the economy to make people richer. They are takers, not makers.

And if this is being repeated at all levels of the economy, then it means that Russia will be driven further into recession. Which should hasten the collapse of the State, in the medium term. What does this mean for the future of Russia? Well the optimistic scenario is that the failure of the current state model should create a vacuum for another one, which could eventually lead to the modernisation of the State. There are plenty of examples of more liberal governments being elected in Latin America, on the back of an economic crisis - the Lula government in Brazil is one such. The reality though is that we will just see more muddling through - perhaps there will be some strengthening of the more technocratic parts of the state, such as the Finance Ministry, which would lead to some economic rationality being injected into the rest of the State, and perhaps less money for the looters. But it won't lead to any wholesale changes - things will have to get a lot worse before that happens.

Investor's View of the Sayano-Sushchenskaya Accident

2009-08-19T23:18:00.000-07:00

My daytime job is as a fund manager focussed on Russian stocks, and one of the less pleasant aspects of my job is the automatic impulse to make money by gambling on the long term consequences of various disasters. In 1994, a couple of months after I started working in the investment business, the General Director of Megionneftegaz was killed. That day we got an order from a client who said, "If it's worth killing someone for, it's worth buying the shares."

So the market immediately responded to the dreadful accident at Sayano-Sushchenskaya GES, one of Russia's largest hydro-electric power stations, by selling off the shares of its owner, RusHydro. The stock is now down 23% on its close before the accident. Happily we don't own it, but I would be inclined to sell it further. Firstly, as we saw in the case of Mechel and Uralkalii last year, once the market takes against a stock, there tend to be two or three legs down. First the fast money sells, and then the larger, slower funds take a week or so to think about it, and decide whether to buy on the dip, or just to get out. This normally gives you a short recovery, then further falls, until there is some concrete proof that the original causes of the fall have been eradicated. So just on liquidity grounds, you can expect more selling, especially as the stock has had a good run this year - it's up 67% YTD, even after the recent fall.

Second, this accident tells us a lot about the state of RusHydro's plant. In a way, it's a tribute to the ingenuity of Russia's engineers that so much of the Soviet-built capital stock is still in operation. Sayano-Sushchenskaya's plant should have been overhauled years ago - I visited it 10 years ago, and they were talking about the need for urgent repairs back then. But there was no capital refit or major investment program, and they have managed to keep the place going on whatever they could squeeze out of their owners, who were busying siphoning off either the cash flow or the energy. Krasnoyarsk is a pretty rough region, especially where electricity and the aluminium industry is concerned, but it's not spectacularly worse than other regions, and has been cleaned up a lot in the last five years. If things are bad there, you can bet that they are bad elsewhere. So this is another warning to the market to avoid capital intensive assets that have been in state or quasi-state ownership for a long time. Somewhere, buried deep inside them, is an accident waiting to happen.

I got some questions as to whether we should be buying aluminium or aluminium related stocks. The answer would have been yes, 18 months ago, but now there is such a glut of capacity in the sector all round the world, any shortfall in supply because of a lack of electricity in Russia will soon be met by other producers, especially since the cost of transport is low relative to what it was. And in any case RusAl should be able to make up the electricity deficit. Although this will create the one big buy opportunity from this accident, which is Kuzbasrazrezugol (KZRU), a major thermal coal miner in Kemerevo, next door to Krasnoyarsk. If demand now switches to coal-fired plants in the Krasnoyarsk region, then KZRU will benefit. And coal is hot right now, as the Chinese are shutting down old mines and buying from abroad. The other big beneficiary is Siloviye Mashiny, which makes the turbines that will have to be replaced. It is expected to get the contract from Sayano-Sushenskaya, and presumably others as well. But Siloviye has already jumped about 25%, and it's not very liquid. KZRU is up about 10%, but it's also illiquid, so it's not for us. But a retail investor can happily swim in these waters, although you need access to the Russian exchanges.

Otherwise accidents like this can be used to explain part of the Russia discount. They remind us that book values for many privatised companies are based on Soviet era asset valuations, with multipliers applied, which tends to amplify the over-valuation. If it's not new, or if it hasn't been in private ownership for 10 years, then you need to really question whether a company's assets are fit for purpose, and this is something that company management will never tell you the truth about. Another reason to avoid the electricity sector, in the long term.

2009-08-16T22:55:00.000-07:00

The Moscow Times report about the aerobatics display crash near Zhukovka at the weekend contained the interest fact that "In February, a report compiled after the crash of a MiG-29 on a training flight in southern Siberia found that at least a third of the nation’s fighter jets were unsafe and should be written off or repaired." This should be so scandalous that heads should roll and there should be a major enquiry. But it barely caused a ripple of interest in Russia. I remember reports from last year's fighting in South Ossetia that the Russian side got a nasty shock from the quality of Georgia's anti-aircraft defence, mainly because their Israeli and U.S. equipment was so good.

The bottom line is that Russia's military is riddled with incompetence at all levels, and is feared by nobody. It's galling to understand this fact, because if you watch Russian TV, you would believe that Russia's army is elite and feared by the rest of the world, especially the spetsnazy, like the Alfa or Vympel brigades, who regularly congratulate themselves on air, in a way that the SAS or Delta forces would never dream of doing. They think that the Nord-Ost theatre or Beslan sieges were victories, and don't realise that the civilised world looks on in horror at their ineptness.

This is what happens in a government without civil society or press. There is simply no way of actually checking if government employees are doing a good job, because there is so little feedback. If any information does actually get to the leadership, it can be dismissed as being politically motivated, coming from enemies of the system. You get this kind of incompetence at all levels of government - when you deal with the government, you pretty much expect them to make some sort of mistake in processing your information. This happened to a friend of mine who was applying for a residency permit - they lost his application because someone spelled his name wrong when transcribing one of his application forms (no scanning or online entry, naturally), and we had similar problems when applying for a work permit: they switched the nationalities for me and my boss, which caused endless problems.

What does this mean for the future of Russia? It means that the State will gradually be less and less able to deal with the tasks in front of it. There was a small wake-up call during the Kursk submarine disaster, where it was clear that Russia had no capacity to rescue from the submarine, even though it was only in 100 metres or so of water. Plus it was clear that it was incompetence that led to the sailors' deaths. The Russian government is becoming less and less fit for purpose. Either things will carry on getting better, and presumably the logical end of this process is the same as in 1917 - probably the main reason for the revolution was that the Tsarist regime was completely incapable of running the country. The bureaucracy was essentially able to use the popular discontent to switch to a new system of government, rather like a parasite switching hosts. They could switch back to a sort of monarchy, or to a quasi-theocratic regime. Of course, they could always try democracy, but that would just be signing their own death warrant.

Russia, Sochi, and the Olympics

2009-08-14T01:17:00.001-07:00

Both Putin and Medvedev have been in Sochi this week, indulging in the semi-holidays that Russia's managers seem to prefer in August. They spend their time in government villas in the south of Russia (They used to go to the Crimea, when it was part of the Soviet Union), but they carry on working, either by flying in ministers or whoever from outside, including foreign visitors, or they conduct visits to nearby regional centres. This may well be why Sochi, rather than, say Khanti-Mansiisk, was supported for the Winter Olympics bid. Although Khanti-Mansiisk regularly holds World Cup biathlon events, no one from Moscow wants to spend a lot of time there.
Medvedev and Putin both inspected Olympic sites. Naturally everything is ship-shape and on track, despite the fact that there have been three heads of Olimpstroi over the last couple of years. In addition, according to yesterday's Moscow Times, there is still no final plan for a key road from the airport to the sports area, which takes up half of the total budget. The Olympics will probably go off OK, just as the G7 meeting did, but no doubt there will be a last minute panic, as there always is with most large scale projects like this in Russia (and not just in Russia). We just have to hope that corrupt inefficient building doesn't lead to one of the buildings or roads collapsing. Let's just hope that the terrorists who are attacking Moscow's friends in the North Caucasus (which are just down the road), don't get wind of it.

Ingushetia shows how the Kremlin's Caucasus policy is failing

2009-08-12T22:58:00.000-07:00

On Tuesday Yunus-bek Yevkurov, the President of Ingushetia left hospital, vowing to hunt down those who had tried to assassinate him. On Wednesday Yevkurov's Minister of Construction (and a trusted lieutenant) was shot dead in his office. The backstory to this is that Yevkurov was put in place by the Kremlin last year, to replace Zyazikov, who was also a Kremlin appointment, to replace Ruslan Aushev, an Afghan war hero who had become too independent. Zyazikov was clearly a bad lot, and was removed by the Kremlin because his thuggish tactics were making him, and Moscow, more enemies than friends. Or maybe he was becoming too independent. Who knows? There is no press, you can't trust the investigators, and every side in the argument will accuse the other of corruption. But you can't argue with a bullet.
What seems to be happening now is that the opposition forces that were essentially created by Zyazikov's hardline tactics are now attacking Moscow's new man. It's not beyond the realms of possibility that these are working on the orders of Kadyrov in Chechnya, who has shown ambitions of moving beyond his republic. The key is that Moscow's mismanagement has allowed opposition forces to gather support, and to become stronger. The Caucasus are an excellent venue for civil war.
And now, on the back of this, you have the economic crisis which means that there is less money to go around. Although Putin has generally followed sound fiscal policies, he is always happy to throw money at a problem, and this is generally what they have done in the Caucasus. Now that there is less money to go around, this creates problems for Moscow's envoys, because all of their power is based on their ability to hand out cash. They may well have promised money to people or built up debts that cannot be repaid, because no money is coming from Moscow. Construction is key in this, because one of the main channels for money is for the region to come up with some ambitious project, like infrastructure or housing, Moscow allocates the money, the money is stolen at the regional level, and nothing is built, and the local authority either pays off the inspectors from Moscow, or they blame someone else for the project's failure. So a lot of the flows would have gone through the Minister of Construction, and you would only ever put a trusted person in that position.
Yesterday's killing is a clear signal that this is all about money, and that the opposition in Ingushetia has no respect for Moscow. Bear in mind that a lot of this is propagated by blood feuds - even if you come to terms with someone politically, you may have to remain opposed to them, because they are linked to the killing of a relative. This is the fuel that drives conflict in the region - one killing leads to a feud, which leads to another killing, and so on. The attraction of Sharia law is that it is actually able to break this cycle in a way that Russian law can't because the latter is so corrupt and arbitrary and lacking in respect.
The bottom line is that Russia's future is returning to its past. Russia has always had problems with insurrection in the Caucasus, and has always responded by cracking down harshly. One problem with having independent states in the South Caucasus is that they provide refuge for Russia's enemies in the region (or rather, enemies of the local thugs appointed by Russia). So it was no surprise when Russia was so angry about Georgia getting close to NATO - they really need to be able to intervene militarily in the Caucasus states, for their own security needs. And they get angry about it because America has no compunction about doing this in their own back yard, so why shouldn't Russia have the same privilege. So Russia's future here is that there will always be conflicts and terrorist incidents in the regions, and the small states in the region will have to do what Russia tells them, just as there are not many small poor Latin American states that feel able to defy Washington.

Russia starts the Ukraine Presidential campaign

2009-08-12T02:24:00.000-07:00

I was trying to work out why so much fuss was made of the Patriarch's visit to Ukraine a week or so ago, and now it's clear. Russia is setting out its stall with regard to the Ukrainian presidential elections early next year. After their very heavy-handed, and unsuccessful attempts to influence the last presidential elections, Russia has learned its lesson, and is using slightly softer power this time. Mind you, it would be hard to be less soft than last time, when the highlight of Russian intervention was their attempt to poison Yushchenko.
So this time round they sent Kirill off to Ukraine, with the aim of stirring up Russian patriotic fever in the country, and presumably informing the Orthodox church there that it was their patriotic duty to get their flocks to vote for Yanukovich. Then yesterday Medvedev made a television address, saying that he was going to punish Ukraine's "anti-Russian" stance by not sending an ambassador, and generally pouring as much dirt as possible on Yushchenko. The Russians would be incensed if any foreign leader dared to take such a partisan stance in regard to its own "elections".
The backdrop to Russia's interventions in Ukraine is, and always has been, the division of the spoils of Gazprom's exports to Europe. They want Yanukovich as President of Ukraine, since he will let the Russians do whatever they want. They might be able to live with Timoshenko, since she can negotiate, although she seems to want to make the trade transparent, which is not in the interests of the Russian leadership. But Yushchenko is beyond the pale for them, although it's not clear that he would make it any cleaner. Presumably he represents a different set of Ukrainian oligarchs, and Russia's partners are yelling at Medvedev and Putin to ensure that the old order does not change.
The problem for Medvedev is that by openly intervening, he will strengthen anti-Russian sentiment in Ukraine, and this will be good news for Timoshenko. Yushchenko is a busted flush, because he has not been an effective President and has handed victory after victory to Timoshenko by his petty attempts to spoil her attempts to actually run the country. So there is little point in attacking Yushchenko since he has already ruined his own chances of winning. But the intervention will remind Ukraine's non-Russians of why they voted for Yushchenko and independence, and this will probably drive support towards Timoshenko, as the only viable anti-Russian candidate. And she needs all the help she can get, as Yanukovich seems to have 30% of the vote at the moment, against Timoshenko's 15%.
And one point about the candidate for ambassador - Zurabov. He was a nastily corrupt minister in charge of pensions and social security. Like Chernomyrdin he was a hangover from the Yeltsin family, who stayed for a couple of years in the Putin government. I had thought he had been removed in disgrace, but presumably he's a safe pair of hands for negotiating the division of whatever spoils are expected out of the various trades that are going on with Ukraine. His appointment was actually very interesting - it's a sign that there must be a bunch of economic arrangements that were put in place under Yeltsin, that are still generating revenue, and that needed a Yeltsin family loyalist to administer. Mind you, it was shocking that his candidacy was rejected by the Ukrainian side - I've never heard of any country refusing an ambassador.

Was there a Putin plan?

2009-08-11T00:50:00.000-07:00

Just after Putin became President of Russia, he spoke to the FSB on a routine morale building visit to the ministry and said "I am happy to report that phase one of the plan to infiltrate the Kremlin has been accomplished." More recently, the slogan of the Unity (Edinstvo) party (headed by Putin) at the December 2008 elections was "The Putin plan - Russia's victory". Now that the country has just celebrated 10 years since Putin took over as Prime Minister, and became the de facto ruler of the country, some commentators have talked about Putin's long term plan, and have looked back over the events of the last decade as fitting nicely into some pre-planned pattern.
I've always been firmly of the opinion that Putin is good at tactics, but lousy at strategy. His early documents for reforming Russia and attacking corruption were elegant, and believable, basing the control of the bureaucracy on the courts and civil society. But he threw all that out of the window to win some tactical victories over the oligarchs, especially Khodorkovsky. So although he started legal reforms, they were quickly thrown out of the window because independent courts were not expedient.
The counter-argument to this is that this was all just window dressing designed to get Putin elected, and he never had any intention of following through with these plans. But the cynical truth is that Putin was elected because he was viewed as tough and effective, and he didn't need these liberal policies to win over the electorate. They were already happy with what he was doing in Chechnya. Putin has become tough and illiberal during his time in charge because that's the easiest way to run Russia, not because this was his original plan. He has not cracked down on corrupt practices, because corruption is the oil that fuels the bureaucracy - if you don't enable the corruption of the Russian bureaucracy, they will find a leader who will.
Putin's place in history will largely depend on what comes next. If Medvedev is as liberal as he claims, then Putin will be seen as the man who stabilised Russia, and presented Medvedev with an economic and administrative platform that allowed Russia to be modernised. If Russia becomes more authoritarian and Asian, then Putin will be seen as the start of this slippery slope. He would claim that he always wanted the former, but because he was focussed on the short term, he was never able to enact this strategy.

Medvedev takes aim

2009-08-10T03:40:00.000-07:00

Putin captured most of the headlines last week by going shirtless during his "day off" in Altai. More on that later. President Medvedev seized the occasion, almost because Putin was out of the office, to show more real authority and fire than this commentator can remember at any time the Medvedev presidency. There was a meeting with the Ministry of Internal Affairs (MVD), where he harshly lambasted the lack of progress on transport safety, and this was followed up by a government-wide meeting on the subject. The latter meeting is important, because it made clear to the MVD that they would not be left alone to brush this one under the carpet, and also underlined that Medvedev doesn't think the MVD is competent to manage this process by themselves. This is a shot across the bow of the siloviki (the Securocrats), who have traditionally been Putin's sponsors and power base.

Then there was an pro-small business, and anti-corruption meeting, where Medvedev said that there had been little progress made on this subject, which could be taken as an criticism of Putin's presidency. There were harsh words for corruption in government, again something of a slight against Putin, who wasn't in the meeting, as he was touring the Far East, doing meetings which were essentially photo opportunities. Corruption in the government was given as the main reason for the lack of development of small businesses, and Medvedev's highlighting of this problem can be seen as a criticism of Putin.

Finally, on Friday, Putin ordered a review of the finances of state corporations, most of which were created under Putin. This has been seen by many newspapers as an attack on Chemezov at Rosboronexport, a company that is designed to bring together all of the arms exporting enterprises. This was created early on in the Putin presidency. Rosoboronexport was criticised for wanting to take over any state industrial asset that wasn't nailed down, and it doesn't seem to have been a roaring success. In any case, Chemezov is clearly a Putin ally, and any attack on him is an attack on Putin.

The main conclusion here is that Medvedev seems to be starting to stick his neck out a bit more. Perhaps he is taking advantage of Putin's weakness because of the crisis, or maybe he just feels a bit more sure of himself, and that he has the manpower and the allies to start advancing his own agenda. This is a delicate bit of politics - if Medvedev can show a few small victories then others will start to support him, and he will build a power platform of his own. But he has to show that his is a winning cause. Presumably he is trying to do this now. After all, there is plenty that Putin can be criticised for - although he did at least allow Kudrin to create the reserve funds that are keeping Russia afloat, many of his people did try to steal these funds, and even imprisoned one of Kudrin's people, to further their cause.

And although Putin was tough on the Caucasus, things are spiralling out of control there, with many of Moscow's people coming under pressure, including the attempted assassination of Yunus-Bek Yevkurov, the president of Ingushetia. There continue to be killings and terrorist activity all over the region. It was notable that it was Medvedev who went down to tour the region recently, after a couple of high profile killings that threatened to destabilise it, including the murder of the Minister of Internal Affairs of Dagestan. Plus it's also become clear that a lot of money has been stolen in South Ossetia, which is why Moscow has recently forced them to appoint a Russian as Prime Minister.

In a sense this is all good news, since a competitive political system is just what the country needs. If Medvedev and Putin form two blocs, each vying for power, then they will act as checks and balances on each other, and this could create some accountability in government. In a negative scenario, this leads to civil war, but there is a scenario under which you have two factions fighting for control, who are interested in actually creating stable rules of the games, to stop the other side from cheating. And this creates a separation of powers.

On Putin's photoshow - it seems to me that because this was so clearly staged, and unnatural, it may even have backfired on Putin. Sure, it would play well with babushkas, and with a perceived "simpler" voter (who may only exist in the minds of the Kremlin strategists). Most ordinary Russians, who are literate and no fools, would note that somehow Putin's "host" in rural Altai had fine china with which to feed his host, and most of them would wonder how a camera crew happened to be there while Putin was off-duty. The pictures don't seem to have been repeated a lot over the weekend, which normally happens with popular footage. And in any case they would have been a strong contrast with Medvedev on the same bulletin, meeting with small businesses who were complaining about federal inspectors demanding extortionate licensing fees. Guess which of these images is closer to the everyday reality of most Russians? If I were Putin and I saw that bulletin, I would be spitting mad. Unless that is, I was a vain narcissist who has been shielded from reality for ten years, and now believes only his own publicity.

Roads and Idiots

2009-07-30T01:19:00.000-07:00

There's a hoary old Russian saying that in Russia there are two eternal problems: "Дураки и Дороги" (Roads and Idiots). I first heard it said by former deputy Prime Minister Boris Nemtsov at a conference panel discussion on transport issues.

Well, at the moment the lead item in most Russian news sources has been a spate of high profile road accidents, including a particularly nasty collision between a fuel transport vehicle and a bus. There has been a lot of handwringing about the problems of Russian roads, the President has said that something should be done, and so this is a major news item at the moment. I thought I'd use this as a nice example of how the government process works in Russia.

First, policy is really only enacted as a reaction to something. Road safety should be an ongoing issue, but no one pays attention until something bad happens. And when it does, there's a flurry of activity at all levels. This is why Russian government officials suppress the free press so actively. Not, as many Western observers claim, because of a sinister desire to manipulate people's ideology and voting, but to ensure that their seniors don't find out what is happening. If something bad gets in the press, then it's in the public domain, and something will have to be done. And often that something is just to fire the person who happens to be nearest the bad event.

Second, the Russian bureaucracy are past masters, ninja black belts, Olympic and World Champions at not doing anything, while seeming to do a great deal. So last night we had a full report from a meeting of the Minister of Internal Affairs (pictured above) with his Deputy Ministers. On prime-time TV, he lambasted them about not taking licenses from drunken drivers, and for allowing unqualified drivers to get driving licenses. And he ordered every single traffic policeman to retake their driving test.

Just what the doctor ordered - swift, decisive action. Only, we all know that those retakes will be administered by the traffic police itself, so presumably they will not be that testing. And let's not forget how ministerial appointments work. Those deputy ministers all paid the minister for their jobs, because being a deputy minister allows you to take money from department heads, and so forth. And where does the money at the bottom come from? Well, from bribes by drunk drivers, and from people who buy their driving licenses, of course! So all those deputy ministers have paid large sums to get their jobs, and they are not about to cut off the cash flow that will repay this outlay.

So we know that nothing will change, and of course, they know that we know this. But the scandal has been dealt with. Until, that is, there is another shocking accident and people die. And then we will get another flurry of inaction.

Things heating up in Georgia?

2009-07-22T06:14:00.000-07:00

First signs of threats

Explosions in South Ossetia

Yesterday's news of explosions in South Ossetia were predicted by Yuliya Latynina a month ago. It's almost a year since fighting in Georgia raised fears of a new World War, and things seem to be heating up again. It's hard for Russia to go through August without some form of crisis, even though the country is normally in holiday mode for most of the month. This would clearly be catastrophic for the market, which has had a great run this year, and is up 58% so far.

Russia's involvement in South Ossetia has to be seen within the context of Russia's general involvement in the Caucasus. From Moscow's point of view, there is really no difference between former Soviet states that are now nominally independent, and those former Soviet republics and districts that remained as part of the Russian Federation. The states are less independent than their status would imply, and the Russian districts are more independent. Russia has always used an Ottoman strategy to running the Caucasus - they come in with strong force to establish their authority, and then find a local warlord who can run things for them. And by extension, any local warlord/politician who is not for them, is against them.

Russia's history in the region is one of them backing various horses, who then turn out to be either incompetent, or turn against them, or maybe, just maybe, actually turn out OK. Although even if they turn out OK, then they may have the problem that their sponsors in Moscow fall out of favour. In any case it's a recipe for instability and little here seems likely to change. It's not clear that NATO's presence would help, as they will just take sides too, as they did in Yugoslavia, and don't forget that NATO itself can be as factional as the Russian government.

In addition, you have to overlay the fact that most of Russia's criminal ganglords (the vory v zakone) are from this region, and they have their own political influence in Moscow, and take a healthy interest in affairs in their homeland. And remember that the army needs to be able to justify a heavy presence in the region, because a lot of army bosses make money by smuggling cigarettes, alcohol and drugs up through the Caucasus. The point here is that the situation is a lot more complex than just proto-Fascist Russia bullying its brave liberal democratic neighbour in Georgia. It's also not really about Russia gaining territory, either - Russia has no strong geopolitical interests in South Ossetia or Abkhazia (except maybe for port access in the latter). These conflicts are driven by local interests, and by Russia's desire to stop local fighting spilling over into Moscow.

The Obama visit

2009-07-13T05:16:00.000-07:00

Just had an argument with a colleague about Obama's visit. He thought we should be pleased that Obama and Medvedev seem to be getting along well, and I said that we should be pleased that US-Russian relations are not that important any more.

Here's my side of the argument. For the key issues that confront the US, Russia is no longer a key player. Russia has no real role to play in the trade imbalances between China and the US and the rest of the world. Nor does it really have a role to play in dealing with terrorism, except perhaps marginally in helping with access to Afghanistan. Russia probably could do a great deal of good, if it had an effective military, and didn't help heroin smuggling out of Afghanistan, but it's not really that big of a player. As for Iran and North Korea, it has some influence, but will be ignored when push comes to shove. As for Russia, well, its main issue is in the Caucasus, and although the US did inflame things by over-encouraging Georgia, in the long term the problems there are Russia's and Russia's alone. And the other big issue is gas to Europe, where the US has no real role.

Of course, missile reduction is great, but will never go that far, because there are pro-missile lobbies on both sides. WTO has become this weird sideshow. It's like immunisation - the US wants Russia inside the circle, and in principle Russia wants to be in it, but only insofar as it will give them better market access. And, in their heart of hearts, they really don't want to join. There is a huge amount of money involved in managing Russia's customs. And a lot of this is siphoned off into the accounts of the people who control the borders, i.e. Putin's KGB buddies. And you can bet that the last thing that they want is for Russia to have a clear and transparent customs regime.

So with that as background, it seems that for the US, Russia is a bit of a sideshow, when there are much bigger fish to fry. And for Russia, the US is no longer an enemy, and it's not that much of a trade partner, so they can afford to ignore each other. Politely.

Putin's Pikalyovo Gambit

2009-06-10T20:39:00.000-07:00

Putin's hasty trip to Pikalyovo may turn out to be an important political turning point in Russia. It wasn't just the sight of Oleg Deripaska, unshaven and shabby, publicly humiliated by Putin, that will cause shockwaves. It was also the public nature of Putin's concession to the workers, which to my mind clearly sets a limit to the autocracy.

First, Deripaska. Putin must be as exasperated with the continual flow of bad news from Deripaska as Obama is about AIG. This conflict gave him an opportunity to show this in public, and he grasped it with both hands. He has conveniently forgotten the fact that Putin's government was hand in glove with Deripaska when times were good. Now Deripaska is asking for more than the removal of obstacles to his various deals, and Putin is granting him bailout funds with very bad grace. But don't lose sight of the fact that Deripaska is getting bailed out. And a public humiliation is a small price to pay to save a multibillion dollar empire.

But the humiliation would be a very strong signal to the other oligarchs - whatever anger Putin shows in public, is presumably ten times worse in private. Dvorkovich, the economic adviser to Medvedev, made a nice comment about how factory owners will now do a great deal to avoid a visit from Putin. Medvedev followed up this week with a public roasting for the governors - they have to work with their oligarchs to sort out the mess. Putin has given them the blueprint, and if he visits, it will be a lot worse than Pikalyovo.

The initial response to Putin's visit, triggered by the fact that the workers of Pikalyovo blocked a key Federal highway, in protest against their unpaid wages, was that it would incite workers elsewhere to take similar action. This would create a problem for Putin, as there are several hundred of these single factory towns, and Putin can't visit them all. This is true, although it would be possible for the government to use this meeting as a template for others, to be implemented by ministers, governors, and regional representatives, and as Dvorkovich pointed out, factory owners might take more urgent steps themselves, to avoid a visit from Putin. So it's not a problematic concession to the workers in that sense, because the model can be reproduced elsewhere. I don't think we'll see any more such visits - Putin's wrath would be too ugly to show in public.

The main issue for Putin is that it amounts to a public admission that his autocratic model has limits. In Soviet times, this protest would have been violently suppressed, in secret. That was the initial response, when Putin sent Moscow-based interior ministry troops to Vladivostok, to dispel demonstrations against higher taxes on imported cars. The local troops would not attack their own people. But news of that soon got out, and Putin knew that any subsequent action would attract a lot more attention, especially if it takes place in European Russia.

So he was faced with a choice of clamping down more, Tiananmen-style, or accepting that in the modern age, the State cannot afford to ignore its people. He chose the latter, which was the only realistic alternative, thereby acknowledging that he can't get any more autocratic. How much power the people now choose to take back, is a matter for them. But they must be encouraged by the success of the people of Pikalyovo.

What does this mean for the future of Russia? It shows that the country has the germs of a "democracy". I put the word in inverted commas because it means many things to many people. My meaning, here, is that the state has to respond to the wishes and needs of the people it rules, and that there is some sort of mechanism to communicate those wishes. Now, in a more civilised system, the workers would have been able to take the oligarchs to court for non-payment of wages, and expect to have their contracts honoured. The oligarchs would have been publicly shamed in the press. And ambitious politicians would have gone into bat for the workers, because it would be an easy way to get votes. None of that happened in Russia, and there is a long way to go. But when a dog walks on its hind legs, he doesn't have to do it well, the important point is that he is doing it at all. Assuming, that is, that you think a world where dogs walking on their hind legs is a desirable one.

What's with the telephones?

2009-03-19T23:46:00.001-07:00

Igor Shuvalov is one of the younger, more thrusting members of the Russian government. I've heard him speak, and he's definitely one of the more modern, "Western" ministers. His policy goes beyond the basic austere, IMF-friendly policies of Kudrin, and shows a more strategic and deeper view of how economies work.

He's relatively new to the government, having come up from St Petersburg, via the Presidential Administration, through a stint of being the main sherpa for international meetings. So he must have moved into his office fairly recently. He looks the sort to regularly use his computer, email, and a mobile phone. SO WHY DOES HE HAVE SO MANY ANCIENT SOVIET ERA TELEPHONES ON HIS DESK?

I mean, if you are really powerful in the West, you tend to have one basic phone on your desk, because you have other people to place and field your calls for you. But for some reason, Russian leaders like to have lots of old phones on their desks. They don't drive old Chaikas or ZiLs, even though they are in some ways more elegant, they drive (or are driven in) Mercedes. So why don't they have a nice state of the art VoIP phone, with some nice conference functions, or even video conferencing. You could replace all those phones with one phone, that would route through multiple systems, and take up much less room, and look much nicer.

The first answer would probably be that government communications is run by the FSB, which has just always done things in a particular way (part of which was chronicled in Solzhenitsyn's "First Circle"). And they have probably told their bosses that to protect Russia's state secrets, the only way is to have locally made phones, using point to point wire connections that are (hopefully) strictly guarded. So for an enemy to get access to those phones, they would have to get physical access, whereas a more modern exchange could be more vulnerable. Of course this doesn't hold water, because lots of other governments have modern phones, and there are plenty of ways of encrypting traffic way beyond what physical perimeters can protect.

I guess that for a deputy Prime Minister, there is a government norm that says that you get a certain size of office, a certain number of assistants, a certain sort of car, and a certain number of telephones. So at first blush, it's basically a status symbol. And even Shuvalov, no matter how modern he is, cannot resist these phones, even though it's hardly likely that he ever actually uses any of them.

Why Russia's strengths are weaknesses

2009-03-15T10:56:00.000-07:00

Interesting article by Stratfor

I've always been a fan of Stratfor, mainly because they give a view of the world that is entirely foreign to me, rooted in an understanding of geopolitics that to my mind, must be close to that of those who make decisions at the top of the US military. At the same time I've always been aware of what they do not understand, and that includes economics.

The description of Russia's economic situation, especially in regard to the currency, is about three months out of date. Russia faced its decision in December-January, and unerringly voted in favour of a managed depreciation, sacrificing some of its reserves to do so. But do not forget that a lot of those reserves were built up in 2007-8, preventing the rouble from rising too much. In fact, much of Russia's fiscal and monetary policy in the bubble years was textbook - they acted to neutralise the massive monetary inflows that they were enjoying, instead of assuming they would go on for ever, unlike the Hungarians and the Ukrainians and the Baltics. So the fact that they have reserves to spend is a tribute to Kudrin's policies, and I'm sure a lot of countries envy their situation. Yes, there are problems, and huge weaknesses in Russia's economic policy - but the monetary and fiscal situation is not too bad. Unless, that is, oil goes below $35 again, in which case they will have to devalue again. But the second devaluation will be easier than the first, because there will be less risk that the population will panic and cause a run on the banks.

Now, to discuss the other "strengths". Again, this betrays the Stratfor view of the world. They envy Russia's lack of dissent and accountability for the military powers, as well as their ready access to natural resources. No doubt the Allied military planners in WWII had similar envy for Hitler's lack of political opposition and ready access to slave labour. It's much easier to run a military when you have a war, and there is no one to question your unlimited access to resources. So naturally the military camp would see Russia's authoritarian regime as an advantage. It's like in "A Few Good Men" - it's much easier to prosecute the dirty business of war if you don't have to look over your shoulder the whole time.

But what they don't understand is that American's military strength derives from the fact that its economy generates such tremendous wealth and innovation. And this is because its system of checks and balances allows policy flexibility that stops the government interfering too much in the economy. I often wonder how good the Russian military would be, if the KGB had not been so good at stealing Western military technology. My understanding is that the Russians were shocked during the Georgia conflict by how much better the Georgians were than expected, because of their US training and US/Israeli technology.

As for intelligence, it's really only useful if you can use it and process it well. Again, to do this, you have to have a pluralistic debate, to ensure that weak arguments are defeated. This works much better in an open society than an authoritarian one, and while the Russian intelligence community is probably a lot better at interpreting its intelligence than the military one, that doesn't really say a lot.

So the bottom line, in my opinion, is that yes, Russia does potentially have a lot of strengths, but its basic weaknesses will preclude it exploiting them. Russia could open up, deal with corruption, which would unlock its economic potential, and create a political environment that would allow them to deal with both China and the US as an equal partner. But for the time being they cannot do this, because there are too many entrenched interests that are stopping this happening, which makes them easy fodder for smarter opponents, like China and the US.

Russia, G20, and the IMF

2009-03-12T01:33:00.000-07:00

Good article by Martin Gilman in today's Moscow Times. He really is one of the best commentators on Russian and global economics, and you get to read him for free once a week!

He raises a point, similar to that made by Mohammed El-Erian in "When Markets Collide", that the new world economic order needs a reform of the IMF, and the IMF needs to be reformed to allow a bigger voice to the new surplus nations, especially Russia and China. Both Gilman, and El-Erian admit that this is politically impossible, because the Europeans and the Americans will never relinquish control over those bodies. For instance, Geithner is currently calling for a capital increase for the IMF. This would be a great time for Russia and China and India to contribute more than everyone else, and get an increased voting share. But that means someone has to give up their influence, and no country wants to do this, least of all the U.S. (and of course, the French, who are second to none in their ability to lever their presence in international organisations to get other nations to do their work for them).

So the G20 meeting this weekend is likely to have the usual nice statements, maybe a commitment to new policies which are essentially the status quo dressed up in a new declaration, and little real change. The larger the international meeting, the less chance it has of actually changing anything. Gilman points out that this would be a great time for Medvedev to take leadership and really increase Russia's profile in the world, and he is absolutely right. Russia, jointly with China, could tell the world that they will only continue to finance their deficits, if the world allows them a greater say in the new financial order. This is essentially what the U.S. told Europe at Bretton Woods after WWII, and the surplus countries would be fully justified in doing so now. In fact, this is probably the only way that the U.S. and Europe can co-opt these countries to stimulate their economies, and start to redress some of the global trade and financial imbalances that have built up over the years.

Russia has the financial and the intellectual firepower to do this. It's perfectly positioned between East and West, and is more outward looking than China. It would be a perfect implementation of a "soft power" foreign policy, that is much more appropriate to the post-Cold War era. However I don't think it's likely. There's no Russian equivalent of Larry Summers - a strong economist with a global view, so no one can champion this domestically, except maybe Shuvalov. That means that n one in the financial bloc can take on the foreign policy bloc, who, although they are not dogmatic, don't have the economic understanding to push this agenda. And of course it's way too complex for the siloviki, who still think that Russia' foreign policy should be based on the threat that Russia will either send its missiles to the West, or it won't send its gas.

Little signs of a power shift

2009-03-11T08:41:00.001-07:00

It was very notable that Alexei Kudrin chaired a meeting where the government made a big decision about Uralkali. The story here is that Uralkali, a potash miner in Perm region, had an accident at one of its mines in 2006. The accident caused damage to a railway line, a power station, and some residential buildings. An inquiry held at the time said that the damage was due to natural causes, and Uralkali was not blamed.

Fast forward 2 years to late 2008 - a government meeting chaired by Igor Sechin announces that the investigation will be re-opened, because they think that Uralkali is to blame. The company hits the panic button, telling the world that the potential damages are limitless, because the company may not only have to pay for repairs, but also for the state's lost revenues from the potash in the destroyed mine. This could be billions of dollars. The stock price plummeted, and we have been waiting for news, with various contradictory announcements from government officials.

It was clear that the investigation was designed to put pressure on, and get money out of, Uralkali. The new commission did not even visit the mine, which is in any case buried and sealed, and did not even meet. The decision to be made was purely political - how much to squeeze out of the company. Although the investigation was initiated by Sechin, he did not say anything publicly, but it became clear that Uralkali had many prominent supporters, including Deputy Prime Minister Shuvalov, and Trushev, minister of natural resources. The newsflow has been more in more in favour of Uralkali, and yesterday a fairly final decision was made under Kudrin's aegis, which will let Uralkali off with a relatively light compensation payment.

This fact, plus the fact that Shuvalov was also a prominent figure on the nightly news, suggests to me that Putin is leaning towards the liberals in deciding economic policy. The siloviki rattled their sabres in February, by resurrecting the case against deputy finance minister Storchak, who is a Kudrin ally, but that has died down pretty fast. The bottom line is that all the siloviki can do is to arrest their opponents, whereas Kudrin has real solutions for the economic problems that face Russia. If Putin had listened to the siloviki, Russia's oil wealth would have been squandered and stolen long ago, and Russia would be in much worse shape. My own sources tell me that Putin only talks to Kudrin, Shuvalov, and Gref on economic and financial issues, and yesterday's announcement seems to bear this out.

What were they thinking?

2009-03-07T00:24:00.001-08:00

The lead item on the Russian news this morning is the gift, by Hilary Clinton of a large red, "restart" button to Sergei Lavrov. Perhaps this is a good idea of why the Americans were right not to choose Clinton as their Democratic candidate. The button has, in English, the word "peregruzka" on the top. Now, no doubt there are already plenty of column inches devoted to the fact that the word should have been "perezagruzka", meaning "re-boot", or "re-load", instead of "peregruzka", which means "overload". It's an embarrassing mistake for a gift that is meant to be highly symbolic, and no doubt in the future it will come back to haunt the Obama administration in the same way that Bush's "Mission Accomplished" banner swung back to hit his administration in the face.

What's really shocking about this incident, though, is what it reveals about the way Clinton, and presumably, Obama, make decisions. Mike McFaul is now senior director of Russian and Eurasian affairs at the United States National Security Council, and also Obama's advisor on Russia. He speaks good Russian, or at least he did back in 1990 when I met him, and he was one of the most impressive observers of the massive political changes in Russia. I'm pretty sure he would have caught this in an instant. At the very least, he would have pointed out that they should have written in cyrillic script, since presumably the main audience for this gesture is the Russian leadership, and perhaps even the Russian people. So it's probably reasonable to assume that they didn't ask him.

But is there really no one in the State Department who could have corrected their Russian? Presumably it took a bit of planning to put this button together, so didn't anyone think to run it by the Russian specialists? Anyone who has ever met a Middlebury graduate will know that there are lots of good Russian speakers available to the State Department, so why weren't they asked? What this little gesture shows is typical of a new political appointee, especially in the US - ignore the professionals, in an attempt to stamp your authority, only to have it backfire spectacularly. Some poor staffer in the State Department is presumably going to take the fall for this.

Fortunately, the Russians have taken it in good heart - they are just pleased to have someone in the White House who wants to talk to them. They are also delighted that the Americans have, apparently, backed down in the face of their "show of strength" in regard to the placement of anti-missile systems in Europe. Fair enough, and no damage done. But we all had such high hopes of the Obama administration, who seemed to be willing to bring in the best professionals, and to take a pragmatic, non-ideological approach. Although this looks like rank amateurism, it's still much better than Bush.

"Leading Russian Analyst's" "Prediction" of Break-Up of America

2008-11-26T00:14:00.000-08:00

A couple of blogs, including the illustrious Drudge Report reported on a report by a "leading Russian analyst" that America would soon break up. The fact of this being on the Drudge Report means that it will be picked up by other blogs, in line with the axiom that a lie can get halfway round the world before the truth has got its boots on. So I thought that, as a Russian specialist blog, it made sense to probe a little deeper.

I did a search for this analyst, Igor Panarin, and Google led me straight to his website. He's a Professor at the Diplomatic Academy of the Ministry of Foreign Affairs of the Russian Federation (MFA), which is definitely prestigious, and as far as I understand, it's a specialist institute that does research for the MFA, as well as a place where diplomats can go and brush up their skills. In Soviet times practically every ministry had an internal institute for post graduate study (Often called "Institute of Raising Qualifications), sort of like a Staff College in the military. So this guy is not a flake, although it's not one of the heavy hitters in the Russian research sphere - these tend to be more newly created, and come under the protectorship of a senior politician, acting as his personal research staff and speechwriting team. So this Academy is closer to being a real academic institution, and not a policy mouthpiece or quasi-official think tank.

That's by way of background, and intended to show why I hope that this guy's interview in Izvestiya (which is what started all the news) will not be widely interpreted as reflecting Russian official policy. Izvestiya is so far from being a source for policy initiatives, only someone who had been frozen in time for 25 years would take it seriously. As far as I can see, the story is that Professor Panarin made a speech to a conference in Linz in 1998, that suggested that the United States would break up. His basis for this was United States' lack of moral authority, and its perennial budget deficit.

Well, it's an interesting thesis, and his prophecy was that the USA would break up in 2010, so he hasn't been proven wrong yet. No doubt there are plenty of Russian (and not only Russian) geopolitical specialists who predict long term problems in the US (starting with Paul Johnson), and they have every right to think about this. If Western strategists can consider a scenario where Russia breaks up, then why shouldn't the boot be on the other foot?

I should just point out that there are a couple of other public statements that lead me to believe that Professor Panarin is not particularly close to official Russian thinking, and why we should not take him too seriously. Firstly, his reasoning for the lack of moral authority of the USA was based on the fact that in 1998, Madeleine Albright, a "Czech Jewess" was willing to bomb Serbia, the country that had given her shelter from the Nazis. This was phrased in rather a nasty anti-Semitic way. Second, he describes Gorbachev as a man whose sole agenda was to destroy the Soviet Union. Third, he gives a great deal of weight to his secret analyses of the US economy done by a "serious structure", which is normally taken to mean the KGB.

The KGB are expert and competent in many things, but they are notoriously weak on economics, simply because they were never educated in it. The Ministry of Finance was shocked at Putin's financial and fiscal naivety when he first became Prime Minister (he learned very quickly, though!). The Central Bank and Ministry of Finance look down on anyone in the power ministries, because they really don't have any economic education. No doubt this has changed since 1998, but in 1998 you would be hard pressed to find anyone in those circles who really understood economics well. So Professor Panarin was just flying a kite in 1998 (as some of his other economic pronouncements suggest, especially his lack of understanding of Soviet budget policy), and he wasn't a serious player then, and he isn't one now.

Nikolai Petrov on Regional Tensions

2008-11-25T00:22:00.000-08:00

There's an interesting op-ed in today's Moscow Times here. It's by Nikolai Petrov of the Carnegie Centre, one of the few really independent think tanks in Moscow.

I understand from his article that Medvedev really is feeling pressure from some of the more independent regional leaders, like Luzhkov in Moscow, Shaimiyev in Tatarstan, and Rakhimov in Bashkortostan. These are all people whom Putin was unable to remove. Luzhkov and Shaimiyev more or less pledged allegiance to Putin, but Rakhimov has been under pressure for several years, but the Kremlin has been unable to get rid of him. Petrov reminds us that it was pressure from this group that forced Yeltsin to appoint Primakov as Prime Minister after the crisis in 1998, and I remember going to a conference in early 1999 where Luzhkov spoke, and it was more or less certain that Luzhkov would be the next President.

Petrov points out something that I hadn't really registered, that Luzhkov had called again for regional leaders to be directly elected. This was one of the constitutional changes that Putin rammed through after the Beslan tragedy. It was a sign of the times that no one really questioned or criticised this at the time. I remember a couple of years later, my wife, who is apolitical, suddenly said, "How come we lost the right to elect Luzhkov?". Certainly one of the structural reasons for the Beslan tragedy was a lack of Kremlin control over the regions, but Putin couldn't see that wilful ignorance of local wishes was not necessarily a step forward.

Now that Luzhkov is calling for elections to be reinstated, this is a threat to Russia's vertical structure of power, and needs to be crushed. Petrov points out that Putin would have dealt with this by soft power. Medvedev reacted almost in a panic, by extending his own term limits, reducing the threat of an attack from the regions. It was clear at the time that most of Medvedev's audience for his speech to the Federal Assembly was not prepared for this innovation, which means that it wasn't discussed with them. No one even knew how to spin it.

As the world goes into crisis, and Moscow realises that its pockets aren't limitless, this reveals the limits of central power. It looks like Medvedev will follow the same path as Putin. He knows that liberal values, especially in the economy, are the only effective basis for a modern state. However, because Russia is an immature democracy, with a corrupt bureaucracy inherited from Soviet times, it's very hard to follow a liberal agenda, without it being abused. So Medvedev will profess liberal beliefs, and maybe he really believes them. But he knows that being liberal won't help you to rule Russia.

So it seems likely that he will be similar to Putin - he'll follow illiberal policies, because that's the only way of getting things done. Budgetary policies will remain tight, because that's an important lever of power, and helps preserve Russia's independence. So Russia will stay a good credit, although it's possible that taxation will become more draconian, to make sure that the budget stays balanced. But there will be more reverses of political liberalism, and despite Medvedev's statements to the contrary, the courts won't become any more independent, because that makes them harder to control.

2008-11-24T01:28:00.000-08:00

The Central Bank widened the trading bands for the rouble against its currency basket, and the market gratefully marked the rouble down against the dollar and the euro. It looks like the strategy is to let the rouble fall by about 1% per week, and hope that the market gets bored, or runs out of liquidity. It may be that they are planning some sort of capital controls that will badlly punish those who are holding short positions on the rouble. Otherwise this predictable slide is an open invitation to those who would speculate against the rouble. Presumably the Central Bank has discussed this with the IMF and other experts, so there must be a logic to the strategy.

Devaluation is definitely needed. Otherwise there will be continued capital flight, and it's also needed for the current account, to make Russian business more competitive. The only problem is that a rapid slide in the rouble could lead to a loss of confidence in the currency, and lead to a run on the banks. In principle the CBR could buy all of Russia's household savings (in banks) at the current rate, and still have quite healthy reserves. On the other hand, there is probably a fair amount of mattress money that would also have to be converted. And in any case, it's not the best use of reserves, to dollarise your own country.

The markets are still hugely dislocated, but at least the process of refinancing the short term hard currency debts of Russian corporates has started. Evraz has apparently got the money it wanted, and the market is now trying to guess what company will be the next to receive money. Lots of companies are bouncing off their lows, but nothing will really move until the oil price starts to recover.

The rouble and the money markets and the equity markets are all dependent on the oil price. The rouble needs a high oil price to create demand for the local currency, as exporters repatriate revenues. The money markets want oil revenues to give them faith in bond repayments. The equity market is dominated by oil companies. Russia is dependent on the outside world, which is what Putin hates most. He's been talking about reducing Russia's dependence on oil. The problem is, that for this to happen, they need to make it easier to start up other businesses. But that means dealing with bureaucracy, and Putin has done nothing about that, except to make an annual speech to corrupt bureaucrats, about the need to root out bureaucracy and corruption. Medvedev really doesn't look like he's doing anything different.

More thoughts on the Consitutional amendments

2008-11-21T04:35:00.000-08:00

The main question about the decision to increase the Presidential term from four years to six years is not why they are doing it, but why they are in such a rush to do it. Previous amendments to the constitution have had a period of discussion before being enacted, or at least they went through the normal process in the Duma. Why does the Kremlin feel such a pressing need to implement this change so soon, given that the next elections are not for nearly four years?
The most popular answer in Moscow at the moment is that Medvedev will shortly step down from the Presidency, allowing Putin to take the job for the next six years. This may or may not have always been the plan, according to this view. This fits with the notion that Putin is just another Asian despot, who was able to pull the wool over the West's eyes for a couple of years, but who in reality has more in common with a Central Asian ruler-for-life than with a European democrat.
I don't agree with this. This is the same line of argument that discovered all sorts of loopholes in the Consitution that would have enabled Putin to stay in office before the last elections, and was also applied to Yeltsin. It may be that there are very senior people in the Kremlin who are proposing this course of action. So I can believe that people with excellent sources are hearing that this will happen. But this sort of rule-bending with the Constitution has so far never been done. If the Kremlin wants to break the law, they just go ahead and do it. They know there are some laws they can't break, though - doing this with the Constitution would undermine their own legitimacy, and leave them more vulnerable in the long term.
Another school of thought is that the Kremlin is rapidly feeling a loss of support from the oligarchs, and the regional governors. The oligarchs have too many problems of their own to help the Kremlin, and there is less money to buy off the governors, so there are more separatist rumblings. This feels right to me. The Kremlin has always needed the support of various interest groups of Russia (including, at a distant remove, the population), and they must feel that their own power base is shakier at the moment.
So having a longer Presidential term gives them a counterweight to problems in the regions. If things get bad, they can hold snap elections, and Putin would use his popularity, and control of the media to either reinstate Medvedev, or to take over himself. The point is that this is not a plan, but an insurance policy, to be used in case oil falls to $30 (or lower) and the money in the reserves runs out.

Why Russia should be proud of its financial policy

2008-11-18T05:43:00.000-08:00

If you had said, back in 2000, that Russia would enjoy seven years of massive current account and budget surpluses, but it would not squander this wealth, but salt most of it away in reserve funds, and then be in exceptionally good shape ahead of a global economic crisis, you would have been called a delusional optimist. The nature of politicians everywhere is to spend as much money as they have. This is especially so in Russia, where there are huge spending needs, not to mention hordes of corrupt bureaucrats milking the state at every opportunity.
Yet the fact is that Russia's finances have been managed according to the doctrine that Gordon Brown claimed to follow, of a neutral fiscal stance over the cycle. True, the Russians seem to have been following a long cycle, but they did the right thing. They put money away during the good years, and are now spending it, when times have become harder.
Not only that, but they are handling the run on the currency quite well. There's no panic, but a clear and predictable strategy, plus they are taking some hard decisions in terms of tightening interest rates to minimise the need to spend their reserves. There are all sorts of panicked and short term measures that emerging markets economies tend to do at times like this, and Russia is doing none of them.
Part of the reason for this is that the people in charge (i.e. Vladimir Putin) don't really understand the economy, but they do not that countries in debt have less freedom of action, so they will do everything they can to keep Russia free in this respect. The fact that the state is refinancing hard currency loans taken out by corporates is not designed to give the state greater control over the private sector. The plan is to reduce the dependence of Russia on foreign banks, and foreign banking policy.
When Russian banks first started having problems with getting their loans refinanced by Russian banks, Kudrin was reported to have called Paulson, to get his insurance that the US Government had not instructed their banks to cut off loans to Russian banks. Kudrin probably already knew the answer, but he was probably calling to humour Putin, who assumed that the US was doing this, because it's exactly what he would do in their position. The thing that Putin hates most is being dependent on foreigners, so he wants Russian businesses to be independent too. If he wanted to nationalise those companies, he wouldn't use something as subtle as loan refinancing to do it.
Little by little therefore, we are getting closer and closer to a situation that the West fears most. The Russian government is becoming less and less incompetent, and less and less inclined to listen to the West. The Russians are still doing plenty of stupid, short-sighted things, especially in terms of their relationships with their neighbours. In a way, the West should encourage this, because the modern Russian government is in danger of becoming an equal partner, so it's in the West's interests to give them the ammunition with which to shoot themselves in the foot.

Medvedev's Presidential Address

2008-11-05T06:03:00.000-08:00

New Wrapper, Same Emptiness
President Medvedev made his annual address to the Russian Houses of Parliament today.
His predecessor always used to do this some time around May-June, so it's an interesting departure that he does it now. In a way, this is a good time for such a speech, as it sets the agenda ahead of the New Year, in much the same way as the Queen of England does in her annual speech to Parliament.
The content was much the same as Putin's though. The headlines will tell you that Medvedev has proposed to "clarify" the Constitution and allow the President to remain in office for six years, and for Parliament to sit for five years. Currently both terms of office are four years. No doubt there are some technical reasons for this, but the market didn't like them, and promptly sold off about 5%. In any case, it doesn't look good if your first constitutional initiative is to increase your term of office - this is always the first thing that dictators do.
The rest of it was much the same - lots of generalities about improving government, including the usual platitudes about corruption. Medvedev has talked a lot about dealing with corruption, and has even come up with some concrete anti-corruption measures, including tighter controls on the incomes of civil servants and their families, but this is like treating haemophilia with bandages. And making speeches to corrupt parliamentarians about the need to deal with corruption just makes the process a joke. As long as Medvedev allows Duma deputies to take money for votes, or allows ministers and deputy ministers to take money to approve appointments, he will do nothing about corruption, and nothing will change or improve in Russia.
It's probably no coincidence that Medvedev decided to make his speech on the day that Obama won the Presidency. Obama promises change and youth, and Medvedev knows that he suffers by comparison. He also knows that in the modern world, he can't censor out the excitement of Obama's taking the U.S. Presidency, so he's trying to steal his thunder.

Free press or no?

2007-03-19T01:02:00.000-07:00

Most commentators talk about the Russian press as though it were under draconian censorship. In the same paragraph, they also praise independent journalists, and lament their deaths. There's a slight contradiction here - if the press were really under control, no journalists would be killed.

You can reconcile this by saying that all the key media, especially the TV news, are rigorously controlled, and independent journalists mostly work for small newspapers. So independent comment is marginalised by the state, and independent journalists are harrassed, threatened and even killed when they threaten private interests. I think it's important that the state only aims to control key media, and does not attack independent media per se. Most commentators assume that the campaign against the freedom of the press is entirely state-sponsored, but it's not.

Of course, the state has been negligent in defending the free press. There has been a marked lack of success in bringing to justice the killers of journalists, or the people who hire them. However, it's not clear if this is because the justice system itself lacks independence - it's equally incompetent in finding killers of politicians or policemen. Actually, that's a bit ingenuous - when a journalist or democrat campaigner is killed, the police have clear instructions not to find the real culprit or cause. They might find a hired killer or scapegoat, but never more.

The point is that it's not some cabal at the top that is rigidly controlling and censoring the press. It's the rottenness of the whole system that stifles the development of a free press.

Too convenient? Or not convenient enough?

2006-11-24T22:01:00.000-08:00

My last post was called "The Killings Start Again", and it now looks prophetic, even though I didn't really mean to suggest that they would continue. Since then, we have seen the deaths of Alexander Litvinenko and Movladi Baisarov. The death of the former has caused a lot more noise in the West, partly because of its exotic, hideous nature, and partly because it happened in London, in front of a free press.
The Western press seems to have jumped to the conclusion that Litvinenko was killed on Putin's orders, because he was a vocal critic of the Putin regime, and he was killed to shut him up. The problem with this argument is that Litvinenko has been in London for four years, happily publishing his views, and presumably talking to the Western security services about anything that might interest them. Why shut him up now, when all the damage has been done? Things move very fast in Russia, and Litvinenko is unlikely to have any hard information, as he has not been in country for so long. I just can't see why Putin, or the FSB would want to kill Litvinenko after so long.
It does seem likely that the person responsible for Litvinenko's death either works or worked for the FSB, if only because of the choice of weapon. But that doesn't mean that they were acting on official state orders. Every other part of the Russian state is available for hire to private interests (except its weapons of mass destruction, if only because they don't really have many commercial applications), so why shouldn't the state's professional killers? So it might have been FSB (or GRU) killers who did the deed, but that doesn't mean that Putin signed off on it.
Russian TV is giving the death a fair amount of coverage. They didn't report it to begin with, but then, it probably took the Kremlin 24 hours to form a view on the subject and to communicate it to the networks. They have not broadcast Litvinenko's deathbed accusations against Putin, and at the time of writing, are still questioning whether it was a murder.
The official line is that they have nothing to hide, and I'm prepared to believe that they don't. Litvinenko worked with Berezovsky and various FSB officers who probably made a lot of money off dodgy deals during the Yeltsin era. It's possible that Litvinenko was shaking down one of them, who decided it would be easier to call in a favour, and have Litvinenko bumped off. I stick to my view that when people are killed in Russia, there is usually a monetary motive, because no one believes in ideology or politics any more.
The same is true of Baisarov's death, in my opinion. Before he was killed, there were reports that he was wanted by the Chechen prosecutors. The Russian press said that he was the FSB's man in Chechnya, and had been an associate of Akmad Kadyrov, the first President of Chechnya, who was assassinated. It seems that Baisarov fell out with Ramsan Kadyrov's, Akmad's son and successor. My feeling about this is that it's the army who runs Chechnya now, and Ramsan is allied with them, and Baisarov was a threat, because he was on the other side, and knew a lot about what Ramsan had done. (He's alleged to have his own militia, and kidnapping business). So Baisarov was in Moscow, negotiating some sort of amnesty with the FSB, when he is shot in the street for resisting arrest. I read one report which said that he was shot by a member of the private security department of the Chechen ministry of internal affairs. I would read this as a hit squad sent from Chechnya, that was going to kill Baisarov, whether or not he resisted arrest. It's also a bit of a snub to the FSB that they were not able to protect their man in central Moscow, but then, maybe the FSB had abandoned him.
The other news, which may be related, is that in the same week, the prosecutors announced that they had arrested the head of the department in Chechnya responsible for allocating funds for the reconstruction of residential housing. I have independently heard that these guys take as much as 80% of the funds allocated, as an arrangement fee. That is, I won't approve your grant from the government, unless you give me most of it. Kommersant said it was 40%. In any case, someone is getting very rich from this, and I would not be surprised if Anna Politkovskaya were not investigating this before her death. There are rumours of links between Politkovskaya and Litvinenko, which is possible.
I can well imagine that this spate of deaths is the result of Putin's administration starting to get serious about corruption in the Caucasus, and we are seeing some very corrupt and nasty local officials starting to cover their tracks. And of course, there is no way that any of this would be possible without support in Moscow. So it would be interesting to look for some high level changes in Moscow. It's possible, for instance, that Zurabov's health and social affairs ministry is responsible for dispensing this aid, which is why he is coming under attack. In a way, one feels sorry for Putin, who is being attacked for deaths which are caused by him becoming serious about fighting corruption, and he can't go public and give the real reasons. Mind you, his comments on the matter are so heavy-handed and graceless, I don't feel overly sympathetic.

The killings start again

2006-10-11T11:40:00.000-07:00

Back in the early 90s, banking was a dangerous career in Russia. Hardly a week went by without some banker being killed in a contract killing. The thing to understand here is that in post-Soviet Russia, banks are not banks. Or at least, not in the sense that they take deposits and lend them. Banks in Russia are transfer agents, shifting money from one pocket to another, and the key to remember is that none of these operations is arms-length. The goal is to move money in such a way that it can't be moved back. It's not money laundering - when you launder something, it looks similar before and after the laundry. Banks are money processors here, taking one type of money, and transforming it into a different sort.

Fast forward to the present day. Real banks have been created, and they generally do the sort of things that banks do. There aren't enough of them, and for various reasons, their services aren't much required by the economy. People don't save all the money they could, because they don't trust the banks. And people don't borrow as much as they might, especially corporates, who fear that debts will be sold to corporate raiders, and used to take them over. But there is a banking system, and no doubt it will develop in time.

And then, almost out of the blue, the deputy governor of the Central Bank is shot, as he leaves his weekly soccer game. Normally if a bureaucrat gets killed, it's because they were paid to do something, and they didn't. But this bureaucrat was basically honest, as far as most people can tell. So why was he killed. The general view is that he was moving too harshly against fake banks that were "laundering" money, and was killed precisely because he couldn't be bought. Then, a week or so later, there's a massive anti-Georgian pogrom, including against Georgian casinos, at the same time as Putin announces that gambling will henceforth be only allowed in four specially designated areas.

I think these events are related. The anti-Georgian hysteria is ugly, and may be motivated by a desire to win votes from the nationalists at next year's elections. But what if it all were planned? Maybe Kozlov was killed by those who wanted to carry on laundering their gains from illegal businesses. And Putin knew this, and realised that the state could not let this challenge go unanswered. So he uses the anti-Georgian sentiment to move against all immigrant gangs who run various rackets, and act radically to completely undermine some of the key bases of organised crime. The anti-gambling move is the biggest thing that has happened in Russia for a long time.

Organised crime is so entrenched in Russian society. There is huge money in gambling, both legitimate profits, as well as the ability to move money from drug trafficking through the casinos. And so obviously the links between casinos and the local law enforcement and tax bodies are close. There must be a whole swathe of bureaucrats in hundreds of towns and cities who live off the gaming business. And now Putin is striking at the heart of their livelihood, as well as that of entire clans of organised criminals. And Putin has cut them off at the knees. No wonder he needs the anti-Georgian hysteria as a smokescreen. This would mean a seismic shift in the Russian landscape. If it's true, there must be a lot of people who want Putin dead. No wonder he has been in Sochi most of the summer, and is now in Germany.

But then there's a nagging doubt. Don't forget that when Putin was deputy mayor of St Petersburg, he was on the board of a couple of casinos. This was waved off as an ex-officio post from his role as the head of foreign economic relations, which is possible. But what if the truth were that he was been working with the St Petersburg mafia (many of whom would be not men in stripy suits with white ties and machine guns, but also from the government, army and KGB nomenklatura in the city)? Then his ascent to power is simply the advancement of the interests of one group of gangsters against another's. And his partners are now set up to take over the four new countrywide gambling zones. Not a pretty picture.

And then, on Putin's birthday, and the day after Ramzan Kadyrov's 30th birthday, Anna Politkovskaya is killed. She is one of the few figures of any moral stature in modern Russia. A crusading journalist, her name is particularly associated with Chechnya. There's no question that there's a Chechen link to her death. But it may be that she was killed to embarrass Kadyrov. Because in Kadyrov's world, Politkovskaya's killing would be seen as a particularly piquant present for a man who already has all the watches, cars and concubines he would want. Remember the case of the Mayor of Yugansk, who was an enemy of Khodorkovsky's, and was killed on Khodorkovsky's birthday.

There is also the possibility that Politkovskaya knew too much. As, for instance, did Paul Khlebnikov, whose death also probably had a Chechen link. It all comes down to the billions that have been stolen in Chechnya - the federal centre allocates funds for rebuilding Chechnya, and it all disappears en route. And a number of Moscow and Chechen bureaucrats get very rich. Imagine you're a bureaucrat who is excluded from all this. But you want in. What do you do? You leak the information to a respected uncorruptible journalist, who can then put it into the public domain. When it's public, you go to Putin, express shock, ensure that your rivals are quietly removed, and you take over, promising to restore order. But something goes wrong, the journalist checks around, and someone finds out about the impending publication in advance, and they kill the journalist. Oh well, back to the drawing board, especially since Russia is running out of independent journalists.

And this brings us back to the beginning. Because when you are stealing all that money, en route from Moscow to Grozny, you need to move it somewhere else, preferably offshore, and for that you need a bank. And you don't want a Central Bank that cracks down on money laundering too hard.

Victory day and Russia

2005-05-08T11:28:00.000-07:00

Victory Day is a chance for the Russian people to thank the Soviet State for allowing them to sacrifice large numbers of young women and men in the victory over Hitler. It is always conveniently forgotten that while Hitler's Germany was undoubtedly evil, it was good enough to be an ally of the Soviet Union, until Hitler rudely invaded in 1941. The Soviet government was only really able to mobilise large numbers in support of the war against Hitler by enlisting the Russian Orthodox Church, and turning the war into a Holy War to save Mother Russia, rather than to save the Soviet State.

After the war, the victory was then hailed as justification for the Soviet approach to government, and used to justify continued oppression of the people of the former Soviet Union for a further forty years. The Russians had finally defeated the Germans and the Japanese, and it was all thanks to Comrade Stalin.

The war is an important symbol to be used to justify the continued power of the State. Russia needs an army, the argument goes, to defend itself against outside enemies. And it needs a state to ensure that the army is properly provisioned and managed. Questioning the management of the army, or of the State, therefore, is inherently unpatriotic, and designed to help Russia's enemies.

It's inconvenient, that there is no longer any large outside enemy that wants to invade Russia. There are probably more German-built means of transport in Russia at the moment than there were at any time during the war. No one else is casting envious eyes upon Russian land and natural resources except the Chinese. They are patient enough for the Russian state to collapse by itself. The Japanese and Germans have formed a sort of imperial temperance society, and have sworn off invading anyone else.

So the army has joined the war against terrorism enthusiastically, and have also conveniently decided that the kind of army needed for this war is exactly the same as the one they already have. With lots of tanks and rockets. And roughly the same tactics that were used to beat the Germans. These have been disastrous in Afghanistan and Chechnya, but since the generals are pretty much unsackable, nothing is likely to change.

None of this is really a cause for concern, happily. The lack of competence and confidence inside the Army means that it is unlikely to be useful in suppressing a popular revolution. Its conscripted soldiers don't want to be there. Its professionals are like professional soldiers everywhere, more loyal to themselves than to their political leaders. The generals are all too busy lining their pockets to form a political class. So although the hollowness of Russia's military strength is a drain on the state budget, and a tragedy for the dozens of conscripts who are driven to suicide every year, it will at least mean that the state will not be able to defend itself against an uprising. So let them have their weekend in the sun once a year.

The colour of revolution

2005-05-08T11:13:00.000-07:00

The Russian Investment Review recently asked, facetiously, what colour Russia's revolution, given that the Ukrainian one had been Orange, and the Kyrgyz had claimed a Tulip revolution, to follow Georgia's Rose revolution. Perhaps we should be talking about a plant, rather than a colour. If it must be a colour, then presumably it will be white, in memory of those who rejected Tsarist autocracy, as well as the absolutism of the Reds.

This raises the question of whether Russia will have a revolution at all. Sooner or later, every nation in Europe has risen up against the autocracy that it inherited from feudal times. Russia got rid of its monarchy in 1917, but failed to really change the autocratic state, which continued to oppress Russia's people, only in the name of Socialism, rather than the Tsar. While the Tsar claimed to be appointed by God, the Soviet State claimed to be appointed by the People, a mythical grouping, that was very different from the actual Russian people, who were never consulted in a free election about whom they wanted as their leader.

The Soviet autocratic state was overthrown, temporarily privatised, and has now been re-nationalised by Putin. There is a degree of consultation with the electorate, but Putin has destroyed the opposition (whether democratic or not) in the name of resisting attempts to re-privatise the State. Putin argues that this is the only way that the State can be properly demolished. This is certainly in line with his rhetoric at his most recent address to government and Parliament, where he attacked the power of the State, and the view that Russians had never wanted freedom.

Putin may genuinely believe what he is saying, but he may be, like Gorbachev, a prisoner of his own system. The successful desctructions of post-Soviet states have come from outside the system, generally in the name of freeing the people from both the Soviet State, and the Russians, at the same time. The Russians cannot claim independence from Russia, and so have lacked that vital nationalist impulse.

However, the subtext of Putin's rhetoric is that he is terrified that there will be a colour revolution in Russia. The Kyrgyz and Georgian revolutions had nothing to do with independence from Russia. The Ukrainian revolution was only anti-Russian because Russia chose to intervene on behalf of the old guard. There is a groundswell of feeling against the autocratic state, and Putin has correctly realised that if he does not move ahead of this wave, he will be engulfed by it. His speech on 25 April, 2005 was a warning to the bureaucracy that if they continue to interpret his nationalisation of State power as a signal to increase the State's power, they, and he, will suffer the same fate as their counterparts in Ukraine, Kyrgyzia and Georgia.

Blog manifesto

2005-04-19T22:20:00.000-07:00

I've been studying Russia for about 18 years. When you study something for that long, it's hard to resist the urge to write a book about it. I'm planning a book called "The Future of Russia". The problem is, writing a book is hard work. So I have conceived a cunning plan. If I start off by writing a blog on this subject, I will accumulate lots and lots of words, which can then be edited together to create a brilliant and popular book.

If you like this, then I have another blog, called Ten Thousand Feet, which takes a similar long term approach to telecommunications, the financial industry, and anything else that I can think of.