Book: Russian Roulette: Russia\'s Economy in Putin\'s Era
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Sam Vaknin >> Russian Roulette: Russia\'s Economy in Putin\'s Era
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 2002
First published by United Press International - UPI
Not for Sale! Non-commercial edition.
(c) 2002 Copyright Lidija Rangelovska.
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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. The Author
VII. 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.
Return
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.
Return
Financial Services
An expatriate relocation Web site, settler-international.com,
has this to say about Russian banks: "Do not open a bank account
in a Russian bank : you might not see your deposit again."
Russia's Central Bank, aware of the dismal lack of
professionalism, the venality, and the criminal predilections of
Russian "bankers" (and their Western accomplices) - is offering
"complementary vocational training" in the framework of its
Banking School. It is somewhat ironic that the institution
suspected of abusing billions of US dollars in IMF funds by
"parking" them in obscure off-shore havens - seeks to better the
corrupt banking system in Russia.