Streetwise Professor

March 18, 2011

?????????, 21st Century Edition

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:55 am

Several interesting stories on the way things work in Russia.

The most fascinating is the tale of the remarkable rise to prominence of gas producer Novatek, and the windfall reaped by Putin friend Ginnady Timochenko:

The Novatek agreement was signed on March 3 in Novo-Ogaryovo with Putin personally blessing the deal. According to official reports, Total will acquire 12 percent of Novatek, the second-largest gas producer in Russia, from its CEO and largest shareholder, Leonid Mikhelson, and co-owner Gennady Timchenko.

The huge figures involved in this deal are especially noteworthy. In fact, on Dec. 20, Gazprom sold Gazprombank a 9.4 percent stake in Novatek for 57.5 billion rubles ($2 billion). Only one day earlier, that stake was valued on the MICEX at 87 billion rubles, and it is now worth 101.3 billion rubles. The very next day, Dec. 21, Gazprombank resold those shares to Novatek. Now, with Putin looking on, Timchenko and Mikhelson resold several major share packets to Total for 30 percent more money than Gazprom received for the same shares.

Gazprom is run by Putin’s friend Alexei Miller, Gazprombank is owned by Putin’s friend Yury Kovalchuk, and yet another friend of Putin’s, Timchenko, is co-owner of Novatek. What we have is a complex, multistaged financial transaction in which individuals and companies with close ties to Putin flip billions of dollars worth of stocks and securities in murky, under-the-table schemes.

And lo and behold, Putin anoints Novatek as the leader in future Russian LNG endeavors:

Prime Minister Vladimir Putin, who wants Russia to export 10 percent of its gas as LNG by 2020, blessed Novatek’s plans at a ceremony near Moscow last week, calling it a “good and large- scale work.” Gazprom has delayed decisions on expanding Russia’s only LNG facility, the Sakhalin-2 project with Royal Dutch Shell Plc, and developing the Shtokman field on the Barents Sea.

“Novatek’s project is now Russia’s primary LNG project outside of Sakhalin,” said Chris Weafer, chief strategist at UralSib Financial Corp. “Total’s strategic partnership with Novatek is an acknowledgement that Shtokman is on a much slower development path with an unpredictable future.”

And speaking of anointing, Putin pushed through a deal to elevate a partially state-owned wireless firm to lead efforts to create a 4G network, vaulting the heretofore minor firm to the forefront of the telecoms business:

But investment banking isn’t the only sector the Kremlin and the companies it controls have dipped their hand into recently, despite intense rhetoric of late about privatization and reducing the state’s role in the economy. Last week, Mr. Putin presided over a plan to give a little-known wireless company, partly owned by the state, the lead role in building a nationwide fourth-generation wireless broadband network, leapfrogging the three major non-state companies that had controlled the mobile industry. With these precedents, Russia investors are left wondering which privately-owned industry is next.

In sum, FOKs (“friends of the Kremlin”*) get blessings showered on them: multi-billion dollar overnight windfalls on stock stakes, preferential positions in new utility franchises.

And with respect to privatization, the state appears to be fading its offer to sell a stake in Sberbank:

Russia may delay a key element of its planned $35 billion in state assets sales, a government minister said Monday, as dramatically higher oil prices shrink the budget deficit and reduce fiscal pressure.

The sale of a 7.6% state-held stake in OAO Sberbank, Russia’s biggest lender, may not happen in 2011 because of questions about market conditions and a lack of preparation for the deal, Economy Minister Elvira Nabiullina said Monday, according to Russian newswires. Ms. Nabiullina also sits on the state-controlled bank’s supervisory board.

Later on Monday, Russian Finance Minister Alexei Kudrin said higher oil prices alone wouldn’t halt asset sales and that the “mood of international investors” is a bigger factor.

Deputy Prime Minister Shuvalov could go into the landscaping business with all the hedges in this statement:

Comments state-owned shares “Savings Bank” may be privatized in 2011, if the market had a good situation and be able to attract quality investors. This was reported by First Deputy Prime Minister Igor Shuvalov at the forum “Russia and the world.” “Maybe this year. If we can get a good capital, and market competition is set for good capital, and if we are able to get a good price, and will be at this moment a good market, in this case, the transaction will take place” – said he said.

Kudrin’s demurrals must be taken with a grain of salt: it’s all about the fiscal situation.  The privatization drive, such as it is, doesn’t reflect a newfound appreciation for the virtues of privately owned enterprise over state owned businesses.  It’s driven first and foremost by fiscal needs.  With the recent spurt in oil prices, those fiscal pressures have eased.  And not surprisingly, the enthusiasm for privatization has faded accordingly.

But as the Novatek and telecoms stories indicate the concept of private property in Russia is, well, rather Russian–Muscovite, really.  Property is not really a bulwark against the intrusions of others, most notably the state.  Instead, ultimate discretion over the use of resources rests with the state and its de facto ruler, which takes it from those whom they desire to punish and rewards it–conditionally–it to those whom they desire to reward.  The current system bears more than a passing similarity to the system in Muscovite times, in which holding of property was conditional on service to the state, and loyal service was rewarded by the assignment of a ????????? (“feeding”):

One problem [with kormlenie] was the lack of effective controls over how much was extracted; another, that the subjects would be drawn into complex patterns of personalized relations, where all distinctions between public and private were eroded.

Back to the future.  The current Russian system often more resembles the Muscovite one, in which property tenure was contingent on the discretion of the ruler and dependent on service to him (or her), than even the one that existed after Catherine’s reforms, which severed property tenure from state service.  For all the talk of modernization, that’s the way things work today–and it’s anything but modern.

*Yes, I know that Putin isn’t in the Kremlin–yet.  But that’s a mere detail, and FOKs has a nice ring to it.

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  1. Meanwhile, Gazprom continues insisting it is above the law:

    Comment by Ivan — March 18, 2011 @ 3:26 am

  2. Yet another example of how medieval Muscovy really remains: the FOKs official film director Mikhalkov proclaims the tsunami in Japan was God’s punishment.

    Comment by Ivan — March 18, 2011 @ 6:24 am

  3. Shame about the telecoms, as this was one of the few areas in which Russians enjoyed the services of genuinely competing companies. As Africans have also discovered to their benefit, Russia had no Soviet legacy regulations in the field of mobile telecoms, allowing companies to set up in the same manner as they would in the west. The result, after some consilidation, was three companies fiercely competing for customers using marketing campaigns and pricing plans. Beeline’s marketing was superb, as good as you’d find anywhere in the west. I had wondered how long such common sense and consumer benefit would be allowed to continue. Shame.

    Comment by Tim Newman — March 18, 2011 @ 9:57 am

  4. Discting Latynina’s opinion:

    – Isn’t Gazprombank almost wholly-controlled by Gazprom? So that transaction was like a wash
    – Didn’t the Russian market rise dramatically since December, particularly energy companies? So isn’t it fair and reasonable that Novatek is worth 30% more now than it was in December

    No grand conspiracy lol. And if you throw out the term “Friend of the Kremlin” to any Russian businessman it will inevitably lose its meaning dot dot dot

    Comment by jennifer — March 18, 2011 @ 11:28 am

  5. Real FOKers! Yet corporation after corporation continues to make deals with these thieves. BP executives after being run out of Russia by death threats after it was deemed that their expertise was no longer needed ran back to do a deal. I guess greed trumps common sense.

    Comment by Bob — March 19, 2011 @ 9:42 am

  6. Jennifer–get a clue. I mean that seriously. The stake in Novatek was transferred to Timchenko and Mikhelson for 30 billon rubles less than the market price on the day of the transfer. The day of the transfer. A cool billion dollars, roughly. Great “work” if you can get it.

    And lo and behold, shortly after the transfer, Putin anoints Novatek as its champion for LNG. Purely a coincidence, I’m sure, that his big buddy Timchenko just happened to get a big stake in the company for a below market price right before. What a lucky guy. I’m sure he had no idea that was coming.

    Moreover, factually you are wrong. Per their websites, Gazprom owns less than 50 percent of Gazprombank.

    But you are right that it was like a wash–as in laundering. The suspicious transaction is the transfer of the stake at a below market price to Timchenko and Mikhelson, laundered through Gazprombank.

    The ProfessorComment by The Professor — March 19, 2011 @ 11:31 am

  7. Vladimir Putin’s personal corruption, including the building of palaces for his retirement, is truly barbaric. Even a monkey could see the kickbacks that are flowing to him as a result of these transactions, untold billions that are no different from that pirated by other crazed rogue leaders in places like Iraq and Libya and Egypt. Russia is a corrupt fish rotting from the head and the craven, silent Russian masses deserve their fate. They allow their children to be born into a nation that doesn’t rank in the top 125 countries of the world for life expectancy whose rulers divert vast resources to personal corruption and luxury.

    Russia! What an unholy mess it is !

    Comment by La Russophobe — March 19, 2011 @ 2:32 pm

  8. @LR:

    EDITORIAL: The Vice President of the United States is a Moron

    Posted on March 18, 2011

    EDITORIAL: Biden gets Russia Right

    Posted on July 27, 2009 by larussophobe| 66 Comments

    Comment by Ostap Bender — March 19, 2011 @ 11:49 pm

  9. Wow Gostapo, you forgot that people are allowed to change their opinions.

    Of course, you never stop defending Russia, despite its crimes against humanity.

    I guess things like learning and understanding are beyond you.

    Comment by Andrew — March 21, 2011 @ 6:12 am


    Andrew | March 14, 2011 at 6:28 am wrote:
    “Hopefully they will start targeting FSB sympathisers such as Maimoneedes/Ostap as well”

    Robert | March 14, 2011 at 7:58 am wrote:
    “Geez Andy, cool it off. Assassinating anyone over writing stuff on the Internet?” .

    Andrew | March 17, 2011 at 12:49 pm wrote:
    I just feel the world would be a better place without you Gostapo… LOL

    Andrew | March 17, 2011 at 12:58 pm
    And why would I want to stay away from you …

    Andrew, you should be institutionalized before you commit irreparable damage.

    Comment by Ostap Bender — March 21, 2011 @ 7:52 pm

  11. @LR: comment on your article “White Sun of American Desert Scorches Russian Female Tennis Players”

    Hi LR, I share your frustration and embarrassment at the total failure of US tennis and your lashing out at Russians, who were more successful once again. Given that this tournament was on our home court and America is a huge country, twice larger than Russia, Americans should have dominated both women’s and men’s singles. Instead, USA failed miserable.

    What can be done to make US tennis more competitive? I am not asking for the impossible: to match Russia. But USA should be able to handle Belgium or China or Italy some day. In the old times, before the rise of Russia, USA was the best tennis power in the World. Why are we collapsing?

    Comment by Ostap Bender — March 21, 2011 @ 8:07 pm

  12. And you, Ostap, should be removed from the gene pool before you cause any further damage.

    Comment by Andrew — March 22, 2011 @ 1:39 am

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