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INTERNATIONAL > Europe & Eurasia

Russian capitalism: Putin’s connections extend beyond natural resources

  • November 15, 2016
  • , pp. 36-37
  • JMH Translation

By Yuko Adachi, associate professor at the Sophia University Faculty of Foreign Studies

 

Russian capitalism has a unique structure that refuses to be understood easily. After the collapse of the Soviet Union in 1991, the country made moves to transform itself into a capitalist economy. Under President Putin, however, the country’s economy is backtracking to accommodate growing state involvement. Some calculations reveal that 70% of Russia’s GDP was earned by state-run enterprises in 2015. In order to understand the present-day capitalism of Russia, we need first to recognize some key words: Putin connections, natural resources and oligarchs (newly-emerging conglomerates with political power).

 

The best way to understand how Russian capitalism works is to observe moves for “privatization.” Earlier this year, the Russian government announced its “Great Privatization” plan for 2016, in which the government announced its intention to sell corporate shares it held in state-run giants. The target companies included Rosneft and Bashneft in the oil industry, VTB Bank and Alrosa in the diamond mining business. In August, however, the government postponed the scheduled privatization of Bashneft. Not only that, in October, 50.08% of Bashneft shares were purchased by Rosneft, another company supposed to be privatized, for 329.69 billion rubles (around 550 billion yen).

 

The reason why the plan was called the “Great Privatization” is that those companies picked for privatization are industry giants. The purpose of privatizing the heavyweights is to streamline these key companies’ management and thereby contribute to overall economic structural reform. Also in the background is the government’s need for financing the fiscal deficit with profits from the sales of the shares. The drop in oil prices has taken a toll on the government’s revenue from oil and gas (in the form of export tax and mining tax imposed on oil and LNG) that comprises about half of the total revenue.

 

The planned privatization of Rosneft is supposed to happen by the end of the year. The Russian government, which holds 69.5% of the company’s shares, will sell 19.5% of its shareholding. In the 2016 national budget plan, 700 billion rubles have been earmarked as income from the sales. However, a plan, now under consideration, involves an option for Rosneft to buy its own shares with its own cash reserve. Putin explains this as a step in the run-up to “true privatization.” He also hints at the possibility of accepting foreign buyers as well. Despite Putin’s explanation, the status of the company does not resemble anything like “privatization.”

 

Rosneft on the rise

 

At the very base of the Russian economy are natural resources, such as petroleum and natural gas. Privatization would make it imperative for the government to maintain control over the corporations involved in the exploration and exporting of these key resources. In Russia, privatization has its limit. When Rosneft bought the Bashneft shares, some in the administration called the move foolish. The acquisition of Bashneft shares was realized nevertheless, partly because President Sechin of Rosneft insisted on the purchase. Sechin was Putin’s right-hand man, who served as deputy director of the President’s Office and deputy prime minister (in charge of energy issues) in his administration.

 

The rise of Rosneft, currently the third biggest in sales, is symbolic of Russian capitalism under Putin. It was a state-run oil company facing imminent extinction in the 1990s. During the Yeltsin era that followed the collapse of the Soviet Union, economic power became concentrated in the hands of the oligarchs who built connections with the administration and obtained control of state enterprises. It was springtime for private oil corporations, of which the biggest was Khodorkovsky’s Yukos.

 

When Khodorkovsky tried to sell Yukos to one of the Western oil majors, the move ran counter to Putin’s policy of increasing state involvement in the natural resources industry in order to accelerate economic growth. Khodorkovsky was arrested in 2003 on charges of tax evasion and embezzlement, and spent the next ten years in prison. Yukos was acquired by Sechin’s Rosneft in 2004. Rosneft, by going through a number of M&As, grew to become a world-class oil corporation.

 

We can see in Rosneft the “desirable relationship” between the state and corporations under Putin’s administration: The top management of a corporation should be a state-friendly figure who can cooperate with the government in promoting economic growth, which is fueled by the state-run companies in the natural resources industry. It is desirable if big corporations in the natural resources industry are state-run, but they may be privately owned and may accept foreign capital as long as the government can exert control over their business activities.

 

Silovarchs to gain power

 

In Russia today, in many cases, people close to Putin take top management posts at large institutions. President Miller of Gazprom, which boasts the largest sales among all Russian companies, was Putin’s subordinate when the president was a city official in St. Petersburg. Director Gulev of Sberbank was Putin’s colleague at the same city office. Former finance minister Kudrin also had a St. Petersburg connection.

 

Meanwhile, a new group of people close to Putin are emerging as powerful players. They are called silovarchs and have a common background in the military, KGB (former Soviet Union’s Committee for State Security) and other security institutions. For example, silovarchs include former president of Russian Railways Yakunin, VTB Bank President Kostin, and President Tokarev of Transneft, a pipeline company. They are said to be former KGB members.

 

On the other hand, those opposing the administration would have a hard time of it like Khodorkovsky. In the Yeltsin era, seven oligarchs including Khodorkovsky were said to have controlled half of the Russian economy. Two others from that group, who angered Putin, have since fled the country. Among the oligarchs from the Yeltsin era who are still in business are those who have successfully maintained amicable relations with Putin, like Lukoil President Alekperov and Surgutneftegaz President Bogdanov.

 

Under the current Russian capitalism, companies are prone to fail in gaining international competitiveness as they are less likely to streamline their management, put serious efforts into technological innovation or adopt innovative services. Although President Putin has been calling for restructuring the economy and reducing the state’s presence in economic activities, the reality is moving in the exact opposite direction. Many express concern to see Russia backpedal on its economic privatization.

 

Most companies with sales above 600 billion rubles

(around one trillion yen) are state-run

(Top 30 Russian companies in sales, 2015)

Rank

Corporation

Industry

Sales

(million rubles)

State run

Top management

1

Gazprom

Oil/gas

5,477,278

Yes

P

2

Lukoil

Oil/gas

4,718,300

 

O

3

Rosneft

Oil/gas

3,681,000

Yes

P

4

Sperbank

Banking

2,167,400

Yes

 

5

Russian Railways

Transport

1,401,729

Yes

P

6

VTB Group

Banking

925,600

Yes

P

7

Surgutneftegaz

Oil/gas

890,574

 

O

8

Transneft

Pipeline

774,380

Yes

P

9

Magnit

Retail

763,527

 

 

10

Rosseti

Power

759,608

Yes

 

11

Inter RAO

Power

741,101

Yes

P

12

Bashneft

Oil/gas

637,271

Yes

 

13

Systema

Compound

637,222

 

O

14

X5 Retail Group

Retail

633,873

 

O

15

EVRAZ

Steel

501,826

 

O

16

Tatneft

Oil/gas

476,360

 

 

17

Norilsk Nickel

Non-ferrous metals

456,013

 

O

18

Novolipetsk Steel

Steel

399,420

 

O

19

Sibur

Petrochemical

361,000

 

P

20

RUSAL

Non-ferrous metals

359,512

 

O

21

Novatek

Oil/gas

357,643

 

P

22

Vimpelcom

Communication

355,050

 

O

23

RusHydro

Power

329,560

Yes

 

24

Aeroflot

Transportation

319,771

Yes

P

25

Severstal

Steel

318,763

 

O

26

MegaFon

Communication

314,975

 

O

27

Auchan

Retail

313,628

 

 

28

Rostelecom

Communication

310,917

Yes

P

29

Magnitogorsk Iron and Steel Works

Steel

302,767

 

O

30

United Aircraft Corporation

Machinery

294,538

Yes

P

Note: P means the company has a connection with Putin. O means an Oligarch since the 1990s.

Source: Compiled by the author from company websites and the website of the Russian business weekly “Expert Magazine.”

 

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