The Silovki March

4 March, 2005

A major power struggle over economic policy is moving towards its climax in Russia.

As forecast by earlywarning last September, the liberal group of policy-makers is on its back foot in the face of the rise of the faction which has emerged from the security services - known as the Siloviki (men of power).

The politically motivated attack on the oil major, Yukos, has upset the delicate Kremlin balance between three opposing forces:

• big business (formerly known as the Family)
• the liberal economists
• the Siloviki.

Yukos

The arrest of the Yukos boss, Mikhail Khodorkovsky, and the destruction of his company has drastically reduced the power of big business.

Putin's move to halt the election of regional governors, who will be appointed by the Kremlin instead, will destroy the regional power bases of the tycoons.

The liberals, led by the Economic Development and Trade Minister, German Gref, never exercised much political power, drawing on Putin directly to enable them to combat opposition to reform.

As the Siloviki tussled with big business the liberals found room to promote their policies, leading to four years of strong growth after more than a decade of economic chaos.

This is now at risk.

With the collapse of the three-sided balance of power the Siloviki will now be able to operate unopposed, and turn their attention to economic policy.

Siloviki policies

The Siloviki favour:

• a more statist economic model, with the government in charge of the 'commanding heights'
• a pro-active government industrial policy to bolster chosen sectors and regions reasserting state control in strategic sectors of the economy creating state-owned 'national champions' in these sectors
• using these firms to cement strategic ties and exert pressure - abroad as well as at home
• attracting foreign partners for their technological and management know how - while limiting their influence
• meeting Putin's goal of doubling GDP by 2010.

Oil

The goals of reasserting state control and setting up national champions is already well in hand.

Though final details are still subject to discussion, the merger between Gazprom and state-owned oil company Rosneft (after a US court threw out a blocking bid by Yukos) will create one of the world's three largest oil companies.The government will be in control as majority shareholder, but that will open the door for foreign investors to take minority stakes.

The government has opened up eastern Siberia's untouched reserves, while limiting exploitation to Russian companies.

The most important licenses are expected to go to Gazprom-Rosneft and Kremlin-friendly companies like Lukoil and Surgutneftegas.

Bank

In banking, Vneshtorgbank (VTB, the former Soviet-era foreign trade bank), is growing rapidly.

Liberals want to see it sold off. But a deal to sell 20 per cent to the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) is dead.

Another idea - to sell it to a foreign commercial bank such as Deutsche Bank - is going nowhere.

Though he is a former Family member, VTB's Chairman, Andrey Kostin, has thrown in his lot with the Siloviki giving them access to considerable financial resources.

In a sign of where VTB's loyalties lie, it is thought to have partly financed the state's acquisition of the Yukos production subsidiary, Yuganskneftegas, by Rosneft in December's auction.

Strategic

The definition of what counts as a 'strategic sector' seems to be broadening rapidly.

The latest addition to the national champion family is the United National Aerospace Company (UNAC), which unites defence producers, design bureaus and aviation infrastructure.

Set up in January, the company's efforts are being coordinated by Boris Alyoshin, head of the Federal Industry Agency at the Industry and Energy Ministry.

This body is becoming a key player in the Kremlin's industrial plans.

Another sign of how the wind is blowing is provided by the postponement till 2006 of the proposed privatisation of 75% of Svyazinvest, the state-owned telecoms holding outfit that controls all fixed line operators. It may, in fact, not happen at all.

Steel

Though the metallurgical sector is almost entirely in private hands, it is also thought to be under threat from the Siloviki.

Top of the list of potential victims is Vladimir Potanin who owns Norilsk Nickel, the world's biggest nickel mine.

To spread their assets protectively, some steel groups like Severstal have been expanding overseas as fast as possible. Others, such as EvrazHoldings, are cosying up to the Kremlin.

Report

Just how far the definition of 'strategic' is to be pressed will become clearer within a few months when ex-Prime Minister Sergei Stepashin releases a much-anticipated report on the 1995-6 privatisations, the loans-for-shares deals that created most of Russia's blue chips.

This could become the basis for new attacks on oligarchs - or at least demands for them to pay a 'fair price' for their assets.

On Monday - foreigners and the $23 billion Fund.