Putin's new enemies

Nov 07, 2001 01:00 AM

by Ben Aris

The price of oil fell below $ 18.50 per barrel, the price at which Russia's budget balances. The government said the fall was not a problem as it had sufficient reserves to meet all spending obligations, but this development will up the pressure on President Vladimir Putin. He is facing a new batch of enemies -- the oilmen for whom the price is a bigger problem.

The last few weeks saw Putin riding high over the government and companies, using tactics of caution and consensus-building to reign supreme. Since the terrorist attacks on America on September 11, however, things have changed. Putin has snubbed the powerful military lobby by allowing US troops to operate out of Uzbekistan, quite a departure from Russia's usual policy of guarding its influence in Central Asia jealously. To highlight this change in the Kremlin's attitude, LUKoil's management said that it would consider participating in the Baku-Ceyhan pipeline project, something that would have been impossible a month and ahalf ago.
And Vladimir Ustinov the General Prosecutor, Russia's top policeman, opened investigations into a string of officials previously considered untouchable: Railway Minister Nikolai Aksyonenko; Emergency Situations Minister Sergei Shoigu; State Customs Committee chairman Mikhail Vanin and Vladimir Golovlev, the deputy head of the Duma's budget committee. The connection between all these men is that they all came to power through the intervention of the Family, the powerful group of businessmen that rose to prominence through close connections with ex-President Boris Yeltsin.

All this frenetic activity has given rise to speculation that the long-promised anti-corruption campaign has begun. Kremlin conspiracy theorists, for example, say that this crackdown is a move by the "chekisti", or the powerful former KGB generals who back Putin against their archenemies, the oligarchs. Others say that it is Putin himself who is simply moving on to the next stage of consolidating power after dealing with the other power centres.
Whichever theory is true, Putin is -- less publicly -- facing problems from another quarter. And this is a fight that will have a much bigger impact on the long-term health of the economy than the sacking of a few obviously corrupt ministers. The Family's influence was effectively ended when ueber-oligarch Boris Berezovsky was driven into self-imposed exile last summer.

The "oligarchy" was in part a myth created by Berezovsky, the main influence peddler in the Kremlin under Yeltsin, to protect himself from being singled out. The other oligarchs -- while certainly not angels -- have been more businesslike in their dealings. Smelling the change in the wind as Putin took office, they have largely broken their ties with the Kremlin and concentrated on building up their businesses while the good times last.
These businessmen, clubbing together into the Russian Union of Industrialists and Entrepreneurs (RUIE), were invited by Putin -- as a group -- to participate in the rebuild-Russia effort. They have been met with some successes in lobbying the government for pro-business changes, such as getting a sensible tax law into place. But they haven't had it all their own way and they are set on a collision course with Putin on the economic reform program.
The problem is that the aspirations of the neo-oligarchs (for want of a better moniker) are distinctly different from those of the Kremlin. Until now, Putin's reforms have been straightforward -- basically slashing and simplifying the machinery of government -- and welcomed by everyone. However, by the end of this summer Putin's long-term economic policy had become discernable. His main thrust is to break Russia's addiction to high oil prices. Putin wants to increase oil production so that Russia can earn the same amount of money as it does now at significantly lower prices.

The fall to $ 18.50, while not a catastrophe, has sparked a round of articles along the lines of "is this a disaster?" The government has felt obliged to reply, but the speculation only serves as a reminder to the Kremlin of the need to do something about this state of affairs. The neo-oligarchs, on the other hand, would prefer to see closer cooperation with OPEC and manipulation of oil prices as this allows companies to charge an economic rent and maximize profits, even if the volume of cash earned is less. The oil companies have a lot of money, but they don't want to spend it all on improving their own assets, when so many other attractive -- and potentially more profitable -- assets are on offer for practically nothing.
The difference in opinion is most clearly seen in the issue of production-sharing agreements (PSAs), where again the Kremlin wants to bring in outside help in the form of foreign investors to utilize the country's resources as fast as possible, while the oil men want to develop these resources themselves, albeit at a slower pace. Economic Development and Trade Minister German Gref has said on several occasions that the government's PSA program will be up and running "soon". But according to one industry insider, the oilmen have effectively blocked all work on PSAs.

Widening the net, the neo-oligarchs are also set to clash with the government over WTO accession. Using their spare cash, they have bought into a variety of assets that will be profitable but are currently sickly and in need of investment and protection. The last thing these men want to see is loads of lean foreigners arrive in Russia to compete with their products before they are ready.
Russia is participating with member countries meeting at a WTO summit in Qatar. The member countries still have to decide whether Russia will be allowed to participate in the discussions, but Russia has already reached an understanding with several countries, such as the United States. Putin clearly agreed to allow the US military into Central Asia in part to win WTO concessions.
However, the neo-oligarchs are much less keen on Russia's accession to the trade watchdog as it means opening up the Russian economy to competition they are ill prepared to face. In this case, the Kremlin will support the businessmen's concerns to an extent and is seeking dispensations for early accession. But whatever deal the Kremlin works out with the WTO, Russian businessmen are bound to be unhappy with it.

The WTO problem is the classic dilemma that all transitional governments have to face: trading off the pain to national industry of opening markets against the benefits competition offers for domestic productivity. What is worrisome about the Russian version is the unanswered question of just how much political power the neo-oligarchs still retain.
Until this point, there has been a truce between the previously warring factions of business and Kremlin. High oil prices (and the resultant oodles of cash) have meant that oligarchs were more concerned with fixing their companies -- although oil production accounts for a quarter of GDP and investment in oil accounted for 44 % of total investments last year. If transport is included (largely fixing and building pipelines) then oil makes up for almost all of the investment activity in Russia last year. As the bulk of the oil investment programs reach maturity, the easy gains have already been won -- and big business is sure to become politicised again soon.
How this fight will develop is difficult to say. Russia's vested interests remain deeply dug in even if they are not choosing to exert their influence at the moment. However, Putin still looks supremely strong and confident at the moment -- largely thanks to his new friend George Bush!

Source: NewsBase
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