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International Herald Tribune: LETTER FROM RUSSIA: Keeping the Kremlin’s grip on business in check

By Celestine Bohlen Bloomberg News
Published: August 28, 2007

MOSCOW: Viktor Gerashchenko, chairman of the Yukos oil company, sits in his almost-empty office on the 10th floor of the now-bankrupt oil giant’s headquarters, its logo stripped from the roof, lobby and doors.

The building in central Moscow is a stark symbol of Russia’s triumphant return as an economic player under Vladimir Putin, now in his eighth year as president.

His administration’s 2003 attack on Yukos was the first on a private company and ended with its founder in prison and its key assets sold to a government entity. Since then, Russia has tightened its grip on energy resources, created “national champions” in aerospace and shipping, taken over automobile plants and unveiled a $5 billion nanotechnology initiative.

As the country enters election season, industrialists and bankers are asking whether seizing the economy’s “commanding heights” – an echo of the Stalin-era motto for centralization – is good for business. They say they worry about the ability of a powerful and unaccountable bureaucracy to regulate itself.

“It is not healthy,” Gerashchenko, 69, a former Russian Central Bank chairman and vocal critic of the government’s methods, said in a mid-August interview as he prepared to move out of the building. “In the U.S., there are three branches of government. We have only one.”

Many bureaucrats confuse their public functions and private interests, fueling corruption, said Dmitri Zimin, the founder of VimpelCom, the second-largest mobile phone operator in Russia.

“In Russia, bureaucrats are the state,” he said. “Their appetite for power and wealth can be limited only by outside forces. If they are not checked, their appetites will have to be fed all the time.”

The quickening pace of government acquisitions adds tension before a political transition, with parliamentary elections in December and a presidential vote next spring. Putin, barred from a third term, has yet to announce the Kremlin’s preferred candidate.

Stakes owned by the government, including in Gazprom, the world’s largest gas company, and Rosneft, the nation’s biggest oil company, represent 35 percent of the value of Russia’s stock market, up from 20 percent in 2003, according to Moscow-based Alfa Bank.

Even with the increase, Andrei Bougrov, managing director of the holding company Interros, said that the government’s share of the economy was a fraction of the Soviet system’s total control.

“It doesn’t matter if a company is state or private, as long as competition is fair,” he said. “We want the state to deliver on its role as regulator by establishing fair rules of the game.”

Some business leaders say the government needed to reassert itself after the tumultuous 1990s, when a handful of oligarchs snapped up valuable assets.

Mikhail Khodorkovsky bought oil fields in Siberia at bargain prices and created Yukos, once the biggest exporter of crude oil in Russia. Boris Berezovsky – now exiled in London – took over the largest national television channel in Russia. The station is back in the Kremlin’s grip.

Restoring government control of energy assets makes sense given their strategic importance, said Oleg Vyugin, chairman of MDM Bank and a former deputy finance minister. Higher oil and gas prices allow the government to fund other key projects, he said, adding that the state must still “be able to limit its appetite.”

Gerashchenko said the attack on Yukos showed selective abuse of power. Khodorkovsky is in a Siberian prison on fraud and tax-evasion charges he has said were politically motivated. Yukos’s key assets were sold to Rosneft, whose chairman, Igor Sechin, is Putin’s deputy chief of staff.

Foreign companies haven’t been spared. Regulatory threats were used to force companies such as Royal Dutch Shell, based in The Hague, to sell control of projects to Gazprom.

So far, investors don’t seem concerned. Russia’s key dollar-denominated stock index, the RTS, has more than quadrupled in five years. Net capital inflows touched a record $60.3 billion in the first half from $42 billion in all of 2006.

Still, “the state’s role in the economy lies at the heart of any investment decision,” said Tom Adshead, a portfolio manager at Alfa Capital in Moscow. “It’s the question of whether you can make the transition to a European-style economy without European-style checks and balances on the bureaucracy.”

The challenge is made difficult by the concentration of power among a coterie of Putin associates such as Rosneft’s Sechin. Many of them, like Putin, are from St. Petersburg and worked in the KGB. As board members of government-controlled companies, their power is both economic and political, and rarely transparent.

“The problem arises when everything is oriented around one single man, with people around him who all grew up together in the same courtyard,” Gerashchenko said.

The pendulum has swung, said Alexander Lebedev, a billionaire parliamentarian, whose Moscow-backed National Reserve Corporation owns 30 percent of the airline Aeroflot.

“In the 1990s, the raw materials and the media were in the hands of a small group of oligarchs,” he said. “Now, the state has taken a lot of that back, with the result that we have no independent media, a weak legislature, a judicial system that leaves a lot to be desired and a bureaucracy that is beyond control.”

http://www.iht.com/articles/2007/08/28/europe/letter.php

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