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Russia Report: May 13, 2004


13 May 2004, Volume 4, Number 18
KREMLIN/WHITE HOUSE
PUTIN TO RENEW DIALOGUE WITH BIG BUSINESS.
Next week, President Vladimir Putin will meet with representatives of Russia's business associations, the first such meeting since November 2003 (see "RFE/RL Business Watch," 18 November 2003). The representatives of all three business associations, the Russian Union of Industrialists and Entrepreneurs (RSPP), Opora Rossii, and Delovaya Rossiya, along with members of the Association of Russian Banks are expected to attend. Last month, members of these groups met with presidential-administration head Dmitrii Medvedev and deputy presidential-administration head Vladislav Surkov and gave them a list of questions for the president, according to "Gazeta" on 29 April. One of the main issues on which businessmen will be seeking clarification is what the president means by the term "social responsibility." Does it mean that profits should be shared, that wages should be increased or that investments should be made in the social sphere?

The Kremlin, meanwhile, has its own agenda for the meeting. It is hoping to change not only the image of these meetings but also their content, according to Aleksei Makarkin of the Center for Political Technologies, "Vedomosti" reported on 22 April. Markarkin said that "it is important for the Kremlin to withdraw from communication with the RSPP as the exclusive partner" in a dialogue with Russian businesses. President Putin stopped holding regulalr meetings withthe RSPP after its leaders protested the arrest of then-Yukos head Mikhail Khodorkovskii (see "RFE/RL Newline," 27 October 2003).

RFE/RL asked four experts to comment on the general direction of Russian government policy toward the private sector: Ian Hague, partner at Firebird Management; Anders Aslund, director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace; Peter Rutland, professor of government at Wesleyan University; and David Woodruff, associate professor of political science at MIT. (Julie A. Corwin)

ROUNDTABLE
RFE/RL: Since the arrest of Yukos head Mikhail Khodorkovskii, have new "rules of the game" emerged for businessmen operating in Russia? For example, is it enough for businessmen to stay out politics in order to encourage politicians to stay out of their businesses?

HAGUE: I think that in general, new rules have been established, but these new rules do not imply an intention to stay out of the business of people who are viewed as compliant by the Kremlin. From what I can figure out, there is to be a great deal more involvement by government in the strategic issues of ownership and financial policy at all of Russia's natural resource companies. This has been fairly clearly signaled.

In the oil business, it is now clear that the government reserves the right to approve or disapprove transfers of ownership to entities outside the country. This was true before but now it is much more explicit. So this is definitely an erosion of property rights.

Furthermore, with the new tax regime and its steeply progressive export duties, the profitability of Russian oil companies above a price of $25 per barrel of Brent crude oil is now very severely damaged, and I think this is part of a deliberate strategy to alter the returns to capital on investments in the oil sector as compared to other sectors. Then there is the pipeline issue. Definitive word has now come down that private pipelines (by ownership at least) will not be allowed, and it will be the government that determines routes of access to export markets now and into the future.

Outside of the oil sector, the government's refusal to declassify information on Russia's platinum-group metals reserves all but eliminates the possibility of Norilsk Nickel getting a full international stock market listing, making it more difficult for Norilsk owners to sell down their stakes. This too, I believe, reflects the government's desire to exercise greater control over another of Russia's sources of wealth.

This, basically is the bottom line. The government is not seeking re-nationalization of the assets that were privatized during the 1990s. This is not required to achieve the objective of greater control. Instead they are using regulatory and legislative tools at their disposal to affect the way these companies do business. In doing so, they may be limiting opportunities for oligarchs and other investors to reap massive profits from their control over these assets, but in the long run it is quite likely that these steps will rebound to the overall benefit of the Russian economy, if they accompany these steps by more thoroughgoing liberalization and institutionalization of business activity in other sectors, including some more firmer legal underpinning for property rights.

Whether they actually do press forward with this more progressive agenda is more a question for the political scientists, but I think that this is the direction in which the Putin administration would like to see things head.

RUTLAND: In fact, it now looks like the "new" rules of the game were laid down by Putin back in 2000, but we did not pay close enough attention at the time. Immediately after he became president, Putin moved decisively to strip [oligarchs Boris] Berezovskii and [Vladimir] Gusinskii of their media holdings and drove them into exile. This was a clear signal that the oligarchs should stay out of politics. However, it was interpreted just as clan politics as usual, one clan driving out the other, with Putin being a kind of neutral referee. In fact, as Aleksei Zudin was arguing at the time, Putin wanted to replace oligarchy with hierarchy.

Even though open challenges to the Kremlin are not going to be tolerated, it is still not clear exactly what are the new rules of the game. How much freedom do individual business leaders have to restructure their businesses, to bring in foreign partners? It does not look like they have very much leeway. No businessman can directly challenge the Kremlin, nor can they even expect to remain neutral and avoid contact with politicians. They are supposed to be active participants in the Kremlin's programs, part of the team, contributing financial, personal, and political resources to Putin's agenda.

ASLUND: The main problem with the Russian economy today appears to be the uncertainty of the property rights of large companies. No clear new rules of the game have emerged. It is clear that President Vladimir Putin does not allow a big businessman to go as far as Mikhail Khodorkovskii did, but that does not tell us very much, since it is not obvious in which regard. The Yukos affair changes shape all the time. At present, it appears that it consists of two major components. First, President Putin thought Khodorkovskii had become too big and too independent. Second, other businessmen want to steal Khodorkovskii's assets, and the president appears to be allowed to let them do so.

At one stage, Putin's claim that it was only an issue of the Menatep owners appeared plausible, but it no longer does when Yukos is being threatened by bankruptcy for having interpreted Russia's tax laws by the letter. To be a big businessman in Russia requires [having] at least one representative in the State Duma, one in the Federation Council, and close links with regional governors, which means that every big businessman must be involved in politics, and thus be liable to legal persecution by the president. The persistent question is: Who is next? There is a sense that one businessman after the other will be cut down to size, and for each enterprise potential new owners can be identified.

The legal uncertainty has been aggravated by the recent round of elections and the government reorganization. At present, political power in Russia is so highly concentrated in the hands of the president, that he can follow any whim that he happens to harbor. Even worse, all kinds of his collaborators can appear as if the president is behind their arbitrary actions. Previously, the legal process in Russia was messy, but people could rely upon the checks and balances to work if a very bad decision happened to take place. Now, virtually all checks and balances are gone, which means that the risks of something going seriously wrong have increased substantially.

If there are neither legal guarantees nor safety nets, we should expect something to go seriously wrong sooner or later. Yet, there is one check, the stock market. Right now, the Russian stock market is down 27 percent from its peak on 12 April. While the causes are many, worries about the property rights of Yukos, Unified Energy Systems, and Interros are playing a major role. The market might overcome its concerns this time, but at one stage it might just plummet until the president comes out and really and truly guarantees the property rights of big enterprises. Given that he cannot be checked very easily, it will be very difficult for him to convince the market that he and his staff have changed their attitude to expropriation of large enterprises.

WOODRUFF: There is no sense in which Khodorkovskii's arrest and subsequent events can be said to have established clear "rules of the game" for big business, whether about political participation or property rights more generally. To understand why stabilization of rules of the game has been so difficult, a little context is necessary. Since the 1998 crisis, conflicts over property in Russia have been driven by what I would call "distributional shocks" that have caused huge changes in the value of various assets. The 1998 ruble devaluation was one such shock, massively raising the value of export-producing companies and setting off a wave of struggles over who owned them. The infamous Ilim Pulp case, in which Oleg Deripaska's group made a grab for the assets of a major wood-products conglomerate in 2002, was perhaps the last of the struggles that one can trace to this distributional shock. A second distributional shock has been the continuing run-up in world energy prices, which made fortunes for Russia's oil producers. The impact of higher energy prices overlapped with and reinforced the effects of the devaluation, and continues to be important.

However, the conflict over Yukos reflects not either of these but a third distributional shock, which I'll call the "time horizons shock." Once the Russian economy began to grow and the political situation stabilized under Putin, businesspeople started thinking about long-term plans rather than short-term profit. There were two effects of this. First, stock market valuations went up massively, as majority owners started caring about investor relations for the long haul instead of just maintaining control to collect current cash flow. (The stock market index more than doubled in dollar terms from January 2000 to April 2003, and nearly doubled again over the next 12 months before sinking sharply recently.) Second, all sorts of long-term investment projects -- such as building pipelines to China, or exploring for oil in East Siberia -- suddenly looked very valuable.

In early 2003, it looked like the wealth from new long-term investments and the rise in stock market values was going to go largely into the pockets of the people who had benefited from the loans-for-shares auctions of 1995. Just as the ruble devaluation and oil price shocks had led to conflict post-1998, this sudden appreciation of asset values set off a new round of conflict, of which the Yukos affair is clearly part. Yukos's capitalization and international financial power gave it great advantages in conflicts over the future of east Siberian oil, including pipeline routes and production facilities with Rosneft, a relatively small state-owned company that Putin has backed. It is in these conflicts over the spoils from long-term oil projects that the roots of the Yukos affair must be sought. The magnitude of the time horizons shock is such that other conflicts among powerful companies, some backed by the Kremlin, are very likely to emerge.

The interesting issues going forward are two. First, will the distributional struggle be channeled into questions over tax and fiscal policy, such as the current plan to hike oil taxes, or will it focus on reallocating property, such as the struggle with Yukos or over the dam and electricity complex in Khakasiya? (Economic Development and Trade Minister German Gref has asked the Russian government to appeal a Siberian court decision that would allow it to re-nationalize the plant.) Second, will struggles over the reallocation of property produce enough instability to shorten companies' time horizons once again, scaring off investors, reducing stock valuations, and making long-term projects impractical? The recent fall-off in Russian stock prices could well suggest the latter. In any event, as long as massive distributional shocks continue, the barriers to establishing stable rules of the game will be very high.

SOCIETY
THE FINAL ANSWER: KILL MY NEIGHBOR'S GOAT.
Michael Davies, executive producer of the TV game show "Who Wants To Be a Millionaire," reportedly said that in the Russian version of the program, television audiences occasionally lie when contestants turn to them for help in answering questions, according to the weekly "Broadcasting & Cable" on 26 April. "People over there can't stand to see anyone win," he concluded. While Davies may be misreading the audiences' intentions, there is no denying that the destructive role of envy in Russian life is a well-documented phenomenon in literature, folklore, and jokes. There is even a specific word in the Russian language to describe unjustified egalitarianism, "uravnilovka." And, of course, uravnilovka is an artificial way of preventing envy by keeping everyone at the same level.

This month, the topic of envy was a subject of some debate as two Russian economists on opposite ends of the political spectrum reached different conclusions about its role in the economy, while a sociologist questioned the assumption that Russians really do hate the rich.

Yevgenii Saburov, director of the Institute for Investment Issues, argued that envy is imposing a economic cost by hampering the development of property and investor rights. In an interview with Ekho Moskvy on 4 May, Saburov argued that the Russian public's hatred of oligarchs such as former Yukos head Mikhail Khodorkovskii could result in real damage to the Russian economy. Citing Nobel Prize-winning economist Gary Becker's argument that such envy can have significant economic costs, Saburov said, "we will see that in the case of Khodorkovskii, [the people's] spite will [cost] billions of dollars." "The population is ready to lose this money, and we will lose it daily, as everyone can see what is happening on the stock market," he continued.

Economist Abel Aganbegyan, on the other hand, suggested that envy, and/or perhaps more appropriately, rage, are understandable responses to an economy characterized by entrenched poverty and a widening gap between rich and poor. In an interview with "Argumenty i fakty," No. 18, Aganbegyan, asked why other countries treat the rich with more tolerance, argued that Russia's poor are considerably worse off than in other countries, while the gap between rich and poor is deeper. According to Aganbegyan, workers in Russia earn 25 times less than in Denmark or 20 times less than in the United States.

At the same time, Russia has 25 billionaires -- dollar billionaires not ruble ones, according to Aganbegyan. "There are only 17 billionaires in Japan and even fewer in Great Britain and France," he said. Twenty percent of the population lives below the subsistence minimum. Under that standard, a person can afford a half a kilogram of sausages once a month, one coat and two dresses every five years. "How is that for life in Russia?" he asks.

While both Saburov and Aganbegyan take envy as a given, a recent sociological study challenges the popularly held notion that Russians hate the wealthy. In an interview with "Novaya gazeta," No. 30, Natalya Tikhova, deputy director of the Institute for Complex Social Research (http://www.iksiran.ru), argued that it is "myth" that there is a deep hatred of the rich in Russia. According to surveys conducted in March 2003 of more than 2,000 people, only one-fourth of respondents expressed envy, suspicion, or contempt toward those persons who became rich over the past 10 years. "For this mass of people, the wealthy person is an abstraction because they do not know any rich people among their close acquaintances," she said. "But for those poor people who have seen their closest associates become wealthier, their level of tolerance is much higher."

Tikhova said that socioeconomic strata in the West developed over centuries, and as a result substantial connections between layers are practically absent. However, in Russia only one-third of the wealthy do not have anyone who is impoverished in their closest circle of relatives and friends, according to Tikhova. And in Russia, as a rule, these rich people help their poor relatives owing to what she called a tradition of Russian national culture. "In the West, similar interfamily transfers of wealth are simply impossible," Tikhova said.

If Tikhova's conclusions are correct, then we might expect to see less of the kind of jokes that were popular in the Soviet period lampooning what seemed to be an almost reflexive hostile reaction to wealth. Recall this anecdote: A genie says to a peasant, "I will grant you any wish, but remember that I will give your neighbor twice what I give you." The peasant thinks for a while and responds, "Poke out one of my eyes." (Julie A. Corwin)

COMINGS & GOINGS
IN: Newly elected Ryazan Oblast Governor Georgii Shpak has selected Samara-based entrepreneur Andrei Ishchuk as his representative to the Federation Council, "Gazeta" reported on 5 May. Local analysts believe that Ishchuk, the head of the Volgaburmash holding company, financed Shpak's gubernatorial election campaign. Ishchuk will replace Mikhail Odintsev, a "protege" of former Ryazan Oblast Governor Vyacheslav Lyubimov

OUT: Prime Minister Mikhail Fradkov has dismissed Mikhail Alekseev and Andrei Beskorovainii from their posts as deputy media ministers, "Kommersant-Daily" reported on 8 May. He also fired Sergei Fedorov from his post as deputy energy minister. Fradkov did not specify any new positions for the dismissed deputies.

INJURED: State Duma Deputy (LDPR) Aleksei Ostrovskii fell into a coma on 11 May following a car accident on the evening of 9 May, RIA-Novosti reported.

POLITICAL CALENDAR
13 May: The Naro-Fominskii court will reopen hearings of the trial of Tamara Rokhlina, who is accused of the 1998 murder of her husband, State Duma Deputy Lev Rokhlin

13-15 May: Armenian President Robert Kocharian will visit Moscow

14-28 May: Metropolitan Lazarus, head of the Russian Orthodox Church abroad, will visit Russia, according to Interfax

19 May: President Putin will meet with the leaders of business associations, such as the Russian Union of Industrialists and Entrepreneurs, Opora Rossii, and Delovaya Rossiya

19 May: Agrarian Party must settle its financial accounts with the Central Election Commission or face a ban on political activity

20-21 May: Conference of mayors of European and Russian mining towns to be held in Rostov

21 May: Russia-EU summit will be held in Moscow

21 May: Women's world chess championship will be held in Elista, Kalmykia

22 May: An exhibition of Faberge eggs recently purchased by oligarch Viktor Vekselberg will open to the public in Moscow

23-25 May: Russian Writers' Union will meet in Orel

30 May: Date by which prosecutors must either complete their criminal investigation of former Yukos head Mikhail Khodorkovskii or ask a Moscow court to extend his period of pretrial detention

June: Shanghai Cooperation Organization will meet in Tashkent

June: Tentatively scheduled for President Putin to give his annual address to the Federal Assembly, RosBalt reported on 30 April

1 June: New deadline for exchanging Soviet-era passports for new Russian passports

1 June: The armed forces will begin forming a permanent peacekeeping brigade based in the Volga-Urals Military District

1 June: The presentation of the seventh volume of the Orthodox encyclopedia will be held in Vatican City

2 June: Prime Minister Fradkov invited to speak to the Duma on the topic of wage arrears

3 June: Regional branches of Communist Party will meet before party congress

7 June: President Putin will visit Mexico

7 June: The trial for the murder of State Duma Deputy Galina Staravoitova will resume in St. Petersburg

8-10 June: G-8 summit will be held in Sea Island, Georgia

14-18 June: Eighth annual St. Petersburg International Economic Forum will be held

late June: The Supreme Shaman of Siberia Toizin Bergenov will visit Moscow in order to conduct a ritual purging of the State Duma building of evil spirits, Interfax reported on 6 May

20 June: Former Beatle Sir Paul McCartney will perform a concert in St. Petersburg's Palace Square

20 June: Union of Rightist Forces will hold party congress

28-29 June: President Putin expected to attend NATO summit in Istanbul

1 July: First anniversary of the creation of Federal Antinarcotics Agency

2 July: End of State Duma's spring session

3 July: Communist Party will hold congress to hear reports and elect new party officials

4 July: Vladivostok will hold mayoral election

1 August: Deadline for the Finance Ministry to present a draft 2005 budget to the government

26 August: Deadline for the government to introduce draft 2005 budget to the State Duma

September: St. Petersburg's Hermitage Museum plans to open the Hermitage Center, which will exhibit works from the Hermitage's collection, in the city of Kazan

5 September: Presidential elections are tentatively scheduled in Chechnya

15-18 September: The third international Conference of Mayors of World Cities will be held in Moscow

October: President Putin will visit China

31 October: Presidential elections in Ukraine

November: Gubernatorial election in Pskov Oblast

22 November: President Putin to visit Brazil

December: A draft law on toll roads will be submitted to the Russian government, according to the Federal Highways Agency's Construction Department on 6 April

December: Gubernatorial elections in Bryansk, Kamchatka, and Ivanovo oblasts.

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