STOLYPIN: The ‘Ulyukaev Affair’ and Russia’s hybrid market

STOLYPIN: The ‘Ulyukaev Affair’ and Russia’s hybrid market
Pyotr Stolypin is famous for his reforms to Imperial Russia's agricultural sector.
By Mark Galeotti of the Institute of International Relations Prague November 17, 2016

In the night of November 14, officers of the Investigatory Committee arrested Russian Minister for Economic Development Alexey Ulyukaev and charged him with soliciting a $2mn bribe for approving the $5bn sale of a 50% stake in Bashneft state oil company to state-controlled oil giant Rosneft. The ‘Ulyukaev affair’ can be spun as a milestone in Putin’s slow-burning anti-corruption campaign – the first minister arrested in office in post-Soviet times – but the circumstances around the case have startled and alarmed many in Moscow, and highlight three problematic aspects of current policy.

The question is not, after all, whether Ulyukaev is clean or dirty. Frankly, no one at the top of the Putin system, let alone someone with direct input into financial decisions, is untainted, directly or indirectly. Tireless anti-corruption leader Alexei Navalny has already been engaged in an investigation of Ulyukaev’s sizable portfolio that has reportedly already found an active Cyprus offshore company recently and suspiciously registered in the name of his 80-year-old father. Rather, the questions are more about why Ulyukaev, why now, and what this says about today’s Russia.

The ‘privatization’ of Bashneft into Rosneft’s hands was to a large extent privatization only in the way that transferring money from one pocket to another is making a profit. In aggregate terms it made no real money for the state, but simply allowed Rosneft’s Igor Sechin – hardly coincidentally a close Putin ally – to continue with his essentially imperialist business model, dominating the market by destroying, conquering and absorbing more efficient rivals.

The economic specialists within the government were all opposed and in August the Bashneft sell-off was called off, only to be relaunched in October. Everyone in the government seemed hostile to the idea until Putin suddenly spoke out in favour, saying that because BP owned part of Rosneft it should not “strictly speaking” be considered a state-owned corporation.

Suddenly, opposition to the idea crumbled. Everyone, after all, knows when an official line has been drawn. But that does not seem to have been enough for Sechin, who appears to have decided that Ulyukaev was either a threat or else a suitable surrogate, whose fate could warn others. Sechin had been behind an investigation that dated back to the dubious seizure of Bashneft by the state in 2015, and apparently believing that no victory is complete without malice, made his move against Ulyukaev.

He was particularly able to do this because of a pernicious and apparently growing phenomenon within Russia – the attachment of officers from the security apparatus (typically but not exclusively the FSB, the notorious Federal Security Service) to major businesses, especially state-controlled ones. This is at one a perk for officers who can enjoy private sector salaries and also a means of embedding the government’s monitors.

However, it inevitably raises a basic question: do they end up controlling business, or does business end up with its agents in state security?

The endemic corruption of the Russian state makes the latter inevitable. In this case, Rosneft security chief Oleg Feoktistov, who had been transferred from the FSB only in August, appears for months before to have been running surveillance operations – at Sechin’s request – not just on Ulyukaev, but on a whole swathe of economic liberals opposed to the Bashneft sale in particular, and Sechin’s empire-building in general. Targets also included Deputy Prime Minister Arkady Dvorkovich and presidential advisor Andrei Belousov.

While the Investigations Committee made the arrest and will prosecute the case, this was clearly an FSB operation. While some overheated speculation suggests that Sechin controls certain divisions within the FSB, this is both an exaggeration and to miss the point. In some ways the reality is more alarming: that investigations, even prosecutions, are for sale, and everyone with enough money and influence can have their own pet secret policemen.

Anti-graft as political weapon

This case is likely to have a chilling effect on not just the surviving business class, but also their liberal (in economic terms) allies within the government. It is yet another signal that under late Putinism, the logic of the market is give way to renewed clientelism and state control and intervention, albeit often prosecuted behind the scenes.

While there will be some genuine progress in fighting corruption – and it may well be that Ulyukaev took that bribe, although many have noted both that it would be foolish directly to try to extort from Sechin, and that $2mn on a $5bn deal is perversely way below the ‘market price’ – overall it is, as usual, simply becoming a political weapon.

Ulyukaev is now under house arrest, and faces potentially up to 15 years in prison and a $200mn fine. Quite possibly he will never actually be prosecuted; he is broken, now, and the etiquette of such political assassinations is often that a soft landing follows the fall. However, as a stark reminder that political connections trump law and logic, the ‘Ulyukaev affair’ is likely not to be forgotten.

If Putinism is a hybrid democracy, an essentially authoritarian system behind a pseudo-democratic facade, then it is also increasingly becoming a hybrid market.

Mark Galeotti is a senior research fellow at the Institute of International Relations Prague, a visiting fellow with the European Council on Foreign Relations, and the director of Mayak Intelligence. He blogs at In Moscow’s Shadows and tweets as @MarkGaleotti.