MOSCOW BLOG: Tackling the vested interests in Russia

By bne IntelliNews July 7, 2011

bne -

Russia is in the midst of a vital battle. As the election season draws closer, President Dmitry Medvedev's attempt to accelerate Russia's "modernisation" is provoking a clash with the entrenched vested interests. It is a revolutionary vision - and revolutions always cause bloodshed. Calling for modernisation is one thing; implementing it is another.

Medvedev doesn't enjoy the populist appeal of his mentor, Prime Minister Vladimir Putin, but he has been crystal clear from day one that he hopes to overturn the country's "legal nihilism" and drag it into the modern world. Demands - and more importantly deadlines - to accelerate the privatisation drive, relax restrictions on share trading and oust top officials from state-company boardrooms have been coming thick and fast from the president's office in recent months.

In a sign of things to come, a group of state-owned companies, including Rosneft and Transneft, sent a letter to Deputy Prime Minister Igor Sechin in July protesting against a new bill that forces them to increases transparency by providing minority shareholders and independent directors with more information. Without a hint of irony, the letter claimed these new rules would increase risks, undermine the competitiveness of Russian companies and hurt Russia's investment appeal.

Vested interests

The Medvedev camp has said from the start that it knows it will face opposition from vested interests - and is ready to fight. Deputy Prime Minister and Finance Minister Alexei Kudrin (a liberal, but not part of Medvedev's camp) warned last year that the management at state companies would try to block the share sales during the privatisation programme. However, Kudrin insisted that the government is the owner and decision-maker, and it will push past such resistance.

On cue, a bevy of management figures from major companies on the privatisation list began cropping up regularly in the press to explain why the sale of shares in their company should be small, steady and extremely slow. Some cabinet ministers have joined the calls for "caution".

Medvedev's response came in June, with a demand to accelerate and widen the programme by reducing the state's holding in many companies to below a controlling stake, or even to divest its interest altogether. "The role of the state in direct governance of economic assets must be considerably reduced," Medvedev said in his budget address to the Duma on June 29, reported RIA Novosti. "The Russian government needs to prepare a schedule of privatisation of large share packages in key state-controlled companies to reduce the state's stakes below a controlling interest or give up state participation, except for infrastructure companies or companies related to the provision of state security."

More importantly, the president ordered a timetable for the programme. While it seems a prosaic demand, the lack of a schedule is a major risk that allows vested interests to delay the process in the hope that the wind will change before they lose their grip.

Russia's bureaucracy has massive interests in Russia's business, but it doesn't hold a monopoly on power as it does in other areas such as the military or law enforcement.

On the one hand, the shock of the economic crisis did much to convince the government that this time it actually has to do something to diversify the economy. It helped entrench the position of economic liberals like Kudrin and First Deputy Prime Minister Igor Shuvalov. It also helped convince private business of the urgent need to become more competitive. That means throwing the bureaucratic monkey off its back and reducing the influence of state-owned companies.

One reflection of this is the rise of "active lobbying, unimaginable even three years ago," points out Oleg Babinov of Risk Advisory in a recent note. As the head of the Dixy retail chain told bne in a recent interview, the much criticised retail legislation introduced last year pushed the sector to get its lobbying act together. Russian private business is starting to demand a nurturing hand rather than one that exerts omnipotent control, as bne argued here recently . At the same time, it's understandably nervous about sticking its head above the parapet and openly opposing the government.

But Medvedev has clearly come down on the side of private business in its competition with the state-owned companies, moving swiftly to take on the government when it raised payroll taxes from 26% to 34% in January, a move at least partly prompted by the need to bankroll populist policies ahead of the elections next year. Reports quickly flooded in that the higher costs were hurting economic growth. After months of demands for a swift reversal, the Kremlin got its way in late June.

Whilst Medvedev remains reliant on Putin, and his effectiveness is questionable when it comes to fighting on other fronts, the economy is the thin end of the wedge. "The choice that big business has to make," says Babinov, "is whether to re-enter into an alliance with the bureaucracy or to mobilise the middle class against the bureaucracy in order to swing the Russian political pendulum towards liberalism... is far more critical for Russia's prospects and risks in the present decade than the Putin-Medvedev presidential candidacy dilemma (and will most likely determine the future of the 'tandem' anyway)."

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