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Newsweek: The New Feudalism: Shell’s real crime… was not to let Gazprom muscle in…

Forget corruption. In Putin’s Russia, the nexus of payoffs and patronage is almost medieval, touching every aspect of life.

By Owen Matthews and Anna Nemsova
Newsweek International

Oct. 23, 2006 issue – When armed police showed up last Wednesday night at Zurab Dzhaparidze’s Moscow apartment, he knew immediately why they’d come. Dzhaparidze’s crime, the policemen claimed, was that his apartment’s purchase documents hadn’t been completed properly—they’d come to kick him out. But the 34-year-old film-festival organizer knew better. His real sin was to be Georgian. Ever since the Kremlin declared its disapproval of Tbilisi after an espionage row last month, Russia’s police and bureaucrats have declared open season on Georgians, their businesses and their property.

Top executives at Royal Dutch Shell, too, had few illusions about why they were recently ordered to stop work on their $22 billion Sakhalin-2 exploration project. The stated reason was alleged environmental violations. But Shell’s real crime, it seems, was not to let state-owned Gazprom muscle in on the oilfield. In both cases, the victims of the state-sponsored shakedown were left with little choice. Dzhaparidze paid a hefty bribe to get the police to go away. And Shell, analysts predict, will likely cut a deal with Gazprom.

What do the problems of a young Georgian in Moscow have in common with those of a giant Western oil company in Russia’s Far East? Or, for that matter, with the dilemma of Lena N., a young actress who says she can’t afford to pay the bribe to get her children into a state-run kindergarten, or Sergey Odinartsev, a businessman who found his warehouse confiscated by thugs he said were sent by the local secret police? The answer is that, after six years under Vladimir Putin, Russia has undergone a hidden but dramatic evolution—from mere authoritarianism to something that might best be described as modern-day feudalism.

Ever since he took office in 2000, Russia’s president has worked to concentrate political power and economic wealth in the hands of the state. And he’s succeeded, perhaps beyond his wildest dreams. These days, any transaction of value—from getting your kid into university, to arranging visits to doctors, to starting a business—depends upon the whims of the king, his knights in the Kremlin or the legions of vassals who live off their patronage and in turn pay them tribute. From the mightiest oligarch to the lowliest common citizen, every aspect of every

Russian’s life—their right to a home, their car or work—increasingly presupposes some form of crooked relationship with the state and its servants.

Once upon a time, this would have been called corruption. Nowadays, says Elena Panfilova at Transparency International, that term seems almost quaint. “It assumes corruption is an aberration,” she explains. “In Russia today, it is the system.” Vladimir Ryzhkov, one of the few remaining independents in Parliament, likens Putin to a contemporary czar. Determined to recoup from the chaos of the Yeltsin years, he says, “Putin turned Russia a hundred years back to the traditions of empire and absolute personification of power. We are back to the times when the state and private business grew together in a single body.”

It’s an open secret, well known to Russia’s political classes, that the head of this new order is a round table of 12 “Barons”—top ministers and Kremlin courtiers, all close personal friends of Putin (known informally as the tea-drinkers circle) who gather weekly at the presidential dacha. Below them is a veritable army of 1.5 million bureaucrats, plus 4 million so-called siloviki—policemen, soldiers and security officials. At its most primitive, Russia’s new feudal order gives these “men of power”—the Barons’ vassals, if you will—a license to steal and rob from lowlier citizens. Their weapon of choice, true to Putin’s dictum that his rule would see the “dictatorship of the law,” is the law itself.

Ask businessman Sergey Odinartsev, who arrived at work one morning last summer to find that armed thugs had taken over his tea-and-coffee warehouse in Tula, 200 kilometers south of Moscow. Complaining to the police, he knew, would be useless. The corporate raiders who stole his business had a slew of officially stamped papers confirming that they were the new owners. Worse, they were partners with what Odinartsev coyly calls “people stronger than local police”—the local security services. “They have powerful supporters,” says Odinartsev. “I could apply to the court but I already know it is going to be just a waste of time.”

The mechanism is simple, explains Gennady Gudkov, a former KGB major-general and now head of the State Duma’s security committee. A would-be raider “finds an influential cover, either a bureaucrat or someone in State Security,” he says. After a fee has been agreed, the bureaucrat “goes to the owner of the business you want to steal and says: sell your business for five rubles or you go to jail.”

The only defense is to have more powerful patrons than your opponent. Moscow businessman Vladimir Moiseyev learned that rule when he tried to make a successful takeover bid for a large Moscow hairdressing salon. He had money, already owned 30 percent of the shares in the company and, most important, had good friends in the Interior Ministry’s Organized Crime Unit. Unfortunately for Moiseyev, there was another bidder—someone connected, he says, to the presidential administration. As in a card game, Moiseyev was trumped by his rival’s superior connections.

Gone are the days when businesses had to pay off mafia thugs. Now firms sign for-mal protection contracts with the local administration. One such, signed by a ceramics factory in southern Russia and grandly titled “Contract for the Social and Economic Development of the Region,” stipulates a monthly payment to the local authorities. In exchange, the administration promises to solve “any problems arising with federal or regional organs.” Earlier this year the ceramic factory’s owner, who asked that his name not be used for fear of reprisals, sold out. All his profit, he complains, was going to bureaucrats “simply for the right to exist.” According to a recent study by Moscow’s InDem Foundation, an independent polling group, the volume of Russia’s corrupt economy (the amount paid in bribes and kickbacks by Russian businesses as well as the value of deals cut with bureaucrats in exchange for protection) has skyrocketed from $33 billion in 2001 to $316 billion last year—a sum amounting to nearly half of Russia’s official GDP.

Not surprisingly, given the opportunities for enrichment, government service has become a very popular profession. (According to the Federal Statistics Office, the number of public servants in Russia rose last year by almost 150,000 to 1.5 million—not counting the police or security services. By comparison, the Soviet Union’s bureaucracy under Leonid Brezhnev numbered no more than 700,000.) Consider the lively market in bribes for work. Duma deputy Gudkov recalls that when a former colleague recently went job-hunting, he couldn’t find a “free” job. “A senior bureaucratic post at any Russian ministry costs from $150,000 to $1 million, depending on how high you want to start,” says Gudkov. “Even to get a job as a traffic policeman, one needs to pay from $3,000 to $5,000.” Not that Russia’s growing army of traffic police would ever trouble bureaucrats themselves. For brazen proof that bureaucrats are a caste apart, you have only to note the flashing blue lights on their official cars, which allow them to ignore traffic regulations with impunity.

Impunity is increasingly the watchword of Russia’s powerful. Putin has been careful to appoint his most loyal courtiers as the heads of giant state-owned corporations. In 1997, the tycoon Boris Berezovsky boasted that seven oligarchs—powerful private businessmen—controlled the Russian economy. A decade on, the tables are turned. According to the state news agency, seven men from Putin’s inner circle control state-owned companies that directly account for 40 percent of Russia’s gross domestic product. They include Deputy Prime Minister Dmitri Medvedev, chairman of Gazprom, the $263 billion gas monopoly, and presidential administration deputy chief Igor Sechin, head of the giant state oil company, Rosneft. Another deputy head, Vladislav Surkov, chairs Transnefteprodukt, the state company for oil transportation, while presidential aide Viktor Ivanov chairs national air carrier Aeroflot, as well as the main air-defense contractor, Almaz-Antei. “We used to have a private oligarchy—now we have an oligarchy drawn from the secret police,” says former deputy prime minister Boris Nemtsov, referring to the KGB background of many of Putin’s advisers.

In the new order, foreigners are an inconvenience; they don’t play by the rules. IKEA, the Swedish furniture giant, for instance, confronted by a last-minute demand for more money before the opening of a Moscow mall in 2004, immediately filed a complaint in court and held a press conference, forcing greedy officials to retreat. This spring, the U.S. cell-phone company Motorola disclosed that Customs officials had apparently stolen $200 million worth of brand-new cell phones on consignment to their Russian partners, Evroset. “A Russian company could never go public like that; they would be crushed,” says Panfilova. “The Customs made a mistake—they thought they were stealing from Evroset, not Motorola.” By the same token, the Kremlin last week announced that Gazprom, not the five foreign oil majors that had been bidding, would develop the vast Shtockman gas field in Russia’s Arctic Sea.

The spreading rot of Russia’s new feudal order threatens to strangle Russia’s real economy. The Kremlin is riding high on oil and gas prices, and enjoying a period of bullishness unprecedented in a generation. But Russia’s underlying indicators are dire, on just about every index. The World Bank ranks Russia 151st among 208 countries in terms of accountability, political stability, effectiveness of the government, the quality of regulatory bodies, the rule of law and control over corruption—just below Uganda and Zambia but ahead of Kazakhstan and Niger. And Russia fell nine places—to 62—in the World Economic Forum’s Growth Competitiveness Index. It came in 110th out of 125 for judicial independence, 116th in the soundness of banks and 107th in public trust in politicians. The root cause, says Nemtsov, is the inherent cronyism and inefficiency of the state sector. “Russia is rapidly moving towards being a Third World country,” he says. “And the chances of returning all this into the channel of progress and economic development in the near future are extremely low.”

The only remedy, says Valery Fadeyev, a member of the Public Chamber, a state-appointed consultative body, is “effective institutions, not simulated institutions.” By that he means a bona fide political opposition, a free press and unambiguous laws, especially those guaranteeing the inviolability of private property. Unfortunately for Russia, Putin has systematically undermined all three. Russia’s Parliament these days is little more than an assembly of Putin loyalists. As for the media, the assassination of Anna Politkovskaya, among the last of the country’s true investigative reporters, sums up its tragic state. Putin expressed regret at her death but added that she “wasn’t very influential.” And he was right, in his way. Official pressure and journalistic corruption have made the media one of the least trusted institutions in Russia.

Where will it all end? The system that Putin created in the name of stability may in fact turn out to be deeply unstable. A feudal society like Russia, with its vast network of tribute and patronage, ultimately depends on someone, or something, down near the bottom, actually working and producing money. Right now, that role is filled by oil and gas wells. The easy cash they produce gives Putin’s court a license to pursue their own interests, often at the expense of the nation’s. Yet money alone does not make a strong economy, just as the absence of public politics and a free press doesn’t make for a healthy society. Rotten edifices, like Ukraine and Georgia’s corrupt and complacent old regimes, are doomed to eventually collapse.

© 2006 Newsweek, Inc.
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