Russia 101026 Basic Political Developments

Former Putin prime minister talks about his former boss

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Former Putin prime minister talks about his former boss

Mikhail Kasyanov tells Americans how he traveled the road from prime minister to Vladimir Putin to an outspoken leader of the Russian political opposition. His story of life inside the Kremlin reveals much about the enigmatic Putin.

By Francine Kiefer / October 25, 2010

It was a good question to put to Russian opposition leader Mikhail Kasyanov as he made his rounds in Washington last week.

Mr. Kasyanov was once prime minister to former President Vladimir Putin. When Kasyanov visited with journalists and Russia experts at the German Marshall Fund on Oct. 19, he was asked what motivated him to become prime minister ... and what, later, convinced him that Russia was headed in the wrong direction.

The answer reveals as much about the enigmatic Mr. Putin, now in Kasyanov's old chair as prime minister to President Dmitry Medvedev, as it does about the frank-speaking Kasyanov, who is one of Russia's most prominent opposition figures.

Kasyanov explained that he and Putin struck a deal during the presidential election of 2000. If Kasyanov were to accept the premiership, he would want Putin's backing for major structural reforms – of the pension system, for instance, and the budget. Fine, agreed Putin. All Putin asked in return was for Kasyanov to stay out of his turf. No interference with the regions and their governors; no interference with security (Putin used to head the Russian security service, successor to the KGB).

All went swimmingly. But then Putin began to move on Russia's big businesses, including the October 2003 arrest of one of Russia's wealthiest men who also challenged the political status quo, Mikhail Khodorkovsky. Then came the winter 2004 cut-off of Russian gas supplies to neighboring Belarus, governed by autocrat Alexander Lukashenko.

"It was minus 25 degrees in Minsk and Putin gave instructions to just cut gas supplies," Kasyanov recalls. The cutoff, over a dispute about pipeline ownership and prices, also affected Poland and Germany. "All the prime ministers of Central Europe were calling me," Kasyanov said. Putin "said to me, just, Lukashenko didn't respect him. That was the reason just of cutting gas for millions of customers.”

In the fall, the Beslan hostage crisis occurred, in which more than 300 people, including children, were killed. That resulted in political "reforms" that replaced elected regional governors with ones appointed by Putin.

Kasyanov continued: "I came up to him and I said, 'I cannot do anything more with you and your government'...He said, 'You're making a mistake. If the tax police comes to you, and you have problems, call me. But me, personally.' "

The tax man did come. So did thuggish pro-Kremlin youths when Kasyanov campaigned for president in the 2008 presidential election. He collected more than the requisite 2 million signatures to qualify for the ballot, but in the end, Putin's bureaucrats kept him off. After that, the youths left him alone.

"Putin believes that everything in this world can be purchased," said Kasyanov. And, being a former KGB man, Putin believes in the preservation of an iron-linked hierarchy. When Russian President Medvedev recently fired Moscow mayor and Putin loyalist, Yury Luzhkov, many in and outside of Russia wanted to believe it was a sign of independence on the part of the more liberally minded Medvedev.

But Putin was simply eliminating risk in a political relationship that was disturbing the chain of command, according to Kasyanov's interpretation. Luzhkov was lower in rank, and he had to go. Appearances sometimes to the contrary, Medvedev is not going to break from Putin, but is merely Putin's "senior assistant."

Of course, all of this is just one man's side of the story. Remember that Kasyanov used to be called "Misha 2 percent" for alleged kickbacks he took as Boris Yeltsin's finance minister – a charge he vigorously denies.

But who are you more inclined to believe? The former head of Russia's security services who has turned back democracy in that country? Or someone who campaigned in frigid weather, person to person, shut out from all major media, to collect a couple of million signatures so he could run for president?

Elena Shaftan's letter from Moscow

by Matthew Goodburn on Oct 26, 2010 at 00:01

Jupiter Emerging European Opportunities co manager Elena Shaftan (pictured) returns from Moscow with a fresh perspective on her native country. While she still has reservations over Vladimir Putin's manners, she is generally more impressed by his leadership style.

Here, in her own inimitable way, Shaftan discusses a new found confidence among its people, and why Russia is comparatively better placed than it has been for some time against many of its peers.

She sees a relatively healthy financial sector, a renewed focus on transparency and a determination to stamp out corruption. Above all, Shaftan sees an equity market that looks historically cheap next to many of its emerging market rivals and anticipates a healthy Q3 corporate results season.

Her letter follows:

On a business trip to Moscow 13 years ago, my suitcase disappeared from a hotel luggage room. The response from staff was surly and uncooperative and the suitcase was never found.

At the beginning of October, I took another business trip to Moscow and contrived to leave my suitcase in the boot of a yellow cab. On the basis of my previous experience, I assumed it would never be seen again. Nonetheless I mentioned its loss to the organisers of the conference I was attending. Within an hour the suitcase had been retrieved and returned to me. The question that presented itself was this: what had changed in Russia to produce such a different outcome 13 years on?

The answer is that Russians now value their jobs and see them as an opportunity to make steady, honest money. In my view, this is a sea change in attitudes whose significance cannot be underestimated. Previously, prospects were so flimsy that immediate advancement by any means possible (i.e. corruption and theft) was considered preferable to banking on future earnings from honest employment. Now there is simply greater confidence in the system. And, even if one doesn't like the regime, there is a greater degree of predictability in terms of what the future might hold. That means people and companies can make plans.

Taxi drivers are always my litmus test on arrival. Normally full of complaints and anecdotes, they give you a pretty clear view of the status quo. On this trip, three hours in heavy traffic duly gave rise to a barrage of complaints, but this time, they were not about Russia. They were about Germany and how boring it is, about Italy and how nothing works there, and how wonderful it was for my driver to come back from his three foreign trips a year to the comfort of Russia. “We drink, we fight, but we have fun here. I’d never want to live anywhere else,” he asserted.

It was my first trip to Moscow for a while, as my last few trips had all been to St Petersburg. I got a clear view of how much it has changed. The roads are better than in London or Paris, the streets are cleaner, there wasn’t a single visible beggar or drunk, people were well-dressed – almost too well-dressed – but the biggest change of all was that they looked happier and friendlier than ever before.

The investor conference I was attending was the largest of its kind ever to take place in Russia with over 1,000 participants. More than 700 of these came from domestic companies. Of the foreign investors, instead of a familiar crowd of London-based faces, there were a number of representatives from Asia and the Middle East including sovereign wealth funds and large US-based clients. It constituted a very different mix from what I had been used to.

The highlight of the event was the Iron Man himself – Mr Putin. He is clearly feared by most and has an arrogant and dismissive swagger about him. He read out a previously unseen script, after which he stayed for two hours to listen to other speakers and answer questions. His performance was enjoyed by the Russians as they appreciated his confidence and the impression he gave of being in charge. I sided with the foreigners, however, and found him rather obnoxious.

Having said that, he was there, he was making an effort and the bottom line of his message was this: Russia wants to modernise and re-build and strengthen the economy.  For that it needs foreign capital, something it has frankly never needed before. Hence Russia is prepared to try harder to win this much-needed investment.

I spoke to a large number of influential people including high profile government officials, economists and former government grandees: all people who understand what is going on. These included Arkady Dvorkovich, an economic advisor to the Russian president, Alexei Kudrin, the finance minister, Andrei Klepatch, the economy minister, Aleksey Ulukaev, the deputy head of the central bank, Alexander Voloshin, former chief of staff for both Yeltsin and Putin and now in charge of the Financial Centre and Bella Zlatkis, who is on the board of Sberbank and the government audit committee. Some of these I met in big group meetings, some in more intimate discussions.

The hymn sheet that everybody was singing from was remarkably similar and it went like this: economic growth in the next two to three years will be to the tune of 4% at current oil prices (+/- 0.5% for every $10 of oil). Note this is a slower rate of growth than many had hoped for earlier in the year and half that of pre-crisis levels. Indeed pre-crisis levels of growth are now viewed as frothy, fuelled by unsustainably high commodity prices and high foreign capital inflows. The latter reached $80bn in 2007 or 4.5% of GDP, well above the global emerging market average.

In order for the economy to grow faster, Russia needs to undertake reform in order to attract more foreign capital (current levels stand at under $40bn) and for that it needs innovation, modernisation and better institutions. Those sentiments rang through every single speech at the conference. For example, Dvorkovich started by saying: “We don't want to rebuild the economy because much of it is not worth rebuilding. Our task now is to build a new kind of economy,” and finished with “we live in interesting times – times when we have a chance to change. And we must take personal responsibility for this change.”

How do they want to change? The big discussion in the government for the past couple of years has been innovation versus modernisation. Do they buy in Western technologies and modernise like the Chinese or do they invest in developing their own as the Soviet Union once did? They have taken a sensible middle-of-the-road decision, investing $3bn in nanotechnologies and spending another $3bn on creating a Russian Silicon Valley – a research centre where young brains will be provided with housing and decent salaries in order to work on new technologies and give them an appealing alternative to heading overseas. All of which comes alongside the purchase of technologies for areas that Russia realises it can’t compete in, e.g. auto and aircraft manufacturing.

Having enjoyed eight years of budget surpluses, the government is now planning to run a moderate deficit until 2015. This will be financed by some external borrowing (current levels stand at just 10% of GDP) and a big privatisation programme. This is where the need for foreign investment comes in. Previously Putin's government had made it clear that they didn't want to sell off the national family jewels and would rather go it alone at a slower pace. This turnaround in their thinking is a big change and will see the government selling stakes in large, nationally-owned companies while maintaining a 50%+ share in the early stages.

Another big topic at the conference was government corruption. One of the speakers said: “The number one task of the Russian government is to protect the Russian population from the Russian government”. The finance minister was very frank at a small group breakfast. He said: “Government corruption has got worse in recent years. Government expenditure is five times higher than it was ten years ago and there are now more large contracts for companies to lobby for in areas such as defence, transport and health.” (A three-year draft budget, which allows for a further increase in government spending, has just been submitted.) To cope with this, the government plans to introduce tougher measures and new institutions to ensure the effectiveness and fairness of government spending and the transparency of tenders.

Of course there is scope to be cynical about the government's ability to tackle corruption in an election year. However, some of those close to the finance ministry have suggested that if the higher accountability for spending ends up not being introduced next year, it will simply lead to a moratorium on actual expenditure, reducing the budget deficit and inflation. This is a compromise that Putin has managed to reach with his extremely conservative finance minister Alexei Kudrin. 

The rouble, meanwhile, is expected to carry on appreciating at 3%-5% p.a. and will continue to be free floating as it has been over the past 18 months.

Another big theme was taxation of the resources sector. It became clear that the cuts discussed no more than six months ago will not be forthcoming any time soon i.e. in the next two to three years. Commodities are going to be a cash cow used to finance reform and budget spending, effectively cross-subsidising the domestic economy. Hence we feel comfortable retaining our focus on domestic stocks over resources.

As for the banking sector – the government recently conducted stress tests. While they didn’t publish the results, they are taking immediate action. Of the top 100 banks, 18 failed. These will be bought for a rouble and restructured within the next fortnight. Other smaller banks stand to lose their licences. In a country where there were around 1,300 banks two years ago, there are now 1,000 and that number will be around 100 less in the near future. I consider all of this to be very healthy, long overdue and well-managed in that it has been conducted quietly in order to avoid panic.

As regards the next general election, absolutely everybody I spoke to expects Putin to stay in power one way or another, whether as president (“if he can be bothered dealing with foreign policy which he doesn't enjoy and knows he is not good at”) or prime minister. Ex chief-of-staff Alexander Voloshin, who understands Russian politics and personalities well, said that Putin and Medvedev need each other, that they work well in tandem and that they don't have alternative options. If a scapegoat is needed however, Medvedev is the disposable one.

On the Luzhkov affair*,  my worry was that his removal might lead to ugly public mud-slinging and a contested redistribution of assets controlled by him and his wife. However the consensus seems to be that is not likely to happen and that some sort of deal will be reached quietly. However, if Luzhkov decides to up the ante, it might indeed get ugly.

As for former Yukos chief Mikhail Khodorkovsky still languishing in jail, many continue to hope that he might be let out soon. This would send a big friendly signal to the market, but it looks very unlikely. When this issue was raised at the conference, Putin got very animated and emotional. He said he considered it a stand-alone criminal case involving a number of murders carried out by Yukos security officers whom he refused to believe were acting of their own free will and added that he did not wish to free a murderer. (A mayor of Yugansk was indeed killed on Khodorkovsky's birthday at a time when he (the mayor) stood between Yukos and its wish to consolidate assets.)

Somebody who knows Putin quite well commented on the rather arrogant stance he has adopted on economic matters, as he (Putin) feels that the Russian government’s management of the economy during the financial crisis was laudable. I would tend to agree with Putin on this. Russia avoided many of the problems that developed and indeed many developing countries suffered from, including huge debts and large budget deficits. It is understandable that Putin is fed up with being lectured by the Western investor community on what Russia should be doing.

On that subject, it was rather amusing to listen to the panel of independent economists.  They were effectively saying the same thing as the government officials – that without reform the economy would stagnate and inflation would pick up.  But they said it in such a finger-wagging manner that, if anything, it only served to underline the fact that the government has really understood what it needs to do to facilitate economic growth and is serious about it this time.

Any practical progress will of course take time.  For example, the reform of financial markets (now the responsibility of Alexander Voloshin) which is designed to make Moscow an “international financial centre” (as ridiculous as it sounds) is a great move forward. Currently, trade settlement in Russia is based on pre-delivery of cash for purchases and pre-delivery of stock for sales, rather than “delivery versus payment” as is standard in most international markets; this acts as a potential barrier to many investors. Our funds are among the few that do currently invest in Russian domestic shares and in order to do so we have to negotiate special dealing terms with major brokers under which they effectively underwrite the settlement risk. Changing the settlement process to fit with international standards will open the market to a much broader investor base. There is a real commitment to these reforms, but there is also an understanding that it will take one to two years to complete.

On the corporate side, one theme that came very strongly from all the domestically focused companies (from vodka to drugs, loans to transport and food retailers to electronics) was that there had been a very convincing pick-up in demand in the past two months. This was despite August being seasonally the quietest month and the horrendous fires that disrupted production and people’s lives in Moscow.  We should brace ourselves for very good 3Q results.

Overall, despite guidance for somewhat slower growth and higher inflation next year, I left Russia with a positive sense of the change that seems to be taking place on all levels – from taxi drivers to the government. There is now a fundamental understanding of the inevitability of reform and a genuine commitment to it. There is also a very robust near-term outlook for consumer-related companies. And of course, the market still looks cheap relative to other emerging countries.

*Mayor of Moscow Yuri Luzhkov was dismissed from his post at the end of September, with President Medvedev citing a ‘loss of confidence’ following alleged corruption and mismanagement.

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