Kremlin Intrigues: Russian Economic Reforms or Clan Purges?

12 November 2009. The official press has been aflutter with the news that Russian President Dmitry Medvedev used his ‘State of the State’ speech to call for sweeping economic reforms.[br]

12 November 2009. The official press has been aflutter with the news that Russian President Dmitry Medvedev used his ‘State of the State’ speech to call for sweeping economic reforms.[br]

The AFP went so far as to report that Medvedev’s plans would target a key legacy of his Kremlin predecessor, Vladimir Putin.

It implies that under Putin’s direction, a vast army of state-sponsored companies were created, staffed by Putin cronies, and now Medvedev was going in to clean them up. Presumably to make Russia more like a western capitalist economy.

As is increasingly the case these days, the official press have got it all wrong. It makes you wonder sometimes how they survive as a business – and of course many of them won’t, but that is a whole other story.

The idea that our good old chum Medvedev is going to clean up naughty Putin’s mess is a western media fantasy. To get a better understanding of what is really happening, you can do worse than to turn to a series of reports that have been coming out of Stratfor, the open source geopolitical intelligence service.

Stratfor have been talking for weeks about the upcoming clan war in the Kremlin, and yesterday released a video reporting saying that the first shots of the war had been fired.[br] 

What is crucial to understand, which the AFP clearly hasn’t, is that Putin stands above it all, supported by Medvedev. Putin is still the real power in Russia. He has led the country by employing a Balance of Power strategy, in which he divides the spoils between the two dominant political factions within the Kremlin. He is far and away the most popular politican in Russia.

 

Medvedev would not and cannot make a move this size without Putin’s support. On the surface this move is all about economic reforms, but dig beneath the surface and you will find that it is also – and more so – a power struggle that will shape Russia for years to come.

Russia has long been dominated by intelligence figures. The intelligence services are possibly the only organisations that have been able to survive the cataclysmic changes in Russian and Soviet societies over the centuries.

Although the KGB became the FSB, it kept is structures and allegiances intact. Putin himself came through its ranks. The first and originally dominant faction in the Kremlin is made up of current and former FSB men and their allies, the sivoliki or strong men. This group is led by Deputy Prime Minister Igor Sechin, whose power has increasingly come from the large state-controlled private organisations that the sivoliki run.

But the FSB is not the only intelligence organisation in Russia. The even more shadowy Russian Military Intelligence Directorate or GRU has its own power base, and a deadly rivalry with the FSB.

One of its own is a fascinating figure who has come to be known as the Grey Cardinal. This is the President’s Deputy Chief of Staff, Vladislav Surkov. Surkov is half Chechen and half Jew, so could never become a leader in his own right. He is therefore positioning himself as the Kingmaker behind the scenes. He is rumoured to have brought down Chechen President Dzhokhar Dudayev and oil oligarch Mikhail Khodorkovsky, the former head of YUKOS who now languishes in jail.

Surkov has set his sites on Sechin and his allies. If he can weaken or remove Sechin from his position of power, he may be able to consolidate his control of the levers of power.

Opportunity presented itself in the form of a group of young thinkers rising up the ranks of the Kremlin. These were economists, lawyers and civil servants who felt that the corruption and inefficiency of the state created and shielded behemoths was hurting Russia itself.

Although many are western educated with western leaning ideas, they have also been influenced by the Chinese, who have transitioned much more successfully into the post-Cold War era. They had long been a part of the Kremlin structure, but were blamed (in some cases rightly) for the disasters of the 1990’s, and so had fallen out of favour.

The kids needed a leader and Surkov needed a plan. They made perfect bedfellows. It was Surkov who coined the term for this faction, the civiliki. It is a play on the word sivoliki, with layers of meaning, referring to the civil service, the civil society that the group would like to foster, and even Medvedev’s civil engineering degree.

For months now, the groundwork has been laid for this assault.

In September, Medvedev went public, attacking the big companies, saying

[quote] Bribery, thievery, mental and spiritual laziness, drunkenness are sins insulting our traditions.[/quote]

Stratfor is reporting that Medvedev has signed official papers allowing the Prosecutor General, Yuri Chaika, with the support of Finance Minister Alexei Kudrin (both civiliki) to go after the state-supported countries that gorged on both government and foreign debt during the bull years.

Furthermore, they have authority to re-structure any company with processes that are deemed to be inappropriate or ineffective.

[quote]Such practices include giving large bonuses to board members and executives, tender and public auction violations, unaddressed but well-known inefficiencies in business operations, outsourcing violations, and illegal spending of state funds. These are all standard business practices in Russia, which means that the prosecutor general’s office will be able to “overhaul” whatever company it wants. Furthermore, the prosecutor general will be allowed to set parameters to test companies’ efficiency.

The actual criminal investigations are likely to begin fairly soon; the initial inquiries had already begun in October … The companies under investigation will be cleared, fined or shut down and turned into joint stock companies — which may be the first step toward potential privatizations.
In the sights of the prosecutor general are Vnesheconombank, Rosnano, Rosoboronexport, VSMPO-Avisma, AvtoVAZ, the Housing Maintenance Fund and the Housing and Utilities Reform Fund. The last two agencies have huge public funds that Sechin has used to finance his operations.
[/quote]

Two key questions remain.

The first is why Putin has endorsed this move. Clearly it upsets the balance of power he has worked so carefully to create. Our sense is that he recognises the real need for economic reform. Always vastly inefficient, a multitude of sins of the state-linked giants were hidden by high oil prices. Once the tide went out, it was clear who was swimming naked.

This sheer excesses involved probably made Putin personally angry. He needed to show the public that he would put Russia first, that he stood above corruption and beyond reproach.

He also needs a strong economy to support his geopolitical agenda. The domestic economy does need to be more efficient as the civiliki argue. Foreign capital and companies need to be brought into Russia, but in order to do that Russian companies must be made stronger so they can compete, and legal and financial systems must be improved to attract that capital.

All of these are very compelling arguments, but it brings us to the second question, whether Putin allow Surkov to consolidate his grip on power. It is at this point that their interests diverge.

Putin more than anyone knows the importance of a strong FSB. The very integrity of Russia depends upon it. It is likely that a quid pro quo is enacted, one that will create a new balance of power.

Just as the civiliki grow their economic power, it is likely that the GRU will lose military and intelligence power to the FSB.

It is a big gamble for Putin and Medvedev to take, but if they can successfully push this agenda through Russia could come out a reinvigorated force on the world stage – which is what both men passionately want.

Keith Timimi

EconomyWatch.com