The trend toward toughening state control in the corporate sector of the Russian economy, which first manifested itself in 2000-2001, has become especially evident since the beginning of the year.

THE STATE’S EXPANSION AND CREATION OF ‘POWER CENTERS’

As early as 2000, Russia clearly tended to consolidate business entities, as well as the shares it controlled in holding companies. (This was the time when the consolidation of Rosneft’s subsidiaries began in earnest. Additionally, there was the formation of the Antey and Almaz concerns in the defense industry, the growth of the Rosspirtprom holding company which united 89 alcohol producers, the merger of all nuclear fuel producers and traders into one corporation and the unification of all nuclear power plants in a single power-generating company on the basis of Rosenergoatom, etc.) The annual shareholders’ meetings at Gazprom, Unified Energy Systems, Aeroflot and some other big companies in 2000 also revealed the federal authorities’ intention of toughening their control via corporate procedures (i.e. boards of directors).

Obviously, the toughening of state control through the formation of new big holding companies, together with the state’s broader representation in the existing companies, was prompted by a number of objective factors, such as the need for technological integration and improving the companies’ ability to compete on the market. The increased pressure on various enterprises was also aimed at increasing budget revenues. There are certain indications that in 2000 the government implicitly set a strategic goal of establishing at least one state-owned ‘power center’’ in each of the most important sectors based on the assets remaining in state ownership (state unitary enterprises and blocks of shares).

However, such a policy faced a whole range of objective limitations: 1) a ‘streamlined’ system of state property management, complete with corruption and kickbacks; 2) a limited amount of state assets that would provide for the creation of holding companies controlled by the state; 3) in certain cases, the need to make decisions that are viewed by investors as systemic risks (e.g. deprivatization); and 4) political and geopolitical factors. Still, the path of simple integration and consolidation of state assets looked particularly attractive (compared, for example, with such an alternative as trust management).

In 2002, it became clear that simply forming big state-owned entities on the basis of the remaining assets might have quite negative results. A glaring example is Rosspirtprom where, in addition to the unending scandals between the parent company and its subsidiaries, there emerged problems that stemmed from its managers’ opportunistic behavior. The government was forced to intervene. Its official order of October 29, 2002 stripped the holding company of the right to draw credits on its own; it also forbade the shareholders to elect the boards of directors and executive boards of companies whose shares had been contributed to the federal state unitary enterprise’s authorized capital. Finally, it could not dismiss the leaders of its subsidiaries. All of these procedures required the exclusive consent of the governmental cabinet. Furthermore, it is the cabinet’s authority to forward its recommendations at the shareholder meetings of the aforementioned companies on the size of its dividends, amendments to their bylaws and changes in their authorized capital.

The integration of the defense industry enterprises is another process that has not developed without conflicts as well. According to a program for the defense industry’s development adopted in October 2001, the defense sector’s reform in 2002 through 2006 was to result in the emergence of 74 major holding companies and concerns controlled by the state (on the basis of 400 defense enterprises). However, in 2002 the planned number of holding companies was reduced to 42. By the end of last year, three integrated structures were actually formed (the Sukhoi aircraft holding company, the Almaz-Antey concern and the Tactical Missiles corporation). This year the program will be further amended.

The new federal authorities’ drive for self-affirmation at the start of 2000 was accompanied by the state’s (mostly tax agencies’) tough actions against LUKoil, TNK, AvtoVAZ, Gazprom, Norilsk Nickel etc. Still, those raids – complete with searches and criminal proceedings in 2001 (such as the Federal Tax Police Service v. LUKoil, the Audit Office v. TNK, the General Prosecutor’s Office v. Sibneft and Norilsk Nickel) produced no results – “in the absence of corpus delicti.”

I can agree that prosecuting tax crimes is one of the few effective ways for the state to influence corporations and their beneficiaries. However, three points should be made on this subject. First, tax reform must be further perfected, i.e. the objective economic reasons behind the majority of tax crimes need to be removed. Second, the rule of law should be ensured for the use of force and verification of facts for commencing criminal proceedings. Third – and this is of particular importance – the ultimate goals of the instigators of selected criminal proceedings are not clear, given that tax breaches appear to be systematic.

The year 2001 saw a significant expansion of the executive influence in the economy in several directions:

• personnel reshuffles in the biggest natural monopolies and strategic companies where the state had its stakes (Gazprom, Russian Railways, Rosenergoatom, etc.);
• reorganizations (mostly through mergers) of existing companies and the creation of new holding companies in the strategic sectors; consolidation of regional communications monopolies into seven interregional subsidiaries  within the Svyazinvest holding company; consolidation of aircraft industry companies into five integrated entities, etc.;
• the return of formerly withdrawn (privatized or leased) assets (e.g., Gazprom’s former assets handed over to SIBUR, Itera, etc.);
• attempts to review the existing (since 1992) norms concerning the delimitation of companies’ ownership levels, as well as the stakes owned by the Russian Federation (e.g., ALROSA);
• the establishment of control over main money flows and their concentration in state-owned banks. The Savings Bank (Sberbank) and Vneshtorgbank lend credit to Russia’s biggest companies and have unparalleled access to the ample, as well as the cheapest financial resources – the population’s savings and the Bank of Russia’s funds. Not surprising, there was a heated debate in 2001-2002 on whether or not Vneshtorgbank should be privatized;
• a tough political struggle (2000-2002) around the reorganization of the country’s biggest natural monopolies (Gazprom, Unified Energy Systems, Russian Railways).

Federal authorities have increasingly intervened in regional property conflicts via the president’s envoys to the federal districts. For example, to settle the 2001 conflict between the Karabash Copper Works and Karabashmed joint stock company, the office of the presidential envoy to the Urals District proposed handing over part of Karabashmed shares to the state.

“TRUST MANAGERS” IN THE PRIVATE SECTOR?

Following the first steps aimed at the consolidation of state assets and the show of force against private companies in 2001 and 2002, an alternative strategic approach was developed. It is based on the use of certain private companies (groups) as “trust managers” of the federal center in a particular region (for example, Tyumen) or a particular sector of the economy (for example, ferrous or nonferrous metallurgy). The advantages for private groups are obvious: they thrive not from successfully avoiding prosecution in their use of illicit schemes, but rather from the carte blanche given to them by the state to expand while enjoying its political support.

During that period, the Russian president made a point of it to avoid contacts with financial and industrial tycoons. This policy certainly did not mean that he rejected such an approach; indeed, his remoteness simply made it easier for a trust manager to be easily replaced by another should he breach the established rules. That condition certainly worried would-be trust managers, in spite of all the potential benefits. Moreover, the state’s pointed policy of remaining equidistant from large businesses directly influenced the reorganization processes in the biggest private groups.

A clear counter trend emerged. Private capital attempted to distance itself also from the authorities by moving as far away as possible to ensure its safety; this would include the process of legally registering property rights in consolidated assets abroad. The establishment of TNK International by the Alfa/Renova group, the registration of the Millhouse Capital managing company by the Roman Abramovich group, and the formation abroad of a holding company controlling the SUAL group’s assets were, perhaps, the first signs of Russian businesses attempting to ensure ‘safe transparency.’

Partners in the Alfa/Renova group opted to form alliances with Western investors. Last year’s merger between BP and TNK and the formation of an international industrial group based on SUAL assets with Fleming Family & Partners were fully in line with that strategy. As of January 2004, Fleming Family & Partners’ stake in SUAL International (registered in the British Virgin Islands) is said to have reached 23 percent. It cannot be ruled out that the number of partners will grow (via IPO or strategic partnership deals), i.e. the aluminum holding company may grow increasingly ‘multinational.’

Seeking to protect their assets, in the early 2000s other major groups chose to ensure their representation in regional administrations. For example, Norilsk Nickel CEO Alexander Khloponin became Governor of the Taimyr Autonomous District and later of the Krasnoyarsk Territory, while Roman Abramovich became Governor of the Chukotka Autonomous District.

In addition, in 2002 and 2003 some groups began shifting from attempts to directly privatize administrative control, to a marked loyalty to the federal authorities, while exhorting big business’s “social responsibility.” Some companies signed social partnership agreements with the regional authorities. Others initiated an increase of federal stakes or the transfer of certain assets under the state’s control. In 2003 and 2004, the idea of ‘corporate social responsibility’ (even though the notion is fairly abstract where it concerns commercial entities) became dominant in the debates over the ways to properly arrange relationships between the business community and the government.

In the fuel and energy sector, as well as in the banking sector, there seems to be a clear division marking the “loyal” companies from the others. For example, Gazprom and Rosneft are clearly pro-state companies (given the government’s equity control and their managers’ loyalty), while YUKOS is obviously at the opposite pole. Some of the biggest Russian groups, such as Interros and United Heavy Machinery (OMZ), are not being directly affected by the toughening of state control; according to analysts, they are viewed as reliable since they properly “understand the state’s interests.” Their real owners, in both cases, perfectly realize that any deviation from “understanding the state’s interests” may result in serious sanctions (such as the audit of the acquisition of Norilsk Nickel by Interros).

Many large companies have been forced to prove their loyalty by taking part in litigation that formally concerned economic disputes, yet had clear political repercussions which damaged the plaintiff’s reputation (for example, Gazprom v. NTV and LUKoil v. TV-6).

It seems that between 2000 and 2003 attempts were made to select loyal businesses as opposed to all the rest, although in reality there was a constant rotation between these two groups. Yet some of the events of last year suggested that the status of “trust managers” is rather questionable.

THE YUKOS CASE

Since June 2003, YUKOS top officials have been under intense pressure; Mikhail Khodorkovsky’s arrest was undoubtedly the most important event of last fall. Actions by the General Prosecutor’s Office have given rise to much speculation and accounts, but, as usual, the real motives remain off camera.

Purely political explanations for the attack on YUKOS attempt to link the oil company with the election campaign, or Khodorkovsky’s political ambitions. Others point to the confronting groups in the Russian president’s office and their financial sources (the remaining members of President Boris Yeltsin’s ‘Family’ and YUKOS-Sibneft vs. the St. Petersburg group of security officials and Rosneft). However, none of these offer a comprehensive explanation of the situation, although those motives could have provided an additional impetus for the use of force by the state agencies.

It is equally difficult to accept purely economic motives, aimed at property redistribution, as the decisive reason. At the moment, besides purely market activities, there are no available legal methods for seizing a YUKOS stake, unless variants involving personal pressure are considered: for example, a Special Trust Arrangement (a 50-percent stake in the Menatep Group) could be amended in favor of other beneficiaries. Another possibility would be for a particular company to “voluntarily” return assets to the state, or to an entity named by the state – by analogy with MediaMost, SIBUR and other cases.

By all appearances, there are insufficient legal grounds for the nationalization of YUKOS, or the coercive, yet legal, appropriation of any part of its holdings in the state’s favor. The arrest of a substantial share of the company (initially 44.1 percent) cannot result in a legally backed alienation of this share in the state’s favor. First, according to analysts, the act of arresting shares is legally irrelevant – its being based on Article 115 of the Russian Criminal Procedural Code is questionable. Second, offshore firms that are the legal owners of the shares can file counterclaims in British courts.

Another possible alternative is for the state to present tax claims to the company; hypothetically, such a move could be used to secure an ‘offset deal’ and swapped for a substantial stake in YUKOS. However, such action also requires better validation (it probably has legal grounds, but YUKOS was not an exception to the rule when companies faced all sorts of tax schemes on a broad scale in 1998 through 2000).

But let us go back straight to the cause of the conflict.

The reorganization of the biggest private groups (holding companies) carried out energetically during the 2000s was to a large degree triggered by the need, already understood in 2001, to make their ownership and revenue structure legally flawless. The formation of offshore holding firms (to avoid extra taxation in Russia) was a logical step, and the owners (partners, beneficiaries) opted to ensure the control and protection of their assets via various juridical mechanisms. These measures guaranteed better protection of their property rights, as well as a greater transparency with regard to the real owners of Russian companies.

Naturally, certain motives were insufficient for making beneficiary ownership fully transparent. For example, getting access to the capital market (the issuance of ADR), or having pressure applied by Western banks in a global campaign against money laundering (good examples are the moves by the FATF, OECD, EU, ‘Wolfsberg Principles’, etc.). It was necessary for a certain period of time to pass, after which the risk of losing the acquired (often with breaches of civil or criminal legislation) assets would be minimal. Furthermore, up to a certain point it is impossible to disclose all sources used for property acquisition – this would include tax-dodging. A great majority of Russian companies are unprepared for such a task at the moment. YUKOS was, in fact, the first Russian company to have completed that phase of its development.

Obviously, bringing the whole ownership scheme out of the shadows (and I am not referring to tax and financial schemes here) and creating a fully legal structure for the protection of assets means, first, the reduction of the need for a company to have intimate relationships with government bureaucracy (good connections with federal and regional officials and courts, financing of politicians, etc.).

Second, a private company’s (together with its owners’ and beneficiaries’) independence from the state and its law-enforcement system is growing. It would be difficult to name another private company in Russia that has the size and the level of legal protection of its owners as YUKOS. A question arises: How does a major independent company fit into the ‘strong state’ ideology in its current Russian version?

A potential reason for the use of force against the Khodorkovsky group is related to the whole logic of YUKOS’s development as a ‘model’ company in the 2000s. The policy of promoting a favorable corporate image, together with artificially increasing its capitalization, could be indicative that preparations were underway for the sale of the company, or its merger with a major global company on a parity basis.

As a result of YUKOS’s merger with Sibneft announced in 2003 (and later put on ice), this new company would have been ranked around the fourth or fifth amongst the world’s biggest oil companies. Yet the strategic goal of the new company to become a ‘global energy leader’ would have been difficult to achieve had it not gone multinational. Talks of a possible merger (or the sale of a substantial stake) between YUKOS and ExxonMobil or ChevronTexaco, reported at the end of last summer, make this version the more probable.

The Russian authorities must have found the level of influence and the rate of independence of such a big company unacceptable (given that its production and refining facilities are based in Russia and that it actually controls Eastern Siberia). If the guess is right, a blow to YUKOS’s and Sibneft’s capitalization was also a sensible move. The actions taken by the Russian law-enforcement agencies (irrespective of the legal grounds, names and time limitations) were intended to convey to YUKOS what they should not do under any circumstances; the moves were also intended to show the world that they should not deal with such a ‘tainted’ company. As a result of the drop in capitalization, the YUKOS owners have lost interest in selling off part of their shares.

What followed was an ‘anti-oligarch campaign,’ waged all through last summer and fall (primarily, all sorts of ‘public opinion polls’ were published). To a great extent, the campaign focused on the hysteria around the “rejection of the results of privatization by the people.” Clearly, this was only a cover for other socio-economic objectives of the state.

Naturally, the above is an attempt to offer an adequate explanation for what happened. Still, the first lesson is obvious: the company that had openly (more than any other company) disclosed its structure, shareholders and beneficiaries to the public was the first to fall victim to this legalization. It cannot be ruled out that this use-of-force-and-pressure policy may become standard – especially since the developments in 2002 and 2003 indicate that major international groups may emerge on the basis of several metallurgical and chemical holding companies which have virtually completed their consolidation. Time will tell whether or not this assumption is right.

In conclusion to this section, I would like to make some more general points.

It is quite possible that YUKOS managers and owners really committed crimes (related to tax evasion, use of budgetary funds, scheming with assets and transfer prices to the detriment of other shareholders, and so forth). In that case, the action taken by the prosecutors and subsequent lawsuits are perfectly legal. But this is only true under one condition – that law enforcement is non-selective. But if the owners and managers of only one company fall under judicial pressure for wrongdoings that are common to all companies in a given period, then this type of law enforcement can only be described as being arbitrary.

The whole situation does not inspire optimism. If the authorities only target YUKOS (irrespective of their true motives) then all of the measures taken under the judicial reform in 2000-2003 are hardly worthwhile.

If YUKOS is only the beginning of a campaign (that starts with Russia’s biggest private company so that the smaller companies “fear outright”), there arises the question that deprivatization may be the state’s general policy.

How realistic is it?

It is possible to find flaws in almost any privatization deal that was hatched between 1992 and 2003, which is not surprising given the rapid pace at which the relevant legislation was drafted and the privatization program was implemented (therefore, there was no malicious intent in the privatization deals). Clearly, the issue of privatization legitimacy must be settled once and for all (for example, the 10-year statute of limitations could be reduced), except for cases where the law was flatly violated by officials (including cases of corruption) and where there were clear signs of criminal intent. The latter cases should be explicitly listed in a special legislative act. Provided that the law enforcement practices are equitable, this would be a safe barrier against any attempts at property redistribution on a large scale under the pretext of restoring justice.

It is worth noting that opinions concerning the YUKOS case have polarized: Western officials, business (investment) and academic circles are poles apart from the mass media, which in general represents the “public opinion.” The latter often portrays the YUKOS case in the overall context as an offensive against democratic freedoms. On the other hand, business circles tend to hold neutral attitudes or approve the steps taken by the Russian authorities. This should not be surprising given the unending string of corporate scandals in many developed nations, together with the toughening of corporate and securities legislation.

Enron’s bankruptcy in 2001 and 2002 and scandals involving WorldCom, Citigroup Tyco, Adelphia and other U.S. companies have revealed serious faults of regulation norms concerning corporate governance, accounting and the stock market. As a consequence of these developments, the Sarbanes-Oxley Act was adopted in July 2002.

The 2003 scandal which led to Richard Grasso’s resignation as chairman and chief executive of the New York Stock Exchange – after it was disclosed that he had been given a pay package worth almost $150 million – clearly showed the weakness of control over top managers.

In December 2003, one of the biggest corporate scandals in European history broke out with Italy’s Parmalat case. And already this year, former managers of Germany’s Mannesmann were brought to trial and charged with “breach of trust of the shareholders” in selling their company to Britain’s Vodafone four years ago. Numerous scandals involving Japanese companies and South Korean chebol conglomerates were reported in the 2000s.

Therefore, since foreign businesses oftentimes confront problems at home, they understand that there is sometimes a need to toughen regulation regarding big public corporations abroad as well.

Paradoxically, the illegal corporate deals and legislative problems in the Western nations that only became obvious over the last few years have helped to remove Russia from the list of high corporate risks. This is underlined by the fact that last year YUKOS ranked second in terms of corporate governance among the world’s top 20 publicly traded oil and gas companies, according to Energy Intelligence, a U.S. analytical agency.

Still another effect of the YUKOS case is that it has clearly showed the inner contradictions of what is known as a Russian model of corporate governance. Despite its transparency, openness and adherence to Western corporate governance standards, YUKOS is a one-man company and this man is incarcerated in the Matrosskaya Tishina prison.

Another possible long-term effect of the YUKOS case is that it could weaken the prospects for the emergence of multinational corporations in Russia based on major groups working in the extracting sector. In a sense, a line has been drawn as concerns  the question of  “limiting the omnipotence of Russia’s financial and industrial groups.”

Finally, the YUKOS case will clearly have its effect on the debates about taxation in the extracting sector and other industrial policies.

FURTHER EXPANSION AND POLARIZATION OF INTERESTS

The logic of the state’s expanding control over strategic sectors in 2003 was not limited to the YUKOS case, even though its traces and side effects were observable in many cases.

First, it is worth mentioning that reform of the federal unitary enterprise system was combined with further construction of state (vertically integrated) holding companies. In particular, this year’s plans call for handing 123 federal state unitary enterprises over to state holding companies.

It could be argued that this rather coercive integration could be justified with respect to the fuel and energy sector, nuclear power engineering, communications, the defense industry, and certainly Russia’s unique production companies, such as the Energia aerospace company and integrated aircraft companies which are built around major R&D companies. This policy allows the state to maintain control (even if formal) over the biggest natural monopolies and certain strategic industries (sectors), prevent potential disruption of traditional economic ties and the total degradation of unique research efforts. Furthermore, it permits to preserve the coordination of production and technological activities within the framework of originally unified complexes.

But the global record has clearly shown the real drawbacks of such organizations: the extra costs connected with auditing the subsidiaries, difficulties in exercising control over redistribution of resources (assets) and revenues, a tendency toward politicization, excessive red tape, etc.

Russia’s practices of the 1990s-2000s had the following specific features: 

• permanent reorganization of holding companies with inherent violations of property rights, strife for gaining control, handover of shares, etc. Economic efficiency and rational management were rarely the primary considerations for such reorganizations. It is important to see the differences between the motives for the reorganization of the state holding companies (politics, lobbyism, diverse methods for the transfer of assets, budgets, withdrawal of assets, corruption) and private companies (optimization of management, takeovers, dumping of unprofitable assets, forcing out ‘alien’ shareholders, expansion, tax dodging, outflow of capital). Many times these motives overlap;
• the use of state holding companies for serving the factional interests of certain state officials and private entities, withdrawing  financial resources (offshore holding firms, transfer prices, profit centers outside formal state holding companies, violation of the rights of shareholders of the parent company and subsidiaries, etc.), pursuing non-economic goals (elections, financing particular political groups), and implementing spontaneous budgetary allocation decisions. In addition to plain corruption, this approach results in the state’s inefficiency as an owner and, consequently, minimal revenues on its assets.

Second, pension reform is a telling example of the side effects of the state’s expanded control. Last year even the Finance Ministry admitted that the first phase of the reform had been a flop. The non-transparent choice of Vnesheconombank as the agent for managing state pension funds, the ‘tender’ in which 55 private companies were chosen to manage the assets, and the incomprehensibility of the public information campaign suggested that under the pretext of the pension reform the government sought to maximize the funds remaining under its control. According to Russia’s Ministry of Finance, only 1-1.5 percent of future pensioners (up to 700,000 individuals) have turned over their funds to private managers, against the 6-10 percent as had been expected.

Third, in 2002 Russia witnessed vigorous debates on the goals and principles of potential industrial policy. These talks focused around two essential and interrelated issues: 1) alternatives in the country’s long-term economic development – either maintaining the status quo or rejecting the national economy’s reliance on raw materials. Furthermore, introducing greater taxation of exports to level off profitability in the extracting and manufacturing sectors; 2) absolute state support for ‘integrated business groups’ (as seen by the Russian Union of Industrialists and Entrepreneurs) or “limiting the omnipotence of Russia’s financial and industrial groups.”

In 2003, the debate was actually reduced to highly politicized disputes around the ‘natural resource rent.’ The adoption of a new law on underground resources – the government is expected to consider its draft this summer – will be an important indicator of the authorities’ real position on the issue and their attitude to the toughening of state control in the sector. Key issues include the possibility for local governments to take part in the allocation of mineral rights (the Russian Constitution vests those powers with the local authorities), finding an alternative to licenses (for example, “exclusive rights to excavate within a particular sector” purchased during auctions), the terms for granting mineral rights, geological exploration and other problems associated with prospecting.

Fourth, from the available data it is possible to suggest that since last year the formation of a certain ‘nucleus’ for state expansion and control has been underway. This includes Gazprom, several loyal oil companies and some entities in the defense industry. In light of this fact, the chances for any serious reform of Gazprom are next to impossible.

Licenses and auctions in the oil sector are another possible route for the state’s expansion. It is very unlikely that the review of some licenses that started in 2003 (e.g., Sakhaneftegaz, affiliated with YUKOS, was stripped of its license for developing the region’s biggest Talakan oil and gas field in favor of Surgutneftegaz) was made possible just through the decision by the Ministry of Natural Resources or a regional court.

Importantly, in December 2003 Gazprom, Rosneft and Surgutneftegaz signed a contract and formed a consortium in order to pursue concerted policies for the acquisition of licenses. These were used for developing fields in Eastern Siberia (until recently this region was mostly under YUKOS’s control) and Yakutia. Since the government has ample stakes in the former two companies, it looks like the state wants more control in the sector. State-owned Transneft clearly backs the alliance.

Speaking about concerted policies, counteracting TNK-BP, as well as the expansion of Chinese oil companies in the region, will likely be an important aspect of the consortium’s activities. At the start of the year the first step was made to limit TNK-BP’s activities at the Kovykta gas condensate field. In particular, it has virtually been agreed that Gazprom will join the project, since otherwise the license holder may lose its license to this field and face problems with other pipelines. ChevronTexaco and ExxonMobil, both U.S. companies (which claimed a stake in YUKOS-Sibneft in 2003), this year lost the right to develop three blocks of fields in the Sakhalin-3 project, which, presumably, lies in the sphere of the Gazprom-led consortium’s interests.

Another potential innovation is the emergence of a national oil company (Gosneft). In addition to the consolidation of all assets that the state has retained in the sector, the company would be a bridgehead for the state’s further expansion. In particular, the new national company (along with Rosneft, Surgutneftegaz and Sibneft) has been considered as a candidate for managing – on the state’s behalf – a nationalized stake in YUKOS.

If we analyze the situation in terms of the confrontation between the ‘old Moscow’ and ‘St. Petersburg’ groups, it is obvious that in 2003 their clashing interests aggravated the situation, thus leading to a greater polarization of Russia’s biggest business groups: on the one pole there are the state-owned Gazprom, Rosneft and Transneft companies, together with private companies Surgutneftegaz, LUKoil and the Mezhprombank group; on the opposite pole there is the Alfa/Renova group, YUKOS and Sibneft companies, as well as the Oleg Deripaska and MDM groups.

Clearly, from the point of view of a “state-oriented” strategy, the greatest threat was posed by the ‘old Moscow’ group’s initiatives in the oil industry, telecommunications and the energy sector. YUKOS was the first to fall victim in the battle, with the Deripaska group and Alfa/Renova likely to follow suit. In January, Russia’s Audit Office stated its plans to audit tax payments by Sibneft. Given that tax optimization schemes are very similar at YUKOS and Sibneft, it cannot be ruled out that Sibneft will face tax claims with subsequent bankruptcy proceedings.

However, it would be inaccurate to explain all of the recent steps in the sphere of economic policy exclusively by the two political groups’ mutual attacks.

First, the Russian president has his personal opinion about the proper place of a big private company within the Russian state; actually President Putin expressed his views to the European media during his visit to Italy and the EU summit in November 2003. Second, even though the construction of a ‘federal power vertical’ has been quite successful, regional leaders (particularly those having succeeded in building their own financial and industrial groups) are still able to resist the federal authorities.

Finally, many measures have been definitely positive, namely the attempts to radically reform the federal unitary enterprise system, liquidate Russian ‘domestic offshore centers’ (soon after the amendments to Article 25 of the Tax Code took effect on January 1, 2004), limit the application of tolling schemes, etc.

Since the beginning of the new millennium, the following trends have been prevailing:  the state authorities’ property expansion, attempts to establish (broaden) control over the main financial flows in the Russian economy and, broadly speaking, guaranteeing that businesses depend upon government institutions – despite any decisions concerning deregulation, administrative reform and privatization plans.

This policy may result in the formation of a model for ‘state capitalism’ characterized by a combination of the following:

• significantly expanding the sphere of application of the standard mechanisms of state entrepreneurship;
• creating favorable conditions for the functioning of a narrow range of loyal private companies which have acquired a reputation for being ‘state-oriented’ and relying on the support of the highly centralized state machinery that is controlled by the President (including the legislature and the judiciary);
• using (selectively) show trials and punitive actions against economic entities that fail to fit into the model;
• drawing a dividing line between the national interests of Russia and the inviolability of the private property principle.

It is worth noting here that the notion of ‘state capitalism’ in its traditional sense does not embrace all of the specifics of the model under construction. ‘Bureaucratic capitalism’ would, perhaps, be a more accurate term with respect to the realities of modern Russia. The current system differs essentially from the so called ‘oligarchic capitalism’ of the 1990s, when the relationship between big business and the authorities was based on the direct involvement of major financial and industrial groups in formulating the most important political decisions. Another characteristic was that they were imposing upon the authorities those decisions that yielded direct commercial benefits.

Since 2000, we have been experiencing the opposite trend: the authorities have been noticeably neglecting the interests of private business in general, while imposing their own rules of the game; these are being enforced by enacting various levers. The YUKOS case has drawn the line under the ‘oligarchic’ era. Repeats of that scenario are quite possible, and the private companies need to take certain protective measures to avoid them. While the level of resistance remains rather low, this standoff will not end overnight. Therefore, in the mid-term the number of judicial actions questioning the legality of some privatization deals, as well as the acquisition of assets, will most likely grow.

But the ‘state capitalism for cronies’ policy may naturally bring Russia back to the situation of the 1990s. The problem is that the system under construction leads to the emergence of new potential ‘oligarchies.’ It is quite likely that upon the completion of the consolidation (return) of assets and the re-routing of financial flows of the biggest natural monopolies and state holding companies, the strengthening of the ‘power centers’ in various industries, together with the formation of pro-state inter-industry alliances, their CEOs will be given the green light for expansion into the private sector and the creation of their own groups.

There is no clear distinction between a policy aimed at strengthening state control and property expansion (which corresponds to the classical idea of ‘state capitalism’), and the creation of ‘crony capitalism’ based on tightly intertwining interests of the state authorities and certain business entities. For that reason, the ultimate goals of that expansion are particularly important – is it the strategic interests of Russia as viewed by the initiators of this expansion, or are the goals simply the trivial greed of gold and enrichment through property redistribution?

A policy of state expansion has never been distinctly pronounced. However, the trend toward ‘state capitalism’ became especially obvious in 2003. Time will tell whether this was just an election-year trick, or the beginning of a larger-scale initiative until 2008. Whatever the case may be, property rights’ protection, judicial reform and effective law enforcement will continue to be pressing issues.