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Putin's Heirs: Between Success and Failure By: Ariel Cohen
FrontPageMagazine.com | Tuesday, February 13, 2007

The triumphant presentation President Vladimir Putin delivered to journalists Thursday, February 1, highlighted truly impressive achievements of his tenure. He pointed out that Russia’s close to 7 percent GDP growth in 2006 is based not only on high energy prices, but also domestic demand for consumer products and capital goods. Putin bragged – justifiably – that capital flight from Russia is replaced by $10 billion in portfolio investments inflows and $31 billion in foreign direct investment.

This rosy picture, however, cannot distract foreign investors from understandable anxiety: how the post-Putin succession affects their current and future assets and cash flows. It is clear that in the next regime, major Western investors will have to go through a process of readjustment, in some cases quite a painful one. So, does it really matter who rules Russia?


The answer is, yes it does. Levels of Russia’s openness varied widely in the Soviet times. Since the collapse of communism, however, Russian elites have made a conscious choice to integrate their country into the global economy. Only then they can maximize value of Russia’s immense natural resources – and hope that enough technology transfer and capital inflows will turn Russia from an emerging market into a developed economy.


It is no secret that three groups are currently competing for Putin’s legacy. The first is led by Vice Premier Dmitry Medvedev, the former Putin’s chief of staff and his long-time friend and legal adviser. Medvedev, unlike many in today’s Kremlin, is not a silovik – “man of power”. Nor is he a KGB alumnus.


Medvedev’s bid for succession is coordinated by Alexander Voloshin, a politically savvy Boris Yeltsin’s and Putin’s chief of staff in 1999-2003. Two Russian business giants– Gazprom and RAO UES ålectric monopoly, of which Voloshin is Chairman of the Board, are Ìedvedev’s key supporters.


The second “official” contender is Defense Minister and Vice Premier Sergei Ivanov. He demonstrated his growing power when during the recent visit with Putin to India he not only signed Indians up to co-produce with Russia a fifth-generation fighter jet, but also announced that Indian companies may enter the Russian market to explore for oil – an area far away from defense.


According to insiders’ accounts, Ivanov, a former Soviet KGB foreign intelligence officer and a general in Russian foreign intelligence, is now supported by KGB General (Ret.) Vladimir Yakunin, president of the Russian railroads.


The Ivanov-Yakunin group can be characterized as pragmatically nationalist, suspicious of the West, and having excellent connections with the Russian Orthodox Church.


The third group is headed by Igor Sechin, a long-time Putin confidante and Deputy Chief of Presidential Administration. Persistent Kremlin rumors have it that Sechin, Chairman of the Rosneft oil company board, does not want Putin to leave his post, as this may threaten his own political – and business – survival. The Sechin group is rumored to be the most nationalist of the three.


The three contending groups may cultivate different perceptions as far as the West – and foreign investment – is concerned. At his recent appearance at the World Economic Forum in Davos, Medvedev suggested that Russia might reconsider the freeze on large-scale Western investments in natural resources, including the coveted Shtokman and Kovykta gas fields.


Medvedev sounded like a Russian patriot and liberal – in the tradition of the early 20th century democratic politicians. To the Davos audience he hailed democracy and the rule of law, promised that Russia will produce more oil than Saudi Arabia and “catch up and overtake” Italy, France, and Great Britain in two years, making the ruble one of the world’ principal reserve currencies. He also promised that Russia will be respected and not harmed. In short, he sounded enlightened and presidential. Western investors say, however, that they will watch actions, not promises.


However, a close Medvedev associate says that even if he is elected president, Gazprom will keep its monopoly on gas pipeline infrastructure, portfolio investors will be limited to 50 percent minus one share floats in state-controlled natural resources companies, while Westerners are likely to be limited to 25 percent of equity stakes in large-scale energy projects.


“The Medvedev group will manage economy pragmatically, privatizing when possible and nationalizing when necessary, while maximizing profits of those who are closest to it,” says the Kremlin insider.


This makes Medvedev not that different from the pragmatic nationalists around Ivanov, the Kremlin insider says. However, Medvedev might differ from the rest in three substantive ways. First, he is a lawyer’s lawyer, and will hopefully address the greatest shortcoming of the Putin tenure – the weak, incompetent, and sometimes corrupt judiciary. No such luck with siloviki.


The second difference might be in foreign policy. While Medvedev positions himself as West’s partner and may balance Russia between the West and emerging China, Ivanov is rumored to be the proponent of the “iron triangle” to include Russia, China, and India. Russia’s overtures to the Muslim world, including the attempts to create a gas “OPEC” with Iran and Algeria should be seen through this geopolitical prism as well. Moreover, nationalists want Russia to be the pivot, the “indispensable power” of such a triangle, which is supposed to stave off and offset American and Western cultural influence and economic power.


But the third difference may be more in style than in substance: a more anti-Western atmosphere and suspiciousness of the two nationalist-siloviki groups, their indifference and at times hostility to the West may make both foreigners and Russian investors more uncomfortable – and prompt them to take their investment dollars elsewhere.


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Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Sarah and Douglas Allison Center of the Davis Institute for International Studies at the Heritage Foundation.

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