Modern Day Kremlin watching: back to the future Reviewed by Momizat on . [caption id="attachment_5501" align="alignnone" width="614"] There is thus a resort, entirely justified, to scrutinising personalities and their proximity to Pr [caption id="attachment_5501" align="alignnone" width="614"] There is thus a resort, entirely justified, to scrutinising personalities and their proximity to Pr Rating: 0

Modern Day Kremlin watching: back to the future

There is thus a resort, entirely justified, to scrutinising personalities and their proximity to President Putin which involves consideration, say, of whether they served with Putin when he held essentially the Deputy Mayor`s spot in St Petersburg.

There is thus a resort, entirely justified, to scrutinising personalities and their proximity to President Putin which involves consideration, say, of whether they served with Putin when he held essentially the Deputy Mayor`s spot in St Petersburg.

Winston Churchill once memorably described Russia as “a riddle, wrapped in a mystery, inside an enigma” but that at least, the country`s national interest would reveal its intentions. He also famously compared Kremlin power struggles to bulldogs fighting under a carpet: “An outsider only hears the growling, and when he sees the bones fly out from beneath, it is obvious who won.”

In days past, academics and diplomats would look at the lineup on the Kremlin walls at the May parade or whatever celebration and, depending on the individual`s position, pass judgement on who was up and who was down in the hierarchy. In the event of a person`s absence, who was out and who had most likely “gone to the wall.”

This is something of a return to this past art as observers seek to divine what is going on in the otherwise opaque dealings that serve as the apparent exercise of power in Russia. In Soviet times, there was at least the appearance of national interest alluded to by Churchill but it remains unclear whether there is any such polar star, let alone an ideology, by which the present incumbent Russian government is driven.

There is thus a resort, entirely justified, to scrutinising personalities and their proximity to President Putin which involves consideration, say, of whether they served with Putin when he held essentially the Deputy Mayor`s spot in St Petersburg – think of Dmitry Medvedev, part of the ill called tandem who became President in 2008 and is now Putin`s premier, and Igor Sechin, head of the Russian oil major, Rosneft.

There are those linked to Putin`s time in the KGB, who have been pulled upwards by Putin`s ascent as such individuals have obtained favourable sinecures in politics and business – think Sergiy Ivanow, the current Chief of the Presidential Administration.

And there are those linked to the Ozero Cooperative – a collective effort in the 1990s by Putin and close acquaintances, including some from childhood, to build lakeside homes where they could get away from it all and perhaps enjoy a kebab grill together in the country quiet. Think of Vladimir Yakunin, who also served in the KGB, but until recently was head of Russian Railways and also Yury Kovalchuk, considered Putin`s private banker.

A number of these parties, as well as other acquaintances, have become fabulously wealthy due to their connections to Putin and consequently have been sanctioned by the US and EU  as part of the western targeting of Putin connected persons arising from the downing of MH-17 in eastern Ukraine.

Thus what to make of recent stories involving two of the above? A reshuffling of the “Old Guard” or more mundane reasoning?

Taking the most recent first: Vladimir Yakunin, the head of Russian Railways is to step down and become the Senator for Kaliningrad. Russian Railways, according to its website, is:

  • Operator of the second largest network in the world with 85,200 km of track – 43,100 km of which are electrified.
  • Carries over 0.95 bln passengers and 1.2 bln tonnes of freight annually across 11 time zones.
  • Responsible for 42.3 percent of Russia’s total freight traffic (including pipelines) and more than 32.7 percent of passenger traffic.
  • Employs over 976,116 employees.
  • Russia’s fourth-largest company by revenue – over RUR 1168.8 bln for 2014 (according to IFRS). It is also loss making, notwithstanding government subsidies and at 2014 year end, its current liabilities exceeded its current assets.

In short, it is a high profile company which required a trusted loyalist to administer by virtue of its centrality to the Russian economy. It is also in need of dramatic investment, particularly in the light of significant projects underway or anticipated. One project floated in March 2015, a Trans-Eurasian belt Development to link the Russian Far east with the west necessitating another railway line alongside the Trans Siberian railway is likely to require trillions of dollars. More mundane, but no less important projects, involving modernisation and upgrade of existing links, are likely to cost tens of billions of dollars.

Having your CEO being unable to travel due to sanctions is not conducive to that required level of personal interaction with western suppliers, contractors and financiers necessary to achieve practical progress on the above.

Yet another possible, albeit far more mundane, reason might be deduced from a look at the 2014 financial statements and prior years. In 2013, a global accounting firm issued a qualified audit opinion on the 2013 year end results on the basis that it was not entirely clear that what the company said it possessed as fixed assets was properly established in fact.

Fast forward to the 2014 financial statements and inside we see a reference to the accountants having to correct the 2013 results for this error. Thus the 2013 net profit of RUR 36.7 bln was transformed into a restated loss of RUR 198.2 bln. Sorry about that.

The fact that the 2013 accounts also seem to have a restatement for such errors arising also in 2012 suggests that the CEO might have spent too much time on visionary projects  than on ensuring his company`s financial statements were in order.  A move up and out to the Federation Council seemed the least one could do to a long term friend and loyalist in Putin`s eyes.

The case of Igor Sechin is more interesting given the close relationship with Putin going back over twenty years.

Sechin, a consummate bureaucratic infighter, has been typically accustomed to getting his own way in Kremlin disputes. Rosneft’s requests for emergency financial assistance from the government –  it borrowed heavily to buy another oil major, TNK for USD 55 bln  –  have however been rejected twice by the Russian Finance Ministry: first in October 2014 and then again on June 3.

Putin publicly criticised his former deputy chief of staff on February 4, 2015 asking rhetorically “who is the real Sechin?”

Further, Sechin has suffered reverses in seeking to challenge Gazprom over its gas monopoly. An attempt to force Gazprom to cede pipeline space so that Rosneft could transport gas from the fields off northern Sakhalin to the export terminal at the island’s southern tip to meet Japanese contracts failed and court judgements since then have upheld Gazprom`s hardline stance.

This reversal of fortune would typically have gone to the country`s real court of appeal, namely Putin, but he has proven reluctant so far to side with his former deputy. Gazprom`s own considerable difficulties would have been compounded by a decision in favour of Rosneft.

Interestingly, the handling of Bashneft Oil also seems to suggest Sechin has not so far benefitted from its expropriation last year from the Russian conglomerate Sistema, despite widespread suspicion that Sechin had been interested in acquiring the oil company and had initiated the raiding action.

The fact that the Federal Agency for State Property Management holds the 70 percent plus stake in Bashneft Oil and not Rosneft suggests that the Kremlin may not be so minded to help Rosneft out of its difficulties with this asset and Rosneft does not have the financial capacity to acquire it.

The national interest is thus replaced by money interests. This makes today`s Kremlin watching difficult as not all the various economic interests are obvious – some are hidden and some players have multiple conflicting interests, both economic and political. A return to Kremlin watching should not be grounds for misplaced optimism of so called hardliners  being sidelined. Instead a closer look at “following the money” may be more instructive.

Photo courtesy of Łukasz ‘Loukas’ Liniewicz/Wikimedia Commons.

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