Book: Russian Roulette

S >> Sam Vaknin >> Russian Roulette



(c) 2002, 2003 Copyright Lidija Rangelovska.



Russian Roulette

Russia's Economy

In Putin's Era

1st EDITION

Sam Vaknin, Ph.D.

Editing and Design:

Lidija Rangelovska

Lidija Rangelovska

A Narcissus Publications Imprint, Skopje 2003

First published by United Press International - UPI

Not for Sale! Non-commercial edition.

(c) 2002, 2003 Copyright Lidija Rangelovska.

All rights reserved. This book, or any part thereof, may not be used or
reproduced in any manner without written permission from:

Lidija Rangelovska - write to:

palma@unet.com.mk or to

vaknin@link.com.mk

Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review":

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

Visit my United Press International (UPI) Article Archive

ISBN: 9989-929-31-9

http://samvak.tripod.com/guide.html

http://samvak.tripod.com/briefs.html

http://economics.cjb.net

http://samvak.tripod.com/after.html

Created by: LIDIJA RANGELOVSKA

REPUBLIC OF MACEDONIA

C O N T E N T S

I. The Security Apparatus

II. The Energy Sector

III. Financial Services

IV. The Russian Devolution - The Regions

V. Agriculture

VI. Russia as a Creditor

VII. Russia's Space Industry

VIII. Russia's Vodka Wars

IX. Let My People Go

X. Fimaco Wouldn't Die

XI. The Chechen Theatre Ticket

XII. Russia's Israeli Oil Bond

XIII. Russia's Idled Spies

XIV. Russia's Middle Class

XV. Russia in 2003

XVI. Russia Straddles the Euro-Atlantic Divide

XVII. Russia's Stealth Diplomacy

XVIII. Russia's Second Empire

XIX. The Author

XX. About "After the Rain"

The Security Apparatus

Shabtai Kalmanovich vanished from London in late 1980's. He resurfaced
in Israel to face trial for espionage. He was convicted and spent years
in an Israeli jail before being repatriated to Russia. He was described
by his captors as a mastermind, in charge of an African KGB station.

In the early 1970's he even served as advisor (on Russian immigration)
to Israel's Iron Lady, Golda Meir. He then moved to do flourishing
business in Africa, in Botswana and then in Sierra Leone, where his
company, LIAT, owned the only bus operator in Freetown. He traded
diamonds, globetrotted flamboyantly with an entourage of dozens of
African chieftains and their mistresses, and fraternized with the
corrupt elite, President Momoh included. In 1986-7 he even collaborated
with IPE, a London based outfit, rumored to have been owned by former
members of the Mossad and other paragons of the Israeli defense
establishment (including virtually all the Israelis implicated in the
ill-fated Iran-Contras affair).

Being a KGB officer was always a lucrative and liberating proposition.
Access to Western goods, travel to exotic destinations, making new (and
influential) friends, mastering foreign languages, and doing some
business on the side (often with one's official "enemies" and
unsupervised slush funds) - were all standard perks even in the 1970's
and 1980's. Thus, when communism was replaced by criminal anarchy, KGB
personnel (as well as mobsters) were the best suited to act as
entrepreneurs in the new environment.

They were well traveled, well connected, well capitalized, polyglot,
possessed of management skills, disciplined, armed to the teeth, and
ruthless. Far from being sidetracked, the security services rode the
gravy train. But never more so than now.

January 2002. Putin's dour gaze pierces from every wall in every
office. His obese ministers often discover a sudden sycophantic
propensity for skiing (a favorite pastime of the athletic President).
The praise heaped on him by the servile media (Putin made sure that no
other kind of media survives) comes uncomfortably close to a Central
Asian personality cult. Yet, Putin is not in control of the machinery
that brought him to the pinnacle of power, under-qualified as he was.
This penumbral apparatus revolves around two pivots: the increasingly
fractured and warlord controlled military and, ever more importantly,
the KGB's successors, mainly the FSB.

A. The Military

Two weeks ago, Russia announced yet another plan to reform its bloated,
inefficient, impoverished, demoralized and corrupt military. Close to
200,000 troops are to go immediately and the same number in the next 3
years. The draft is to be abolished and the army professionalized. At
its current size (officially, 1.2 million servicemen), the armed forces
are severely under-funded. Cases of hunger are not uncommon. Ill (and
late) paid soldiers sometimes beg for cigarettes, or food.

Conscripts, in what resembles slave labour, are "rented out" by their
commanders to economic enterprises (especially in the provinces).

A host of such "trading" companies owned by bureaucrats in the Ministry
of Defense was shut down last June by the incoming Minister of Defense
(Sergei Ivanov), a close pal of Putin. But if restructuring is to
proceed apace, the successful absorption of former soldiers in the
economy (requiring pensions, housing, start up capital, employment) -
if necessary with the help of foreign capital - is bound to become a
priority sooner or later.

But this may be too late and too little - the much truncated and
disorientated armed forces have been "privatized" and commandeered for
personal gain by regional bosses in cahoots with the command structure
and with organized crime. Ex-soldiers feature prominently in extortion,
protection, and other anti-private sector rackets.

The war in Chechnya is another long standing pecuniary bonanza - and a
vested interest of many generals. Senior Russian Interior Ministry
field commanders trade (often in partnership with Chechen "rebels") in
stolen petroleum products, food, and munitions.

Putin is trying to reverse these pernicious trends by enlisting the
(rank and file) army (one of his natural constituencies) in his battles
against secessionist Chechens, influential oligarchs, venal governors,
and bureaucrats beyond redemption.

As well as the army, the defense industry - with its 2 million
employees - is also being brutally disabused of its
centralist-nationalistic ideals.

Orders placed with Russia's defense manufacturers by the destitute
Russian armed forces are down to a trickle. Though the procurement
budget was increased by 50% last year, to c. $2.2 billion (or 4% of the
USA's) and further increased this year to 79 billion rubles ($2.7
billion) - whatever money is available goes towards R&D, arms
modernization, and maintaining the inflated nuclear arsenal and the
personal gear of front line soldiers in the interminable Chechen war.
The Russian daily "Kommersant" quotes Former Armed Forces weapons
chief, General Anatoly Sitnov, as claiming that $16 billion should be
allocated for arms purchases if all the existing needs are to be
satisfied.

Having lost their major domestic client (defense constituted 75% of
Russian industrial production at one time) - exports of Russian arms
have soared to more than $4.4 billion annually (not including
"sensitive" materiel). Old markets in the likes of Iran, Iraq, Syria,
Algeria, Eritrea, Ethiopia, China, India, and Libya have revived.
Decision makers in Latin America and East Asia (including Malaysia and
Vietnam) are being avidly courted. Bribes change hands, off-shore
accounts are open and shut, export proceeds mysteriously evaporate.
Many a Russian are wealthier due to this export cornucopia.

The reputation of Russia's weapons manufacturers is dismal (no spare
parts, after sales service, maintenance, or quality control). But
Russian weapons (often Cold War surplus) come cheap and the list of
Russian firms and institutions blacklisted by the USA for selling
weapons (from handguns to missile equipped destroyers) to "rogue
states" grows by the day.

Less than one quarter of 2500 defense-related firms are subject to (the
amorphous and inapt) Russian Federal supervision. Gradually, Russia's
most advanced weaponry is being made available through these outfits.

Close to 4000 R&D programs and defense conversion projects (many
financed by the West) have failed abysmally to transform Russia's
"military-industrial complex". Following a much derided "privatization"
(in which the state lost control over hundreds of defense firms to
assorted autochthonous tycoons and foreign manufacturers) - the
enterprises are still being abused and looted by politicians on all
levels, including the regional and provincial ones. The Russian
Federation, for instance, has controlling stakes in only 7 of c. 250
privatized air defense contractors. Manufacturing and R&D co-operation
with Ukraine and other former Soviet republics is on the ascendant,
often flying in the face of official policies and national security.

Despite the surge in exports, overproduction of unwanted goods leads to
persistent accumulation of inventory. Even so, capacity utilization is
said to be 25% in many factories. Lack of maintenance renders many
plant facilities obsolete and non-competitive. The Russian government's
new emphasis on R&D is wise - Russia must replenish its catalog with
hi-tech gadgets if it wishes to continue to export to prime clients.
Still, the Russian Duma's prescription of a return to state ownership,
central planning, and subsidies, if implemented, is likely to prove to
be the coup de grace rather than a graceful coup.

B. The FSB (the main successor to the KGB)

Note:

The KGB was succeeded by a host of agencies. The FSB inherited its
internal security directorates. The SVR inherited the KGB's foreign
intelligence directorates.

With the ascendance of the Vladimir Putin and his coterie (all former
KGB or FSB officers), the security services revealed their hand - they
are in control of Russia and always have been. They number now twice as
many as the KGB at its apex. Only a few days ago, the FSB had
indirectly made known its enduring objections to a long mooted (and
government approved) railway reform (a purely economic matter).
President Putin made December 20 (the day the murderous Checka, the
KGB's ancestor, was established in 1917) a national holiday.

But the most significant tectonic shift has been the implosion of the
unholy alliance between Russian organized crime and its security
forces. The Russian mob served as the KGB's long arm until 1998. The
KGB often recruited and trained criminals (a task it took over from the
Interior Ministry, the MVD). "Former" (reserve) and active agents
joined international or domestic racketeering gangs, sometimes as their
leaders.

After 1986 (and more so after 1991), many KGB members were moved from
its bloated First (SVR) and Third Directorates to its Economic
Department. They were instructed to dabble in business and banking
(sometimes in joint ventures with foreigners). Inevitably, they crossed
paths - and then collaborated - with the Russian mafia which, like the
FSB, owns shares in privatized firms, residential property, banks, and
money laundering facilities.

The co-operation with crime lords against corrupt (read:
unco-operative) bureaucrats became institutional and all-pervasive
under Yeltsin. The KGB is alleged to have spun off a series of "ghost"
departments to deal with global drug dealing, weapons smuggling and
sales, white slavery, money counterfeiting, and nuclear material.

In a desperate effort at self-preservation, other KGB departments are
said to have conducted the illicit sales of raw materials (including
tons of precious metals) for hard currency, and the laundering of the
proceeds through financial institutions in the West (in Cyprus, Israel,
Greece, the USA, Switzerland, and Austria). Specially established
corporate shells and "banks" were used to launder money, mainly on
behalf of the party nomenklatura. All said, the emerging KGB-crime
cartel has been estimated to own or control c. 40% of Russian GDP as
early as 1994, having absconded with c. $100 billion of state assets.

Under the dual pretexts of "crime busting" and "fighting terrorism",
the Interior Ministry and FSB used this period to construct massive,
parallel, armies - better equipped and better trained than the official
one.

Many genuinely retired KGB personnel found work as programmers,
entrepreneurs, and computer engineers in the Russian private sector
(and, later, in the West) - often financed by the KGB itself. The KGB
thus came to spawn and dominate the nascent Information Technology and
telecommunications industries in Russia. Add to this former (but on
reserve duty) KGB personnel in banks, hi-tech corporations, security
firms, consultancies, and media in the West as well as in joint
ventures with foreign firms in Russia - and the security services'
latter day role (and next big fount of revenue) becomes clear:
industrial and economic espionage. Russian scholars are already ordered
(as of last May) to submit written reports about all their encounters
with foreign colleagues.

This is where the FSB began to part ways with crime, albeit hitherto
only haltingly.

The FSB has established itself both within Russian power structures and
in business. What it needs now more than money and clout - are
respectability and the access it brings to Western capital markets,
intellectual property (proprietary technology), and management. Having
co-opted criminal organizations for its own purposes (and having acted
criminally themselves) - the alphabet soup of security agencies now
wish to consolidate their gains and transform themselves into
legitimate, globe-spanning, business concerns.

The robbers' most fervent wish is to become barons. Their erstwhile,
less exalted, criminal friends are on the way. Expect a bloodbath, a
genuine mafia gangland war over territory and spoils. The result is by
no means guaranteed.

The Energy Sector

The pension fund of the Russian oil giant, Lukoil, a minority
shareholder in TV-6 (owned by a discredited and self-exiled Yeltsin-era
oligarch, Boris Berezovsky), this week forced the closure of this
television station on legal grounds. Gazprom (Russia's natural gas
monopoly) has done the same to another television station, NTV, last
year (and then proceeded to expropriate it from its owner, Vladimir
Gusinsky).

Gazprom is forced to sell natural gas to Russian consumers at 10% the
world price and to turn a blind eye to debts owed it by Kremlin
favorites.

Both Lukoil and Gazprom are, therefore, used by the Kremlin as
instruments of domestic policy.

But Russian energy companies are also used as instruments of foreign
policy.

A few examples:

Russia has resumed oil drilling and exploration in war ravaged
Chechnya. About 230 million rubles have been transferred to the federal
Ministry of Energy. A new refinery is in the works.

Russia lately signed a production agreement to develop oilfields in
central Sudan in return for Sudanese arms purchases.

Armenia owes Itera, a Florida based, Gazprom related, oil concern, $35
million. Itera has agreed to postpone its planned reduction in gas
supplies to the struggling republic to February 11.

Last month, President Putin called for the establishment of a "Eurasian
alliance of gas producers" - probably to counter growing American
presence, both economic and military, in Central Asia and the much
disputed oil rich Caspian basin. The countries of Central Asia have
done their best to construct alternative oil pipelines (through China,
Turkey, or Iran) in order to reduce their dependence on Russian oil
transportation infrastructure. These efforts largely failed (a new $4
billion pipeline from Kazakhstan to the Black Sea through Russian
territory has just been inaugurated) and Russia is now on a charm
offensive.

Its PR efforts are characteristically coupled with extortion. Gazprom
owns the pipelines. Russia exports 7 trillion cubic feet of gas a year
- six times the combined output of all other regional producers put
together. Gazprom actually competes with its own clients, the
pipelines' users, in export markets. It is owed money by all these
countries and is not above leveraging it to political or economic gain.

Lukoil is heavily invested in exploration for new oil fields in Iraq,
Algeria, Sudan, and Libya.

Russian debts to the Czech Republic, worth $2.5 billion in face value,
have just been bought by UES, the Russian electricity monopoly, for a
fraction of their value and through an offshore intermediary. UES then
transferred the notes to the Russian government against the writing off
of $1.35 billion in UES debts to the federal budget. The Russians claim
that Paris Club rules have ruled out a direct transaction between
Russia (a member of the Club) and the Czech Republic (not a member).

In the last decade, Russia has been transformed from an industrial and
military power into a developing country with an overwhelming
dependence on a single category of commodities: energy products.
Russia's energy monopolies - whether state owned or private - serve as
potent long arms of the Kremlin and the security services and implement
their policies faithfully.

The Kremlin (and, indirectly, the security services) maintain a tight
grip over the energy sector by selectively applying Russia's tangle of
hopelessly arcane laws. In the last week alone, the Prosecutor
General's office charged the president and vice president of Sibur (a
Gazprom subsidiary) with embezzlement. They are currently being
detained for "abuse of office".

Another oil giant, Yukos, was forced to disclose documents regarding
its (real) ownership structure and activities to the State Property
Fund in connection with an investigation regarding asset stripping
through a series of offshore entities and a Siberian subsidiary.

Intermittently, questions are raised about the curious relationship
between Gazprom's directors and Itera, upon which they shower contracts
with Gazprom and what amounts to multi-million dollar gifts (in the
from of ridiculously priced Gazprom assets) incessantly.

Gazprom is now run by a Putin political appointee, its former chairman,
the oligarch Vyakhirev, ousted in a Kremlin-instigated boardroom coup.

Foreign (including portfolio) investors seem to be happy. Putin's
pervasive micromanagement of the energy titans assures them of
(relative) stability and predictability and of a reformist,
businesslike, mindset. Following a phase of shameless robbery by their
new owners, Russian oil firms now seem to be leading Russia - albeit
haltingly - into a new age of good governance, respect for property
rights, efficacious management, and access to Western capital markets.

The patently dubious UES foray into sovereign debt speculation, for
instance, drew surprisingly little criticism from foreign shareholders
and board members. "Capital Group", an international portfolio manager,
is rumored to have invested close to $700 million in accumulating 10%
of Lukoil, probably for some of its clients. Sibneft has successfully
floated a $250 million Eurobond (redeemable in 2007 with a lenient
coupon of 11.5%). The issue was oversubscribed.

The (probably temporary) warming of Russia's relationship with the USA
and Russia's acceptance (however belated and reluctant) of its
technological and financial dependence on the West - have transformed
the Russian market into an attractive target. Commercial activity is
more focused and often channeled through American diplomatic missions.

The U.S. Consul General in Vladivostok and the Senior Commercial
Officer in Moscow have announced that they will "lead an oil and gas
equipment and services and related construction sectors trade mission
to Sakhalin, Russia from March 11-13, 2002." The oil and gas fields in
Sakhalin attract 25% of all FDI in Russia and more than $35 billion in
additional investments is expected. Other regions of interest are the
Arctic and Eastern Siberia. Americans compete here with Japanese,
Korean, Royal Dutch/Shell, French, and Canadian firms, among others.
Even oil multinationals scorched in Russia's pre-Putin incarnation -
like British Petroleum which lost $200 million in Sidanco in 11 months
in 1997-8 - are back.

Takeovers of major Russian players (with their proven reserves) by
foreign oil firms are in the pipeline. Russian firms are seriously
undervalued - their shares being priced at one third to one tenth their
Western counterparts'. Some Russian oil firms (like Yukos and Sibneft)
have growth rates among the highest and production costs among the
lowest in the industry. The boards of the likes of Lukoil are packed
with American fund managers and British investment bankers.

The forthcoming liberalization of the natural gas market (the outcome
of an oft-heralded and much needed Gazprom divestiture) is a major
opportunity for new - possibly foreign - players.

This gold rush is the result of Russia's prominence as an oil producer,
second only to Saudi Arabia. Russia dumps on the world markets c. 4.5
million barrels daily (about 10% of the global trade in oil). It is the
world's largest exporter of natural gas (and has the largest known
natural gas reserves). It is also the world's second largest energy
consumer. In 1992, it produced 8 million bpd and consumed half as much.
In 2001, it produced 7 million bpd and consumed 2 million bpd.

Russia has c. 50 billion oil barrels in proven reserves but decrepit
exploration and extraction equipment, and a crumbling oil transport
infrastructure is in need of total replacement. More than 5% of oil
produced in Russia is stolen by tapping the leaking pipelines. An
unknown quantity is lost in oil spills and leakage. Transneft, the
state's oil pipelines monopoly, is committed to an ambitious plan to
construct new export pipelines to the Baltic and to China. The market
potential for Western equipment manufacturers, building contractors,
and oil firms is evidently there.

But this serendipity may be a curse in disguise. Russia is chronically
suffering from an oil glut induced by over-production, excess refining
capacity, and subsidized domestic prices (oil sold inside Russia costs
one third to one half the world price). Russian oil companies are
planning to increase production even further.

Rosneft, the eighth largest, plans to double its crude output. Yukos
(Russia's second largest oil firm) intends to increase output by 20%
this year. Surgut will raise its production by 14%.

Last week, Russia halved export duties on fuel oil. Export duties on
lighter energy products, including gas, were cut in January. As opposed
to previous years, no new export quotas were set. Clearly, Russia is
worried about its surplus and wishes to amortize it through enhanced
exports.

Russia also squandered its oil windfall and used it to postpone the
much needed restructuring of other sectors in the economy - notably the
wasteful industrial sector and the corrupt and archaic financial
system. Even the much vaunted plans to break apart the venal and
inefficient natural gas and electricity monopolies and to come up with
a new production sharing regime have gone nowhere (though some pipeline
capacity has been made available to Gazprom's competitors).

Both Russia's tax revenues and its export proceeds (and hence its
foreign exchange reserves and its ability to service its monstrous and
oft-rescheduled $158 billion in foreign debt) are heavily dependent on
income from the sale of energy products in global markets. More than
40% of all its tax intake is energy-related (compared to double this
figure in Saudi Arabia). Gazprom alone accounts for 25% of all federal
tax revenues. Almost 40% of Russia's exports are energy products as are
13% of its GDP. Domestically refined oil is also smuggled and otherwise
sold unofficially, "off the books".

But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is
based on a far more realistic price range of $14-18 per barrel. Hence
Russia's frequent clashes with OPEC (of which it is not a member) and
its decision to cut oil production by only 150,000 bpd in the first
quarter of 2002 (having increased it by more than 400,000 bpd in 2001).
It cannot afford a larger cut and it can increase its production to
compensate for almost any price drop.

Russia's energy minister told the Federation Council, Russia's upper
house of parliament, that Russia "should switch from cutting oil output
to boosting it considerably to dominate world markets and push out Arab
competitors". The Prime Minister told the US-Russia Business Council
that Russia should "increase oil production and its presence in the
international marketplace."

It may even be that Russia is spoiling for a bloodbath which it hopes
to survive as a near monopoly in the energy markets. Russia already
supplies more than 25% of all natural gas consumed by Europe and is
building or considering to construct pipelines to Turkey, China, and
Ukraine. Russia also has sizable coal and electricity exports, mainly
to CIS and NIS countries. Should it succeed in its quest to
dramatically increase its market share, it will be in the position to
tackle the USA and the EU as an equal, a major foreign policy priority
of both Putin and all his predecessors alike.

Copyright (c) 2007. knowncrafts.net. All rights reserved.