SOCIAL PROBLEMS
While deciding how to control these new corporate entities is bothersome, Putin and his successors are faced with other issues that may be even more intractable. At one time or another Putin has indicated his awareness of most of these problems. To deal with the continuing decline in the Russian population, which has been shrinking by almost 700,000 a year, he has proposed a bonus program for Russian women to encourage them to give birth to more than one child. Russia’s population shrinkage makes it difficult to find enough young men to staff not only the army but also the industrial and agricultural workforce. As in several West European countries, a declining birth rate means that it will be harder and harder to support the increasing percentage of the population who have reached retirement age. In addition, Russia has to contend not only with a low birth rate but also with a life expectancy for men that hovers between fifty-eight and fifty-nine years. That is a disgrace for an industrial country. Excessive drinking, poor diet, automobile accidents, and violence among men account for much of the problem. As Putin pointed out in one of our Valdai Hills meetings, Russian men who live to age sixty-five have a life expectancy thereafter that is comparable to that in the West; the trick is to make it to that point.
Even if the population were growing, Russia would have a problem finding people to live in the Maritime Provinces of the Russian Far East. The population there is falling even faster than the national average. Many of those who remain want to move to Moscow and the center of the country. According to the Institute of Economic Research in the Far East, the population there has fallen 16.5 percent since 1989. As a consequence, only 4.6 percent of the total Russian population is left to occupy 36 percent of the country’s land.51 The depletion of the population there is of concern for economic as well as political reasons: while the Russian population is shrinking (only 6.6 million Russians resided there in 2006), the Chinese population immediately adjacent to the Chinese-Russian border along the Amur River is growing rapidly and totaled 38.1 million in 2006.52
When asked at the 2006 Valdai Hills meeting what he would have liked to have remedied but so far had not, Putin mentioned not only the shrinking population rate but also the national poverty level: large numbers of Russians live far below the poverty line despite the substantial improvements of recent years. He also expressed frustration over his inability to fight corruption. There are many indicators to suggest that corruption has become an even more serious problem on Putin’s watch. This may explain why a year later he appointed Viktor Zubkov as prime minister; Zubkov had a reputation for successfully dealing with corruption.
Putin also expressed his hope that he might yet do more to develop the country’s political system. Given that Putin has been criticized both inside and outside Russia for doing away with elections for governors, eliminating diversity of views in the media, and purging the Duma of any meaningful opposition to one-party rule, his reply suggests that he is either blind to his own shortcomings or his interpretation of freedom of the press and parliamentary democracy differs from that normally held in the West. It may be a little of both.
Mention should also be made of the continuing unhappiness with Russian rule in parts of the country, particularly in Chechnia and some of its neighbors in the Caucasus. Putin has managed to subdue much of the open anti-Russian resistance, but few would insist that the region has been fully pacified. The battle there, just as happened to the United States in Vietnam and again in Iraq, has had the effect of bloodying and discrediting the army, and it will take some time for those wounds to heal.
As talented as he has been in resolving so many of his country’s problems, there seemed to be yet another difficulty that even Putin could not solve: what would happen to the political and social structure he has set up after he left office. Putin did a magnificent job in ending the political and economic free-for-all of the Yeltsin years. He established firm control throughout the government, removing most of the old oligarchs and installing FOP, both siloviki and economic liberals. But because so many of these KGB alumni have become new oligarchs with their own little and not so little economic empires, it was uncertain whether or not they would submit to a Putin successor to whom they owed nothing. Putin had the advantage of being able to pass out patronage plums and in doing so build up a group of loyalists, just as the former Czars did. Even under Putin, however, the prospect of controlling so much wealth has on occasion led to open feuding. A good example was the unseemly brawl between Miller of Gazprom and Bogdanchikov of Rosneft when the Rosneft group refused to submit to Gazprom control and effectively called the Gazprom executives liars.
Nor was this the only instance where rivalry among Kremlin insiders had surfaced in public. In 2007, Vladimir Kumarin, the owner of the St. Petersburg Fuel Company, a chain of gasoline filling stations, was arrested. According to the newspaper Novaya Gazeta of September 10, 2007, Kumarin’s arrest was initiated by the Igor Sechin faction in the Kremlin against the anti-Sechin siloviki. In another case, the attempted arrest of Mikhael Gutseriyev and the takeover of his company, Russneft, as well as the struggle for control of the pharmaceutical distributor Protek and Biotek, also seemed to be a part of this internal battle for control of corporate assets and other valuable spoils that was being waged by this second echelon of siloviki and FOP oligarchs. There even seemed to be a struggle within the upper ranks of the FSB. For example, the arrest of Lieutenant General Aleksandr Bulbov, chief of one of the highest-ranking divisions of the Federal Narcotics Control Service (FNCS) was regarded as just such an instance of this “interagency warfare.” This also seemed to involve a struggle between Nikolai Patrushev, the chief of the FSB, and his ally Igor Sechin, a KGB veteran and a deputy head of the Kremlin administration as well as chairman of Rosneft, on one side against Viktor Cherkesov, who is Bulbov’s boss, on the other side. In this case the FSB was retaliating for an earlier raid by the FNCS against the FSB in 2000 and the subsequent dismissal in 2006 of a number of high-ranking FSB officials who were charged with the theft of valuable property and engaging in illegal real estate transactions. Undoubtedly some of this jockeying for control reflected a deep concern that Putin’s successor would reallocate some of the country’s assets and strip the new siloviki oligarchs of their assets just as Putin stripped the original oligarchs.
As if all this were not enough infighting to keep the gossips in Moscow busy, Sergei Storchak, a well-regarded deputy minister in the Ministry of Finance, was arrested in late 2007 and charged with embezzlement of $43.5 million in state funds. Storchak had been in charge of administering the country’s $100 billion-plus stabilization fund and a close and trusted ally of Alexei Kudrin, the minister of finance. Kudrin fiercely defended his friend Storchak, who he insisted was innocent.53
If even Putin could not control such open feuding, his successor was likely to have an even more difficult time herding these new aristocrats. Now that they not only have their old KGB know-how and connections but also large financial wherewithal, these new oligarchs will be much more difficult to control than the original oligarchs.
Concerns of this sort may account at least in part for Putin’s decision to stay involved as a Russian leader. Putin was clearly aware that he would be damned if he stayed on in power (at least by the outside world). He explicitly said so in the September 2006 meeting of the Valdai Hills Discussion Group. As he put it, “I don’t believe that the country’s stability can be insured by one man alone. . . . If everyone is equal before the law, I cannot make an exception for myself . . . [and ignore the constitution that limits the president to two four-year terms].”
By 2007, however, with his popularity at 70–80 percent, he also came to understand that if he did not stay on, that would also be destabilizing. That led to speculation that Putin might agree to serve as prime minister or in some other vague czar-like role as “father of his country or national leader.”54
Ultimately, Putin decided to announce his choice for president. This put an end to most o
f the speculation and jockeying to stake out a claim on state assets. His nominee was Dmitry Medvedev, who was not only the first deputy prime minister but also the chairman of the board of directors of Gazprom as well as Putin’s longtime protégé and friend from their days in the St. Petersburg governor’s office. Medvedev had followed Putin to Moscow and once there eventually became the head of the Kremlin administration. Regarded as a Putin loyalist, Medvedev certainly has had administrative experience, but his relative youth (he is only forty-two) and his lack of gravitas and experience with the KGB alumni made him vulnerable to sniping and intrigue from the siloviki.
Recognizing the danger, Medvedev (perhaps with Putin’s own acquiescence and maybe even at his initiative) proposed that Putin take on the job of prime minister. Officially this seemed to represent a demotion, but it did leave Putin in place to protect Medvedev’s flank from the siloviki, and it allowed Putin to retain influence and reassure the public without having to amend the constitution. (One way to judge who really is in charge in this new arrangement is to see if Putin and his family move out of their palatial presidential residence, where Putin welcomes groups such as the Valdai Hills Discussion Group, and surrenders it to President Medvedev.) Such an appointment is no guarantee that there will be no quarreling between Putin and Medvedev, but it did seem to put an end to much of the short-term uncertainty and instability. Given Medvedev’s close involvement with Gazprom, it is also another indication of how important energy and Gazprom are to Russia’s well-being.
ECONOMIC CHALLENGES
While Putin’s selection of Medvedev may resolve some of the political issues, much also remains to be done to stimulate the non-oil, non-rawmaterial sectors of the economy. The prosperity that has accompanied the oil boom has been a key factor in improving Russian general economic health, but it has also harmed some sectors. The big boost in disposable income as a result of energy exports notwithstanding, the strong ruble has hurt Russian manufacturing efforts just as the strong guilder hurt manufacturing in the Netherlands. Except for vodka, caviar, and Kalashnikov weapons, almost no commercial products manufactured in Russia have ever won an international competitive preference. It is not that Russia had a strong competitive manufacturing sector before the jump in energy prices. Manufacturing in Russia both in the Czarist and Soviet eras has always needed government subsidies. According to Izvestia, today Russia’s share of the world’s high market is only .5 percent and its machinery exports total only .3 percent of world exports.55 Steep tariffs or import protection barriers help domestic manufacturers compete against foreign imports, but the strong ruble complicates whatever efforts are made to foster domestic manufacturing. Because of tariff protection, a large number of foreign automobile manufacturers have opened assembly plants in Russia to take advantage of the increase in Russian consumers’ disposable income. But if and when those tariff barriers are lowered as a condition for Russia’s entry into the World Trade Organization, that is bound to hurt such efforts.
DO YOU WANT A RUSSIAN FOR A PARTNER?
With or without such tariff protection, many foreign companies will continue to search for opportunities to invest in Russia. Certainly the risks are high; remember the cases of General Motors, which was squeezed out of its joint ventures in Togliatti, and Dutch Shell, which was forced to bring in Gazprom as a partner at an enormous discount. Still, with its oil wealth and growing disposable income, Russia offers a rich market. But there is little prospect that foreign companies will be able to count on the rule of law to protect their property, especially when a national champion takes an interest in their activities. By the same token, Russian companies should not be surprised if they are treated unfairly when they seek to operate outside Russian territory. Many Russians, including Putin, were upset when the Russian steel manufacturer Severstal attempted to merge with Arcelor, the West European steel company. At the last minute, Arcelor opted to dump Severstal and merged instead with Mittal, an Indian company. Most Russians viewed this as a form of discrimination against Russia and Russians. There was a similar reaction when Russians were told that they would not be allowed to have a representative on the board of directors of EADS, the parent company of Airbus, even though Vneshtorgbank had purchased between 5 and 7 percent of the company’s stock and for a time considered buying as much as 10 percent. In the same way, Aeroflot was rejected when it sought to take over operating control of the troubled Italian airliner, Alitalia. In 2006 alone, Epsilon Corporate Finance reported that Russian companies made twelve attempts to buy shares in European companies, all of which were rejected. Five of those efforts involved Gazprom—most notably, offers for Centrica in England and PGNIG in Poland.56
One reason for such discriminatory treatment is the real fear of the symbiosis between Russia’s national champions and the state. If a Russian company is allowed to buy a share in a Western company, the Western company may find that its partner is not a commercially oriented investor but the Russian government—a corporation that in fact is a Russian national champion and President Vladimir Putin. That is certainly what some Western critics have concluded about the way Gazprom operates when it moves into Western markets.57 This is an example, even if indirectly, of the price Russia must now pay for the disdain and disregard for the rule of law. Whether justified or not, Russian investments outside of Russia are now regarded with extra caution and will be treated skeptically for some time to come.
Certainly Russia’s financial and economic condition has improved since the August 17, 1998, financial meltdown. As of fall 2007, all but a fraction of Russia’s foreign debt has been paid and Russia now has a $420-plus billion reserve of hard currency as well as a $120 billion stabilization fund that had been administered by Sergei Storchak from the Ministry of Finance. But while the state has an impressive cushion of assets in the Central Bank, the corporate and local government sectors have taken advantage of eager and overgenerous Western investment banks to borrow sums that by some accounts will soon equal what the state has accumulated in its reserve rainy day fund. If there should be a serious drop in energy prices, the local governments that depend on the corporate sector taxes to pay their bills would face serious difficulties. The Russian companies that have taken advantage of Russia’s high credit rating to borrow billions of dollars and euros would be in similar trouble. A really substantial collapse in energy prices would spell an end to Russia’s status as a super energy power.
RUSSIA INVESTS ABROAD
But if energy prices do not drop, or at least do not drop significantly, the Russian government will almost certainly continue to seek to exert its influence outside of Russia for some time to come. We can also expect to see a larger and larger presence of Russian companies outside of Russia. Rather than just deposit U.S. dollars in a bank or invest them in purchasing U.S. government securities, both the Russian government and Russian individuals and companies will begin to spend more and more of their dollars and euros on buying up properties outside Russia. While a few might buy up sports teams, as Roman Abramovich did when he bought the Chelsea soccer team in London, others will expand their holdings of manufacturing and service companies as LUKoil did when it bought up the Getty Oil filling stations network and Nelson Resources, which had major oil holdings in Kazakhstan. Generally Russians purchase foreign companies that produce products similar to what they produce within Russia.58 On August 8, 2007, the Financial Times reported that Oleg Deripaska, one of the oligarchs who has worked closely in the past with Putin, had invested $1.54 billion to purchase a large stake in Magna, a Canadian auto parts manufacturer. Even more spectacular, Deripaska had bought up almost 5 percent of General Motors stock for $900 millon. The assumption is that he planned to build on this link with General Motors to upgrade the technology and work practices at Gaz, his Russian automobile manufacturing plant.
There will be people who oppose such investments, especially in companies that have strategic significance such as Stillwater Mining, the United States’ only producer of platinu
m and palladium. The Germans under the leadership of Angela Merkel seem to be particularly sensitive to such “sovereign investment fund” initiatives. They fear that not only the Russians but also the Chinese will use their huge foreign currency reserves to acquire equity in defense-related companies as well as recently privatized industries. According to the spokesman for the German government, while “private investors would generally be welcome,” the Germans were committed to preventing state sovereign investment funds as well as Russian and Chinese nationalized industries from buying up German businesses. In the words of Roland Koch, the German official sponsoring such legislation, “We didn’t just go through all our efforts to privatize industries like Deutsche Telekom or the Deutsche Post only so that the Russians can nationalize them.” Along the same lines, the European Commission, the executive office of the European Union, has proposed legislation that will require energy companies to unbundle or separate their energy-producing divisions from the units that distribute and transport that energy. This, the European Commission argues, would stimulate competition and prevent a single gas supplier to a region from dominating the distribution network. Such legislation will make it difficult for a company like Gazprom to institute an embargo and generally monopolize control. Subsequently there have also been proposals that would require members of the EU to notify the EU before they conclude any bilateral agreement with third parties (read Russia) that would affect EU interests.59
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