Streetwise Professor

December 10, 2014

Judo Pays, Even When the Torrent of Rents Turns Into a Trickle

Filed under: Energy,Politics,Russia — The Professor @ 8:33 pm

As the capo di tutti capi of the natural state that is Russia, Putin’s primary responsibility is to distribute rents in order to secure political support. This is a relatively easy task when oil prices are high and the money is cascading in. Things are somewhat more challenging when the torrent turns into a trickle, as now.

Those closer to the tsar get taken care of: those less favored have to get by on scraps. Putin’s judo buddies-Gennady Timchenko and the Rotenbergs-are the closest to him, and they are continuing to live off of state largesse:

Having grown rich on government contracts during the boom in Putin’s Russia, friends of the president are benefiting anew as times grow tough. Lucrative orders keep rolling in for the favored few even as western sanctions and a collapse in oil prices push the economy to the brink.

The development has polarized Russia’s oligarchy and pitted Putin’s small circle against less well-connected rivals in a battle for money and privilege.

Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko — both targeted by U.S. sanctions for their ties to the president — are landing a growing amount of state contracts. Together, they have won at least 309 billion rubles of work since U.S. sanctions were imposed in March, filings show. That figure — which works out to about $8.1 billion at the average exchange rate over the period — is 12 percent more than they received in all of 2013.

A Rotenberg-affiliated company is also about to secure a 228-billion-ruble order to build a bridge to Crimea, which Russia annexed in March, according to a high-ranking government official, who spoke on the condition of anonymity because the contract hasn’t been officially awarded.

Since the judo gang (and Sechin too) is getting a bigger slice of a shrinking pie, others are becoming resentful:

Executives who are used to prospering from government ties complain privately they are being elbowed aside. One Russian billionaire said Rotenberg and Timchenko have all but cornered the market in government contracts. He spoke on the condition of anonymity to avoid jeopardizing his companies’ chances of winning business.

The question is whether this discontent will coalesce into a an opposition that can challenge Putin’s rule. At present, I think that is not much of a threat, because if Putin is saving all the carrots for his friends, he keeps a tight grip on the knout to bash anyone who might dare to oppose him. The fate of Vladimir Yevtushenkov and Bashneft serves to concentrate the mind of anyone thinking of challenging Putin, and coordinating opposition from several grasping, suspicious, and short sighted oligarchs is extraordinarily difficult.

So the Putin system will wheeze along, making some enormously wealthy, and letting the devil take the rest.

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  1. And 2 out of 3–Brent and the Ruble came perilously close to 63 today.

    Comment by The Pilot — December 10, 2014 @ 9:33 pm

  2. @Pilot-I guess we have to determine whether we are talking about the RUBUSD (which was about 55 today) or the Ruble basket (.55xRUBUSD+.45RUBEUR), which was about 61.

    Urals-Med (which is the price that really matters to Russia) was below 63. The basket and Urals-Med could well cross tomorrow at around 62 . . . which is Putin’s current age.

    The ProfessorComment by The Professor — December 10, 2014 @ 10:44 pm

  3. I doubt Yevtushenkov ever thought about challenging Putin – he’s hardly the challenging type. But he happened to control a well-managed oil company that generated attractive cash flows while increasing output. Perhaps someone very close to Putin wanted it real bad. “Please, Vlad, may I have it?” Or, perhaps, Putin is out to re-nationalize the oil sector. Even after Yukos and Russneft, the seizure of Bashneft stands out because it seems so random and unmotivated (“lawless” does not surprise anyone, but “illogical” still baffles). Yevtushenko always played the Kremlin’s game dutifully – look at his doomed Indian investments. The implications is there are no rules anymore, not even an informal code for non-KGB oligarchs. “Whatever we want, we take.”

    Comment by Alex K. — December 11, 2014 @ 12:30 am

  4. Actually there is a code. When Sechin says he likes your company that is code for get your personal affairs in order immediately.

    Comment by pahoben — December 11, 2014 @ 3:47 am

  5. Or, perhaps, Putin is out to re-nationalize the oil sector. Even after Yukos and Russneft, the seizure of Bashneft stands out because it seems so random and unmotivated

    Somebody else (might have been SWP himself) that Rosneft, under pressure to increase production and finding itself incompetent to do so, saw seizing another oil company as a way of hitting production targets. That Peter has been robbed to pay Paul will not concern Sechin and his buddies one jot: provided he can slavishly inform Putin that Rosneft’s production is up, he’s done his job.

    Comment by Tim Newman — December 11, 2014 @ 4:06 am

  6. Somebody else (might have been SWP himself) suggested that that Rosneft

    Comment by Tim Newman — December 11, 2014 @ 4:07 am

  7. As I’ve often opined, that nobody can see where a potential challenge might come from tells us nothing: Russia has a long history of their leaders being deposed suddenly, usually violently, and by somebody whom nobody suspected. Khruschchev’s ousting of Beria is probably the best example, poor Lavrentiy never saw it coming and probably never quite believed it was that bumbling Ukrainian who’d pulled it off right up until he was shot in the face a few weeks later. Only Stalin managed to keep himself in the top position by engaging in insane paranoia and shooting any potential enemy both real and imagined: Uncle Joe didn’t feel the need to pay sweeteners to keep his minions in line, being allowed to live was reward enough. I think it’s a reasonable guess to assume there is a plot to oust Putin developing right as we speak, and it is probably already in a very advanced stage. If and when it comes, the world will wake up to find the old leader under house arrest, his minions on the run, and a new guy in the Kremlin of whom nobody knows a thing. The new guy might well not even be opposed to Putin in terms of policies, simply somebody who fancies his turn at playing leader. An economic crisis will merely provide an opportunity, and the more Putin rails against the West and suppresses imaginary opponents at home, the easier it will be for a real opponent to make his move. I think the whole ruling elite are living extremely dangerously right now.

    Comment by Tim Newman — December 11, 2014 @ 4:15 am

  8. SWP, have you read this book and/or review?

    “Putin’s Kleptocracy: Who Owns Russia” by Karen Dawisha

    Comment by JavelinaTex — December 11, 2014 @ 7:15 am

  9. a.k.a Fun fun fun a.k.a

    Comment by Dixi — December 11, 2014 @ 7:38 am

  10. a.k.a. 🙂

    Comment by Dixi — December 11, 2014 @ 7:46 am

  11. Even economics is stronger than Putin, and his gangster charm. Low oil prices brought down the Soviets, then Yeltsin, and very likely Putin. Stong men like Mugabe can hold on when his citizens are dirt poor, but Russia is too worldly for him to control. Fundamentals matter.

    Comment by scott — December 11, 2014 @ 10:56 am

  12. @JavenlinaTex. I’ve read it, or the first 40 pct of it. It is a hard slog. Terribly written & organized, which will limit its appeal and its impact. Dawisha does an impressive job at putting together all the disparate strands of Putinist corruption, and makes a strong case that he enriched himself from the day the Soviet Union collapsed, if not before. I just wish her facts had been in the hands of a better writer and a better editor.

    The ProfessorComment by The Professor — December 11, 2014 @ 12:03 pm

  13. @Tim. The most likely source is from within the security services, a la August, 1991. When does Putin go on vacation next? (Ironically, of course, Gorbachev was vacationing in Crimea when the coup attempt occurred.) Some time when he is away from Moscow, ideally far away (e.g., Siberia, or one of the ‘Stans), would be an opportune time.

    I agree that things are cooking as we sit here today, and that the stove is in the Lubyanka.

    The ProfessorComment by The Professor — December 11, 2014 @ 12:08 pm

  14. @Tim-Yes. ‘Twas me. Though others made a similar suggestion around the same time.

    The ProfessorComment by The Professor — December 11, 2014 @ 12:08 pm

  15. @Alex K. I did not peg Yevtushenkov as a potential plotter. I said that the raid against him was in part pour encourager les autres. A reminder to everyone that their property is contingent.

    To the Sovok mind, there is a perverse logic in going after someone who is not in outright opposition, or who is perceived as a threat. It tells everyone just how arbitrary the system is, and that sows fear. So random and unmotivated are features, not bugs, in an authoritarian regime.

    That said, pace Tim, I did and do believe that the primary driver was that he owned an asset that Mullet Man fancied. That asset has been nationalized, and after a decent interval of time (if this word can be used in any context involving Putin, Sechin, Russia, etc.) it will wind up in Rosneft’s portfolio.

    The ProfessorComment by The Professor — December 11, 2014 @ 12:13 pm

  16. Putin is in a good position to remain in power for the indefinite future. He knows who he needs to keep happy to remain in power and is sacrificing all those who are not necessary. Those who are sacrificed won’t do anything against Putin unless it looks like Putin will fall. They won’t risk premature opposition that allows Putin to dispose of them and divide their assets to his remaining supporters.

    What this does do is detach a whole bunch of people who used to be active supporters to neutral or passive opposition. This means if the regime does come under threat, they won’t support it. But they won’t be the ones threatening Putin.

    Is there a secret conspiracy to remove Putin by people in his inner circle as Tim Newman suggested? I don’t think so at this time. Khruschev/Beria/Malenkov all operated in a situation where the paramount leader was already gone, and each was attempting to ascend to the top. Stalin (and Trotsky and Zinoviev and Kamenev) did the same after Lenin’s death. But they all waited until Lenin and Stalin were dead. Nobody in Putin’s circle could remove Putin and let Putin live; it would be too dangerous for them as Putin could regain power. Which means they would need to kill him; and that is a step a bit too far. Not only would there be some tinge of personal loyalty by others in the circle, unleashing that level of violence would put them in jeopardy going forward. A palace coup could only take place if there was a strong consensus that Putin was unhinged and his actions were threatening all of them. Furthermore, any such conspiracy would be prone to one of the conspirators defecting and alerting Putin which means there can be no long term conspiracy. It can only happen in an ad hoc fashion when ruthless people agree to move quickly in the face of turmoil to “save the regime”. That means they must react to events opportunistically, not create them.

    The only way Putin will be removed is by mass unrest against Putin by the populace. That might trigger a palace coup, but we are a long way off from that kind of unrest. Communism had already lost much of its internal legitimacy by that time, and the Soviet economy was in far worse shape. Furthermore, it took several years of low prices to destablize the Soviet Union. Lastly, Gorbachev was an idealist and fundamentally misunderstood the forces he was unleashing, and how rivals to his power had been created in the constituent republics of the USSR. This dynamic does not exist today with Putin.

    I think Putin is well set to survive for at least another 5-10 years. He may lose the ability to destabilize Europe or play havoc in the near abroad, and he may become increasingly under siege during that time. He may even need to make tactical concessions to his internal opponents from time to time. I don’t see him being removed though unless there are some very traumatic events that happen during the next several years.

    Comment by Chris — December 11, 2014 @ 12:26 pm

  17. @Professor: Rosneft’s Rub625 bn bond placement at below-OFZ yields is worth taking a look at. The way it appears to be structured hardly squares up with the Central Bank’s defense of the ruble. It looks like it’s going to kick the ruble further down (unless priced in) and inflation further up.

    @Chris: Yes, social unrest in industrial towns (dozens of Russian Fergusons perhaps) will be impossible to drown in cash this time. I wrote a few lines on that on my blog. But will it translate into a general revolution, a Takhrir? I’m not sure. My bet is with mother Nature – Putin is 62 and probably not in the best possible shape. There’s also a chance he’s literally losing his mind.

    Comment by Alex K. — December 12, 2014 @ 2:06 am

  18. Doesnt have to be mass unrest. Quite frankly the mid grade FSB guys are watching the higher ups privatize FSB assets and probably realizing that London isnt going to be as welcoming to them as their predecessors who just happened to be in the driving seat 15 years ago or so. No one really expected Berezovsky to be purged and hounded out of the country as rapidly as he was. Especially as Putin’s centralization of power isnt just bad for central FSB guys, its also bad for those FSB guys in the regions whose regions are rich enough with assets worth stealing. Ie Bashneft’s previous owner is also getting fucked by Putin, and he represents another slice of provincial elite that is being choked off as more and more assets are diverted to a smaller circle. Tahrir after all wasnt really a popular revolt, it was a military coup against a perceived inept manager.

    Comment by d — December 12, 2014 @ 9:00 pm

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