CONFERENCE CALL: Ulyukaev arrest intrudes on Moscow Exchange NY event

CONFERENCE CALL: Ulyukaev arrest intrudes on Moscow Exchange NY event
PM Dmitry Medvedev sits down with Alexey_Ulyukaev in better days.
By Ben Aris in New York November 17, 2016

The timing could not have been worse. American investors and fund managers were tucking into wine and canapés at the Russian Tea Room in uptown New York as the news broke that Russia’s economy minister, Alexey Ulyukaev, had been arrested for soliciting a $2mn bribe.

The reception was the opening event of the “Moscow Exchange Forum – New York Session” held on November 15 at the Waldorf Astoria, which was designed to sell the Russia story to US investors and the timing of the event seemed perfect. Donald Trump’s election the previous week is see as a boon for President Vladimir Putin as he looks to wind down geopolitical tensions, and the Russian stock market, already one of the best performing in the world this year, jumped on the news of Trump’s election.

The revellers at the Russian Tea Room, therefore, were in buoyant mood as protestors gathered outside Trump Tower only a few blocks away to shout “Not my president!” Trump had spoken with Putin earlier the same day and twitter feeds were full of “positive signals” and provided the meat for much of the chit chat at the reception.

“Shit,” said the PR professional sitting across from me.

“What’s up?” I asked as he scrolled rapidly down his phone’s screen.

“Ulyukaev has been arrested on corruption charges,” he replied.

The news rippled across the room as everyone reached for their phones and the chief topic of conversation became Minister for Economic Development Ulyukayev’s arrest for taking a $2mn bribe from Rosneft officials in connection with the privatization of the oil company Bashneft.

The news made the Moscow Exchange’s effort to court investors to invest more money into the Russian market harder. It also undermines the Russian government’s plans to earn enough privatization money for the budget in the next three years as part of its 2017-2019 budget plans.

However, to be fair to the exchange it didn't shy away from some unwelcome news, but did what it should have done: address the issue head on. Ex-Bloomberg senior Russia reporter Ryan Chilcote was moderator for part of the event and posed the uncomfortable question to former finance minister and co-head of the presidential council Alexei Kudrin, who remains close to president Valdimir Putin. In the old days there would have been an attempt to bury the issue or simply ignore it. Ironically, as the room was full of old Russian hands this transparency probably did more to persuade the investors that things are changing in Russia than the damage one scandal could cause. The RTS index was actually up 2% the day after the news broke. 

Did he do it? Who knows. I have interviewed Ulyukaev many times over the years and found him to be a serious, low key professional who has always been totally on his game. He is a mainstay for the Russian government on policy and was the same at his previous job as deputy governor of the Central Bank of Russia (CBR). He is certainly not flamboyant or as obviously interested in money as some other officials I have met.

However, corruption is endemic in the government, driven not just by greed, but also as part of the institutional system of kickbacks that is the system. It’s the police force phenomenon: officers cannot accept “clean” cops on the force, as they expose all the rest to arrest, so a rookie cop will find bribes forced on them by their colleagues simply as insurance. The same principle applies at all levels of the Russian government and bribes are a way of binding political allies to you.

But the story looks odd. Kudrin spoke the following day at the Moscow Exchange event and categorically denied there was any political motivation behind the arrest. “This was not a political decision. The decision to privatize Bashneft was a government decision that could only be made by the head of government or President Putin,” said Kudrin. That means Ulyukaev had no leverage to extract a bribe from Rosneft, as he had no way to block the deal.

Secondly, it is inconceivable that senior Rosneft officials had no recourse to the Kremlin to ask for help if they thought Ulyukaev was going to block their deal. Rosneft CEO Igor Sechin is, after all, one of Putin oldest friends and closest allies. Sechin is not even an oligarch, he is a stoligarch, a member of Putin's inner circle.

Finally, the sum is risibly small. The Bashneft sale was worth over $5bn, so $2mn is a tiny amount in comparison and barely life changing.

Power play

Still, it remains possible that Ulyukaev is guilty as charged. But it smells of politics. Ulyukaev had been an outspoken critic of both the plan to sell Bashneft to Rosneft, but more recently has also vocally opposed the scheme whereby the Rosneftegaz holding company that owns Rosneft’s shares on the government’s behalf would lend Rosneft the money to buy its own 19.5% stake that is up for privatization. This really would be moving money from one of the government’s pockets to another.

The accusation looks like a power play by Rosneft to remove an opponent from the field. Ulyukaev was sacked from his post the following day and Kudrin commented: “Sometimes the authorities and investigators make mistakes – it has happened before.”

And Kudrin knows this well, as he spent years trying to get his former colleague at the finance ministry Sergei Storchak out of jail after he was arrested on corruption charges. If this was a political power play, then there is a good chance that the charges against Ulyukaev will be dropped and he, as a respected and talented bureaucrat, will be rehabilitated with some posh academic job.

But the damage has been done. The whole sorry saga undermines confidence in Russia’s privatization process – and that could prove to be a big problem further down the road.

During the Moscow Exchange event I asked Kudrin if he was not worried about the funding needs of the government under the 2017-2019 budget. The Reserve Fund will probably be exhausted by early next year and the National Welfare fund also run down to nothing over the following two years. With oil prices unlikely to recover to more than $55 per barrel, the state intends to double borrowing on the international markets with a $7bn Eurobond in 2017 and more than double domestic borrowing on the domestic market from RUB500bn this year to RUB1 trillion or more in the next three years on the domestic market. The European Bank for Reconstruction and Development’s new chief economist Sergei Guriev warned in a recent podcast with bne that this could crowd out other players on the domestic market and cause rates to rise and slow growth further.

“It is not a problem, as in addition to the borrowing plans the government has a list of companies it intends to sell that will make up the difference. Sovkomflot and another stake of VTB will be sold next year and we are considering several other names too,” pointed out Kudrin. “With these privatizations we will meet the needs of the budget and reduce the deficit by 1% a year.”

That’s if no one interferes with the next privatizations and no else gets arrested.