Streetwise Professor

August 11, 2009

The Junior Partner Speaks

Filed under: Energy,Politics,Russia,Uncategorized — The Professor @ 9:45 pm

Dmitri Medvedev continues his split personality performance, sounding liberal on economic matters, but a chest-thumping Russian nationalist on foreign policy, especially on matters related to the near abroad.  The tragedy is that his economic pronouncements have virtually no possibility of being implemented, but that his foreign policy statements likely reflect the future course of Russian policy.

With respect to economics, Medvedev ordered a legal inquiry into Russian state corporations:

President Dmitry Medvedev ordered prosecutors to investigate Russia’s state corporations on Friday, questioning the need for the powerful institutions championed by Prime Minister Vladimir Putin.

The state corporations, which enjoy privileged legal status, are part of the economic vision Putin enacted during his two terms as president. He touted them as engines of Russia’s development that will eventually be sold to the private sector.

On Friday, the Kremlin released a brief and toughly worded statement in which Medvedev ordered an official probe into these firms. “The President ordered (prosecutors) to present their proposals including on whether there are reasons to further use … structures like state corporations.”

. . . .

Medvedev’s order to Prosecutor General Yury Chaika, who normally handles high-profile criminal probes, called on him “to pay special attention to general questions about how effectively (these firms) are using the state property transferred to them.”

. . . .

Some analysts suggested that Medvedev’s order on Friday was aimed at finding extra revenues amid the economic crisis rather than challenging the legacy of Putin, with whom Medvedev rules Russia in a so-called “tandem” power-sharing arrangement.

“When the state of the budget is one of the sore points for the Russian economy, such measures are directed at finding extra sources of financing in case oil prices fall,” said Yaroslav Lissovolik, chief strategist at Deutsche Bank in Russia.

Roland Nash, head of research at Renaissance Capital, Russia’s largest investment bank, said the order was part of Medvedev’s anti-corruption drive. “He has talked constantly about cleaning up Russia, and a very good place to start would be the state corporations,” Nash said.

Medvedev is right that the state corporations are a massive millstone around the neck of the Russian economy.  It is particularly laughable to think that such monstrosities, which have every incentive to throttle competition, can be the source of innovation.  They are, instead, far more likely to be means for the connected to tunnel state assets, as Mr. Nash states openly, and which Medvedev obliquely suggests with his statement about the “effectiveness” of the use of state property.

Medvedev also stressed his intention to curb burdens–including the burden of corruption–on small and medium-sized businesses:

Russian leader Dmitry Medvedev Wednesday attacked red tape and official extortion of  small businesses, a sector he wants to play a bigger role in the economy and provide more jobs in the economic downturn.

Modernizing the economy and reinforcing the rule of law are priorities for Medvedev, who took over last year from his ally and mentor Vladimir Putin, now his powerful prime minister.

“Experts say money spent by businessmen on overcoming red tape takes up a considerable part of (businesses’) annual revenues,” Medvedev told a meeting of officials gathered to discuss the issue in the town of Zvenigorod outside Moscow.

“Straightforward extortion of money (by officials) also exists, and that is simply disgusting,” he said.

Promoting small and medium-sized businesses is a major part of Medvedev’s plans to modernize Russia, whose wealth remains heavily reliant on the export of oil, gas and minerals. Those sectors, along with heavy industry, continue to employ large numbers of people in Russia.

Again, these statements are exactly correct.  The rate of business formation, and the proportion of output produced by small firms, is far less in Russia than eastern Europe, for instance, and corruption is a major reason.

But if you search “medvedev state corporations” you will see that the President has been saying these things throughout his term, and nothing happens.  Indeed, the more he speaks, the more you get the impression that he is in fact powerless to change things.  Moreover, that makes me wonder whether Putin actually prefers it that way.  The disconnect between word and deed makes Medvedev’s impotence plain, which in turn reinforces perceptions that Putin is actually in charge.

Moreover, when it comes deeds, they often don’t match his words.  Indeed, there is a sort of zig-zag nature to Medvedev’s actions regarding the economy and state corporations.  For instance, last month he signed legislation creating a state corporation to build tollways.  (Road building, it might be added, is outrageously corrupt, even by Russian standards, contributing to the appalling quality and astronomical costs per kilometer of road built.)  He also signed a decree transferring the assets of 426 state companies to Russian Technologies, the poster child for bloated state corporations:

In a presidential decree signed on July 10 and announced on July 14, Medvedev approved the transfer of the state’s assets in 426 companies to Russian Technologies, the giant state corporation that was formed on the basis of the state arms trader Rosoboronexport and already controls titanium maker VSMPO-AVISMA and automobile manufacturer AvtoVAZ (Reuters, July 14; Moscow Times, July 15). Russian Technologies is headed by Sergei Chemezov, who served with Vladimir Putin, the former Russian president and current prime minister, in the KGB in Dresden, East Germany, in the 1980s.

Commenting on Medvedev’s decree handing over state assets to Russian Technologies, Mikhail Fishman and Konstantin Gaaze wrote in the Russian edition of Newsweek: “Now Medvedev finds himself in an embarrassing situation. He signs a controversial decree that violates, in the opinion of experts, his own statements about liberalizing the economy.” Fishman and Gaaze quoted experts as saying that while Medvedev’s campaign to replace officials with independent directors on the boards of directors of state companies has “symbolic meaning,” what is needed in practice is “to lower barriers to small businesses and limit the role of state corporations in competitive economic spheres.” Medvedev’s decree moves things in the opposite direction.

Fishman and Gaaze also noted that in signing the decree granting state assets to Russian Technologies, Medvedev has greatly strengthened the position of Chemezov, who, as they wrote, is a key member of the group of siloviki hardliners who continue to surround Vladimir Putin. It remains to be seen whether the continued influence of the siloviki is compatible with Medvedev’s stated goals of fighting corruption and liberalizing the Russian economy.

But he also ousted silovik Chemezov from a presidential commission on modernizing the economy, and the investigations of state corporations may also be aimed at Putin’s pal:

The timing of Medvedev’s order suggests the investigation may be targeted at least in part at Russian Technologies, which is headed by longtime Putin ally Sergei Chemezov, who has recently come under criticism for his management of military plants and AvtoVAZ.

Medvedev on Thursday ousted Chemezov from a presidential commission on modernizing the economy. The Kremlin offered no explanation, but Chemezov reportedly had missed several meetings.

What’s the message? You can be corrupt, but don’t miss a meeting?

On foreign policy, though, Medvedev has been the epitome of consistency, and adherence to the siloviki hard line, on Georgia in the days surrounding the anniversary of the war, and now on Ukraine:

President Dmitry Medvedev launched a Kremlin drive to bring Ukraine into its fold on Tuesday as he waded into the country’s presidential elections with a call for a new leader to break with the “anti-Russian” policies of the incumbent and to co-operate with Moscow.

In an open letter to Viktor Yushchenko, neighbouring Ukraine’s pro-western president, the Russian leader refused to renew diplomatic ties by saying he was postponing the dispatch of a new ambassador to Kiev until there was a change in relations.

Mr Medvedev criticised Mr Yushchenko for pursuing anti-Russian policies that include arming Georgia in its war against Russia last year and pursuing Ukraine’s entry into Nato while “ignoring the opinion of your country’s citizens”. In his strongest attack yet against Mr Yushchenko, Mr Medvedev accused him of putting gas supplies to Europe at risk and departing “from the principles of friendship and partnership with Russia”.

“We have the impression that Kiev consistently seeks to break traditional economic ties with Russia, first and foremost in the energy sector,” said Mr Medvedev. “Russia hopes a new Ukrainian leadership will be ready to build ties between our countries, ties that will indeed answer the true hopes of our peoples in the interests of strengthening European security.”

Here’s more:

Russian President Dmitry Medvedev waded into neighbouring Ukraine’s presidential election campaign on Tuesday, attacking the incumbent as “anti-Russian” and urging the next leader to cooperate with Moscow.

In an open letter to Ukraine’s pro-Western President Viktor Yushchenko, Medvedev said he would postpone sending a new ambassador to Kiev, and accused Yushchenko of putting gas supplies to Europe at risk by disrupting ties with Moscow.

. . . .

“This is a tough diplomatic demarche,” said Vladimir Fisenko, head of the Ukrainian think-tank Penta. “This is a signal for the presidential campaign, aimed against Yushchenko.”

“It is also a signal to all Ukrainian politicians that it’s time for Kiev to change its course.”

It is widely agreed that the real issue here is gas:

Alexei Mukhin, the head of the independent Russian think-tank Centre for Political Technologies, said gas was the Kremlin’s main source of concern.

“Russia is preparing for delays in gas payments in December and January,” Mukhin said. “Many in Ukraine are likely to try and use the gas card in their election campaign.”

Yushchenko has criticised a deal on gas prices and transit that Tymoshenko struck with Russian Prime Minister Vladimir Putin in January.

An EU-Ukraine deal on rebuilding Ukraine’s gas network infuriated Moscow because Russia was not involved, and Medvedev mentioned this again in a posting on his website.

“The supreme Ukrainian leadership is negotiating the supplies of gas — Russian gas — with the European Union, bypassing Russia, and is signing a document contradicting the Russian-Ukrainian deals of January,” he wrote.

This is not surprising at all.  And to be honest, I’m actually pleased by the elfin Medvedev’s attempt to play tough guy.  (But, Please!  No shirtless photos!)  Why?  Well, because it worked out soooooo well for Russia last time that it interfered in the Ukrainian Presidential election.  That  was decisive in sparking the Orange Revolution.  (Funny, nobody seems to mention that particular triumph of Putin.  Sort of down there with Beslan, Nord Ost, the Kursk.)

You’d think they’d learn.  Well, no actually.  And heavy-handedness would go over particularly badly if it appears that the main objective is gas.  Even the heretofore supine Europeans are increasingly aware of the effects that Russian dominance of Ukraine would have for their energy security.  They made the first tentative steps towards providing support for the Ukrainians on gas, and although they seem reluctant to get to deeply involved in dysfunctional Ukrainian politics, they may have little choice if Russia reverts to form.  And Medvedev’s broadside suggests that they have every intention of doing so, thus setting up a confrontation between Russia and Europe.  A confrontation that would reach its peak in the depths of winter, nearly on the anniversary of the 2009 gas war.  Would Russia spark another gas war in a gambit to  swing the election?  Would a desperate Yuschenko or Timoshenko do so in order to stoke a nationalist surge in the hopes that this would prevent the election of Russian ally Yanukovych?  I imagine something spectacular will happen, as both sides have a predilection for brinksmanship.

The months leading up to the Ukrainian election will be very interesting indeed.

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  1. Interesting that you are pleased at the prospect of another “Orange Revolution” in Ukraine, considering how the last one brought the present leadership to power. Yushchenko obsesses on a very flexible number of Ukrainians dead over seventy years, while ignoring Ukrainians dying now. Why do you think another “Orange Revolution” would have a better result for Ukrainians than the last one? No reason at all.

    Comment by rkka — August 12, 2009 @ 4:20 am

  2. There’re two ways of looking at Medvedev’s letter in terms of unnecessary roughness, or Russia acting accordingly to a not so hospitable (to Russian concerns) Ukrainian president. There’s a reasonable basis for believing the former, while also thinking that this action by Medvedev will not significantly change things. This seems to be the Russian government’s way of firmly making clear that no matter what Yushchenko does from hereon, he’s not to be given any consideration among the more pro-Russian of elements in Ukraine. Part of this thinking might keep in mind any pre-election charm offense.

    In comparison to Tymoshenko – Yushchenko and Yanukovych aren’t as go with the flow. With the upcoming election in mind, recall the first post-Soviet presidential vote between Kravchuk and Kuchma. Running on a pro-Russian platform, the latter beat the former, only to then drift away from that slant. Later years saw Kuchma as well as Kravchuk (who went from an antagonistic position towards Russia to a more moderate one during the so-called “Orange Revolution”) drift again.

    With others involved, this saga could very well linger on. At the same time, in a hypothetical Yanukovych presidency, don’t be surprised with Ukraine remaining out of NATO and better prospects for a post-2017 Russian naval lease in Crimea.

    As of now, it’s questionable whether a Machiavellian jockeying against Yanukovych will succeed. For many, recent history suggests to be wary of making any firm predictions at this juncture.

    At play and periodically overlooked are competing oligarchs whose differences aren’t exclusively related to Russia-West issues.

    Comment by Cutie Pie — August 12, 2009 @ 5:06 am

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