The curse of the Kremlin

Vladimir Putin's recent public tirade against various energy-sector oligarchs shows that not much has changed in the parlous world of Russian business.

Stratfor.com

Russian prime minister Vladimir Putin made a very public and harsh speech Wednesday in which he singled out several energy firms – and oligarchs – over the mismanagement of the country’s electricity industry, essentially making sure everyone knew they were on the Kremlin’s target list.

The Russian economy went into a tailspin during the global financial crisis, with shockwaves being felt through the financial, economic and energy sectors in the country. This took much of Russia by surprise; it had become used to financial and economic prosperity before the crisis, when oil prices were high and investment was heavy. It also internalised the Kremlin — which had been using its economic heft to maintain stability at home and relaunch itself into the arena of global politics – forcing the state to look at its economy in the long run, and decide how it should run itself intelligently (instead of simply dictatorially) from here on.

When the economic crisis hit Russia, the Kremlin did not at first use its enormous economic wealth – much of it saved in a series of government funds amounting to approximately $600 billion – to bail the country out and keep the currency stable. Instead, the Kremlin turned to the oligarchs – a class of ultra-wealthy businessmen in Russia – to instead "donate" their services and funds in the name of Russian nationalism and loyalty to the state.

This was a dramatic move by the Kremlin, which had long struggled with the oligarchs. The oligarchs came into being after the fall of the Soviet Union; they snatched up critical pieces of the state, reaping incredible wealth in the process. Many of the oligarchs attempted to politically shape the country at the same time. But when Putin was elected president of Russia, the oligarchs became one of the Kremlin’s top targets and many of the their empires were crushed.

The financial crisis of 2008-2009 was one of the last gasps of the oligarchs (as we knew them), with the state commandeering their wealth to help the state. Some of the oligarchs gave money directly to the state. Others were coached on how to invest their funds in failing sectors or in the stock market. Oligarchs like Oleg Deripaska, Alexei Mordoshov or Mikhail Fridman saw their worth of roughly $US20-$US30 billion fall to just a few billion within a span of a few months. Some oligarchs, like Moscow Mayor Yuri Luzhkov’s wife Elena Baturina, cannot be counted in the billionaire’s club at all anymore.

But as the Russian state has started to recover and emerge from the recent financial crisis, many of the oligarchs are also recovering their fortunes and inching back up to their pre-crisis level of wealth. However, as we look at the list of those oligarchs recovering their positions, something has become apparent: most of the remaining oligarchs are Kremlin loyalists. Some may even call them Kremlin puppets. The Russian state has created a new class of business elite that is not independently minded, preferring instead to head up businesses that do the Kremlin’s bidding.

This is very different from the Kremlin’s plan of 2005, which simply ousted oligarchs and put security officials in their place – creating a new class called the silovarchs. The Kremlin realised during the financial crisis that security-minded Kremlin loyalists were not the best people to lead Russia’s critical business sectors. Instead, the Kremlin has been weeding through the oligarchs and allowing those who are loyal to the state and good at their craft to return to their lofty positions and wealth. The Kremlin has needed to do this to capitalise on the shrewdness of certain oligarchs – something the silovarchs could never really master due to their lack of business experience.

But there have been a few oligarchs who are not exactly Kremlin loyalists who have slipped through the system and come out of the crisis intact. Four of those oligarchs – Viktor Vekselberg, Leonid Lebedev, Vladimir Potanin and Mikhail Prokhorov – were specifically named by Putin Wednesday as failing to live up to their obligations as investors in key Russian sectors, namely electricity. Putin has called out oligarchs publicly in the past, warning them to either shape up or ship out. It is typically his last admonishment before the state makes moves against their assets or persons. Putin did not hide this fact, blatantly saying that unless these oligarchs fulfil their obligations, they would face fines or be banned from working in that sector.

The Kremlin has been taking very seriously its plan to modernise the economy, especially after the financial crisis. Russia understands that it needs two things it had purged during the 2005 consolidation of the state: investment and skilled businessmen. Russia has looked to reintroduce investment into the country by allowing a select few to own strategic assets (like electricity) that the state had nationalised. Moreover, the state is open to certain (trusted) foreign investors returning to the country for such investment. Secondly, the state has recognised that it needs business-minded people. Placing security officials (like Federal Security Service) in charge of companies was what ran many of them into the ground. There is a need in Russia for a business class similar to the oligarchs of the past.

However, Moscow wants to allow these shifts in its push to modernise those who are loyal to the state. The Kremlin walks an incredibly fine line when it allows an oligarch class to remain in Russia, while Putin calls to the carpet those he feels should not remain in that class.