Streetwise Professor

In the past couple of years, I’ve often drawn the analogy between Russia and a cartel.  In a cartel, competing interests agree to cooperate, in setting prices for instance.  Cooperation maximizes the aggregate profit, but this cooperation is unstable because by defecting from the cooperative agreement, one cartel member can profit at the expense of the rest.  The fear of retaliation, and the outbreak of profit-destroying competition, is sometimes sufficient to deter such opportunistic conduct.  But there are circumstances in which the short run gains from defection can exceed the long run losses from the resulting competitive phase.  When this happens, the cartel falls apart.  This can often occur in response to shocks that make the old cooperative deal no longer optimal.

In Russia, there are competing interests–the clans.  They cooperate because conflict is costly. But that cooperation is always vulnerable to opportunistic defections; the short run gains from defection may more than offset the costs of retaliation that such defection triggers.

In some earlier posts, I hypothesized that the economic crisis could be the shock that destablizes the cooperative agreement between the clans.  Heretofore that has not happened, but several stories suggest that conflict may be imminent–or may have already begun.

Most notably, Stratfor is about to run a five part series titled “Kremlin Wars,” the subject of which is a breakdown in the uneasy truce between the major clans headed by Sechin and Surkov.  In its email announcing the series, Stratfor writes:

Strange things are happening inside Russia these days. Pro-Kremlin political parties have boycotted the parliament, our sources say lawsuits are about to be filed against some of the state’s favorite companies, and rumors are circulating high within the Kremlin that the Russian economy is destined to be liberalized.

When looked at separately, each of these currents can be rationalized, for Russia has just recently completed elections and the global financial crisis is still hammering its economy. But a deeper look reveals instability inside what is normally a consolidated, stable and politically-locked Russia. Something much bigger and more fundamental is afoot: a war among the most powerful men of the Kremlin is coming.

Stratfor buys into the cartel analogy, and the implications of the economic crisis for the stability of the inter-clan cartel:

It is the classic balance-of-power arrangement. So long as these two clans scheme against each other, Putin’s position as the ultimate power is not threatened and the state itself remains strong — and not in the hands of one power-hungry clan or another.

But having all major parts of Russia’s government and economy fall under the two clans creates a certain structural weakness, a problem exacerbated over the past few years by the effects on the Russian economy of chronic mismanagement, falling oil prices and, most recently, the global financial crisis.

Shocks–such as a financial crisis–can affect the calculus that drives the choice between cooperation and conflict.  The shock can make the old arrangement clearly inefficient, but navigating the way to negotiating a new arrangement is quite difficult.  The necessity of renegotiation presents opportunities for rent seeking, gamesmanship, and brinksmanship that can often result in conflict.  Stratfor believes this is a real possibility in Russia:

[Putin] likes the idea of fixing the Russian economy and making it work like a real economy, but it would mean throwing off the balance of power in the country — the equilibrium he has worked all these years to achieve. And should this balance be thrown off, the effects could ripple throughout every part of Russia — all levels of government, influential security institutions and even the country’s powerful state-owned companies.

When these issues came to our attention some months ago, our first thought was that they were merely the machinations of just another high-level Russian source hoping we would promote his agenda. So we sought confirmation with a number of unrelated sources — and we received it. The final convincing event in our minds was  Putin’s Sept. 29 declaration that some heavy economic reforms are indeed necessary. We cannot rule out that this could all be a disinformation campaign — those are as Russian as vodka and purges — but we cannot ignore our intelligence from such a broad array of sources, especially when it’s combined with signs of  political and  economic instability now cropping up inside Russia.

I will read the Stratfor series with interest, and look for other indications that a breakdown may be imminent.  A couple of possible harbingers.  First, Medvedev has renewed his criticism of the state corporations:

Dmitry Medvedev, Russia’s president, yesterday called for sweeping curbs on state corporations that control swathes of the economy, declaring that many should be closed.

Without naming specific companies, he told a meeting of Russian business leaders at the Kremlin that the corporations should “simply disappear” or become joint stock companies, with many of their state privileges removed. “I think that at some moment the creation of state corporations got out of control,” Mr Medvedev said.

These corporations are the domain of important siloviki.  A strike at the corporations would be a strike at them.

Second, John Helmer’s Dances With Bears reports a development which sounds like a preemptive strike by the Sechin/Rosneft interests against the Gazprom interests:

Gazprom, Russia’s leading company, has told Fairplay that reports that Deputy Prime Minister Igor Sechin agreed this week with the Turkish government to reroute the South Stream gas pipeline on to Turkish territory do not mean that Gazprom has decided to lay a land segment of the pipeline in Turkey, and bypass Bulgaria altogether (for the route until this week, see map).

Sechin, who is a well-known rival and critic of Gazprom CEO, Alexey Miller, was reported as agreeing on October 19 with Turkey’s Minister of Economics, Taner Yildiz, to reroute South Stream through Turkish territorial waters, and in exchange, to supply Russian crude oil to a new pipeline across Turkey from the Black Sea port of Samsun to the Aegean Sea port of Ceyhan. According to a Kommersant reporter granted special access to Sechin, the new scheme has been in negotiation with the Turks since Prime Minister Vladimir Putin was in Ankara on August 6. Ahead of Sechin’s arrival to meet Yildiz in Milan on Monday, Russian officials were working out a more ambitious scheme, according to the Kommersant report, which has the dramatic effect of replacing Bulgaria as Russia’s energy transit partner for both oil and gas with Turkey.

. . . .

The hint in Kommersant, however, that Sechin has moved South Stream away from Bulgaria altogether produced angry press comment in Sofia, the Bulgarian capital, where the government denies it is losing to Turkey both the gas pipeline and the Burgas-Alexandropoulos crude oil pipeline, which Moscow has been backing for more than a decade — until now. Bulgaria’s Minister of Economy, Energy and Tourism Traycho Traykov flew to Moscow for talks today.

Gazprom’s principal spokesman Sergei Kupriyanov refuses to answer questions, adding to the impression that his company’s leadership is in disarray over Sechin’s moves towards Turkey. A Gazprom source told Fairplay Russia has asked Turkey for permission, and received it, to explore the territorial waters of Turkey to find out whether the area is suitable for the pipeline. A southward deviation of the planned route under the Black Sea is being sought by Moscow in order to skirt Ukrainian territorial waters. “If it is suitable”, the Gazprom source said, “then the pipeline may be laid across the Turkish marine territory. Where it goes next – to Turkey or to Bulgaria or elsewhere – is not decided yet.”

The doubt in that last sentence is challenged by the Bulgarians, who claim they have already signed commitments with Putin to lay South Stream across Bulgarian land territory.

Still somewhat murky, but given the history between the Rosneft and Gazprom interests, it is highly plausible that this represents a glimpse of a fierce row between the two.  (Also, it provides yet another illustration of something that I discussed in a post on BP’s hapless dealings in Russia: what could BP management possibly have been thinking when they went to Sechin for help to broker a deal with Gazprom?)

It will be of great interest to see what specifics Stratfor produces to support its view that a Kremlin war is underway.  The dynamics of the duumvirate are likely to be the most visible manifestation of any tension.  Medvedev’s escalation against the state corporations–a Putin creation–could be one important indication of destabilization.  Similarly, public feuds over privatization and government support for certain businesses would be another indication of political ferment.  Perhaps ironically, efforts to promote political stability and conformity, and stamp out any means by which opposition elements could coordinate and coalesce are another indicator of political fissures; the natural reflex of the insecure is to attempt to extend and strengthen control, whereas the secure can tolerate a modicum (or more) of criticism and opposition.  The almost comical election rigging is consistent with a fear of instability and a perceived imperative to restore control; so are the moves against the last vestiges of (relatively) independent television in the country.

Churchill famously remarked about the bulldogs fighting under the carpets in Russia.  The balance of power between competing interests in a natural state like Russia is tenuous, and prone to breakdown during periods of stress.  Given the opacity of the system, growls emanating from under the carpets are often the first sign that such a breakdown is occurring.  Stratfor claims to hear them.  It bears keeping an ear cocked to determine whether it is right.