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Mismanagement of Russian Economy Could Lead to Social Unrest

Eurasia Daily Monitor, The Jamestown Foundation – December 1, 2008 — Volume 5, Issue 228 Print E-mail
DECEMBER 01, 2008
IN THIS ISSUE:
* Economic expert irritates Kremlin by describing how sinking Russian economy could spark social instability
* Murky German Gazprom subsidiary expands its web of business activity to Italy


Mismanagement of Russian Economy Could Lead to Social Unrest


Yuri Zarakhovich

The standard Kremlin spiel on Russia’s economic crisis is that it is all America’s fault. President Dmitri Medvedev said in his Address to the Federal Assembly of the Russian Federation on November 5: “…the U.S. economy…pulled financial markets all around the globe [down] with it in its fall…They did not listen to the numerous warnings from their partners (including from us). As a result they have caused damage to themselves and to others” (www.kremlin.ru/eng/speeches, November 5).

Prime Minister Vladimir Putin said on October 1 that the irresponsibility of America’s financial system was to blame for the global economic crisis. The Times quoted Putin as saying, “Everything happening now in the economic and financial sphere began in the United States. This is not the irresponsibility of specific individuals but the irresponsibility of the system that claims leadership” (www.business.timesonline.co.uk).

Not so, counters Yevgeni Gontmakher, a Russian economist and social issues expert, who was once an advisor to President Boris Yeltsin, and later the deputy social development minister, and chief of the Social Development Department of the cabinet staff under President Vladimir Putin (www.biografija.ru/show_bio.aspx?id=27465). Currently the director of the Social Studies Center of the Institute of Economics of the Russian Academy of Sciences, Gontmakher’s view of Russia’s crisis differs greatly from the official version.

“Russia’s crisis has nothing to do with the U.S. or global recession,” Gontmakher told Eurasia Daily Monitor on November 12. “Assertions that the U.S. has crippled us are pure propaganda. Whatever is happening over here, we have done with our own hands.” Gontmakher believes that “Russia’s systemic crisis resulted from the state’s polices adopted as of 1999,” when Putin rose to power. “These policies unhinged Russia’s economy long before Global recession started.”

Gontmakher points out that while the state has been stomping out the political opposition, it has also driven small and medium businesses into the grave. “Business doesn’t breed in captivity,” he quipped. The state also tightly controls big business. Foreign investors were given some serious lessons, when the state took over the Shell-led Sakhalin-2 project (The Washington Times, December 22, 2006); eased out the owner of Heritage Capital Investment Group, William Browder (www.business.timesonline.co.uk, April 4); and brought the stock market down by $58 billion overnight, when Putin publicly promised “to clean up” the Mechel Coal and Steel concern (Kommersant, July 26).

A Siberian analyst Dmitry Tayevsky, who writes for the Irkutsk www.babr.ru portal, says that the root of the current crisis in Russia reflects “not economic problems but serious administrative miscalculations” (www.babr.ru/?pt=news event=v1&IDE=48608).

The prominent economist Andrei Illarionov, once Putin’s top economic advisor but now a strong critic, told the VOA Russian Service in an October 20 interview, entitled “Catastrophe, Stage 1,” that under the guise of “fighting the crisis” the Kremlin would be seeking “almost monopolist control over the economy the same as it has already grabbed a political monopoly and wiped out any unwelcome opposition” (www.voanews.com/russian, October 20).

Russia’s current economic scene appears dismal. The RTS, Moscow’s main index of shares, dropped from nearly 2500 in May (www.rosfin.ru/news76795.html) to 692 by November 25 (RBK TV, November 25). The ruble-denominated MICEX dropped from 1839 on May 14 (www.lenta.ru/news, May 14) to 595 on November 25 (RBK TV, November 25).

“Our stock markets are dead as a doornail,” commented Gontmakher. With Russian Urals oil vacillating under $50 per barrel these days, there is no hope of quickly replenishing the diminishing state currency reserves, which have dropped from $597.5 billion on August 8 (www.bankir.ru/news/newsline, August 14) to $453.5 billion by November 14 (www.news.yandex.ru).

Top Russian economists recently looked at five possible scenarios, Gontmakher says. All of them, except modernization and immediate reform, would lead to a catastrophe. This single solution that could still save this country is not, however, in the cards under the conditions of the existing state, which is afraid of losing its monopoly of power. “The consequences will be dire,” Gontmakher says. He believes that the country may pass the point of no return sometime in 2009.

Experts see a very serious possibility of an abrupt collapse of the living standard and economic disintegration leading to social unrest, eventually followed by political upheaval.

Gontmakher’s story in the daily Vedomosti (November 6) was pointedly titled “Novocherkassk-2009,” in an allusion to the major workers riots on June 1 and 2, 1962, in the city of Novocherkassk, which were suppressed by the Soviet Army; 23 people were killed and dozens jailed in the unrest (see V.A. Kozlov, Massovye Besporadki v SSSR pri Khrushcheve I Brezhneve [Mass Riots in the USSR Under Khrushchev and Brezhnev], Sibirski Khronograph, Novosibirsk, 1999). The article raised quite a commotion by drawing a picture of a shaky social peace collapsing once the 1962 situation starts repeating itself with prices and tariffs increasing drastically, wages dropping, workers laid off in droves, and food disappearing from the shelves because of collapsing imports and inadequate domestic production. “Either we finally take an effort to reform, or else we will enter a crisis that cannot be resolved within the framework of the current constitutional order,” the story concludes. On November 22 Rosomsvyaznadzor, the government’s media watchdog, issued a warning to Vedomosti that Gontmakher’s article could be seen as inciting extremism (www.polit.ru/news, November 22). Both Vedomosti and Gontmakher protested against the admonition.

As Tayevsky put it, “There will not be a crisis in Russia. There will be something immeasurably worse. But decent words for what it will be have not yet been devised, at least in the Russian language.”


Berlusconi, Centrex, Hexagon 1 and 2 and Gazprom


Roman Kupchinsky

Sergio Berlusconi, the billionaire Italian Prime Minister, arrived in Moscow on November 6 to meet with Russian President Dmitry Medvedev and sign an Italian-Russian deal that will involve Russia in constructing third and fourth generation nuclear reactors in Italy. The head of Russia’s Rosatom (the state nuclear energy corporation), Sergei Kiriyenko, stated after the signing ceremony, “Italy faces the task of returning to a leading position in the European nuclear power industry” (Moscow Times, November 7).

Expanding the Russian-Italian energy relationship has always been a priority for governments led by Berlusconi. In November 2007 Eni, Italy’s major gas company, signed a 50-50 percent agreement with Gazprom to build the controversial $10 billion South Stream pipeline, seen by the Russian leadership as a means of torpedoing the Nabucco pipeline, a project intended to diversify gas supplies to Europe. The gas relationship between Eni and Gazprom has not, however, always been transparent and in recent years has come under scrutiny by Italian parliamentarians.

In May 2005 Eni signed an agreement that would have allowed Gazpromexport, headed by Gazprom deputy CEO Alexander Medvedev, who is also allegedly one of the “unseen cardinals” of the murky Centrex Group in Europe, to participate in selling Russian gas to Italian domestic consumers. Almost immediately the contract came under investigation by a commission of the Italian parliament, Bloomberg reported on October 18, 2005.

The commission discovered that a Viennese company called Central Energy Italian Gas Holding (CEIGH), a part of the Centrex Group, was to play a major role in the lucrative contract. The investigation also revealed that a prominent Italian businessman named Bruno Mentasti-Granelli, known to be a close friend of Silvio Berlusconi, owned 33 percent of CEIGH through two companies, Hexagon Prima and Hexagon Seconda, both registered at the same address in Milan. Russian state-controlled Gazprom held 25 percent of the shares of CEIGH through ZMB, the German-registered subsidiary of Gazpromexport, while Vienna-based Centrex Europe Energy and Gas AG held 41.6 percent. Italian lawmakers promptly blocked the agreement, accusing Prime Minister Silvio Berlusconi of having a personal interest in the contract through Granelli’s participation.

Is it possible that Gazpromexport’s Alexander Medvedev did not know that Berlusconi’s close friend, Granelli, owned 33 percent of CEIGH? Did (now-president) Dmitry Medvedev, the chairman of the board of Gazprom at the time, not know? After talks in Moscow on October 20, 2005, Gazprom CEO Alexei Miller and Paolo Scaroni, Eni’s chief executive, declared under pressure from the Italian media, that the agreement had been cancelled. The joint press release stated that the two officials had “agreed to remake the earlier achieved accords on gas and consider possible cooperation in oil projects and in oil supplies in Europe” (Kommersant on-line, October 21, 2005).

Why CEIGH, a company created to sell Russian gas in Italy, was registered in Vienna remains a mystery. Why was ZMB, a fully owned subsidiary of Gazprom Germania, involved in a scheme to sell Russian gas to Italian consumers? What role did the mysterious Austrian-based Centrex Group, the parent of CEIGH, play in this arrangement? Centrex, after all, sent its profits to an off-shore company named Siritia Ventures in Cyprus, which then forwarded the earnings to another shady company, OOO Rubin, a business with a phony address in an apartment block in Moscow.

According to Austrian public documents, the shares of Central Energy Italian Gas Holding in October 2005 were split up between Centrex Beteiligungs GmbH, Vienna (located at Wiedner Haupstrasse 17), which owned 19,301 shares valued at €100 ($126) each; Hexagram Prima S.R.L., Milan, (Via Fatebenefrattelli 20), 5,001 shares; and Hexagram Seconda S.R.L. (located at the same address), 4,998 shares (Bericht Des Aufsichtsrates der Central Energy Italien Gas Holdings AG mit dem sitz in Wien, 4 June 4, 2007). According to Italian company records, both companies are owned by Granelli, although his name does not appear on the CEIGH registration documents (Prospeto Cerveu Hexagram Seconda S.R.I., January 21).

One of the former directors of CEIGH, Robert Nowikovsky, has been alleged by a Russian website to be a close friend of Gazprombank Chairman Andrei Akimov, who, along with Alexander Medvedev, have long been suspected of having been KGB agents in Vienna (Novaya Gazeta, January 16, 2006). Why was Nowikovsky involved with Centrex and CEIGH in the first place? Who brought him into the picture and why?

Nowikovsky, according to Stern Magazine (September 13, 2007), is the owner of “RN Privatstiftung,” which held one fifth of the shares in Centrex until March 2006. He was also involved when the IDF fund was set up in Vaduz, Liechtenstein, in 2004 by Hans Baumgartner, a Swiss lawyer and board member of the shady Swiss company RosUkrEnergo.

IDF soon established a fund for shareholders in Centrex. The value of the shares, with a minimum investment of one million dollars, has skyrocketed since 2004. The authorities in Vaduz, however, refuse to reveal the names of the shareowners.

According to the Stern article, state prosecutors in Israel and Vienna are currently investigating an alleged illegal payment of 4.5 million dollars made by a company associated with Nowikovsky in 2002 to the sons of Ariel Sharon, who was then Israeli prime minister. The payment was allegedly made together with another Viennese businessman, the secretive billionaire Martin Schlaff.”

The official Centrex subsidiary in Italy is Central Energy Italia S.P.A. based in Milan. The Centrex Group website, however, does not provide any indications that its Italian branch is in any way affiliated with Gazprom.

This subterfuge suggests that the Italian Prime Minister is deeply indebted to Moscow and will play the role of a loyal puppet, similar to that played by former German Chancellor Gerhard Schroeder and former EU Commissioner Romano Prodi, who have been promoting the Kremlin’s energy, and possibly other, interests in their home countries and in the EU in any which way they can.

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